The Seven Causes of Rising Healthcare Costs

\"The…that Every CFO, Benefits Manager and Broker Should Know

by Eric Bricker, MD

The average employee health insurance cost for family coverage is $12,106. That cost—whether it is in insurance premiums or medical claims paid by the employer increased an average of 6% in 2007 and many employers are facing increases as high as 30% this year. To put that cost in perspective, a family with two SUVs may spend $200 a week to fill their gas tanks. At $4 per gallon, they would spend $10,400 per year on gas—still almost $1,800 LESS than their total spending on healthcare. Understanding the causes of these out-of-control healthcare costs is vital to CFOs, benefits managers and insurance brokers.

Doctors Ezekiel Emanuel and Victor Fuchs recently wrote an article in the Journal of the American Medical Association on the root cause of high healthcare costs. Their central premise is that escalating healthcare costs are not mainly due to technology or health insurance red-tape, but rather OVERUTILIZATION of healthcare services by doctors and patients. Here are their seven causes of overutilization:

Physician Culture

Doctors are taught in medical school and residency to be aggressive and thorough in their diagnosis and treatment of disease. Ruling out rare diagnoses with expensive tests is seen as a

sign of intelligence. Any attempt to be more judicious in a diagnostic or treatment plan—such as using medication and physical therapy for acute low back pain rather than ordering a $1,500 MRI of the spine—can be frowned upon by a doctor’s peer group.

Fee-for-service Payment

Doctors know they get paid more to do something than to not do something. This financial incentive causes doctors to perform procedures when there may be little clinical evidence that the procedure is necessary. For example, a recent New York Times article describes physicians ordering $1,000 CT scans of the heart to look for blockages in asymptomatic patients when these scans have not been shown to improve patient outcomes.

An economist from Georgetown University said fees from imaging tests, such as CT scans, make up half of the typical $400,000 annual salary that cardiologists make. That’s a strong incentive.

Marketing to Physicians

The pharmaceutical industry as a whole spends $10,000 on each and every physician in America marketing the latest medications—more than $7 billion annually. Physicians are often faced with a decision on which medication to prescribe where they have a choice between a generic and a brand-name drug.

With few comparative studies on the effectiveness of one drug versus another, pharmaceutical companies emphasize favorable results for their particular brand-name medication knowing that physicians don’t have any data to refute their claims. One wonders why the default choice of most physicians would not be the generic in these situations.

Medical Malpractice Law Suits

To guard themselves against medical malpractice law suits, many physicians practice defensive medicine—ordering extra tests and procedures to “cover themselves” in case the patient decides to sue. The extent to which this practice exists is somewhat controversial, but being sued is on the mind of many physicians and can have an effect on their practice patterns.

Patient Preference for the “Newest Thing”

Doctors often do what their patients ask them to do and patients often want the latest test or newest procedure. For example, I recently spoke with a urologist in the Dallas area who said the main reason his fellow urologists perform robotic prostate surgery is because their patients want to use the robot. He said the patients do leave the hospital one or two days earlier compared to the traditional technique, but the outcomes and complication rates for the two different methods are very similar. The robot costs over $1,100 more than the traditional technique—and that’s before factoring in the $1.2M price for the robot itself.

Marketing to Patients

Earlier I wrote that the pharmaceutical industry spends $7 billion marketing to physicians. Well, they also spend $4 billion marketing directly to patients. These ads encourage patients to ask their doctor about the most expensive medications, not generics.

Case in point, the cholesterol-lowering drug Zocor was Merck’s biggest seller in 2005 with $4.3 billion in sales. There were commercials all over television for Zocor encouraging patients to ask their physician about the medication. Then Zocor’s patent expired in 2006 and now it can be purchased under its generic name—simvastatin. Now a Zocor ad can’t be found anywhere.

However, you do see constant ads for Zocor’s competitor— Lipitor—which is still on patent and the number one selling drug in America. The cost of a 30 day supply of simvastatin is $28; Lipitor $120. So why isn’t simvastatin the number one drug in America?

Third-Party Payment

Because patients are often only responsible for a small copay when they see a doctor, they are shielded from the true cost of care. Health insurance changes the behavior and decisions of patients who only have to pay $25 for a $325 prescription. As in the earlier case with Zocor, more patients would be asking for generic medications if they were exposed to the actual cost.

What You Can Do as an Employer or Insurance Broker

As a CFO, benefits manager or insurance broker you can structure your insurance plan so as to minimize this healthcare over-utilization. Many companies are raising their deductibles to $5,000 and having “sub-plans” underneath the deductible that require the employee pay 20% coinsurance or use a health savings account or health reimbursement arrangement. By restructuring your benefits you can save upwards of 20% on your healthcare costs.

Eric Bricker is an Internist in Plano, Texas and Chief Medical Officer of Compass Professional Health Services. To find out more go to or email Dr. Bricker at

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