Behind Rising Health-Care Costs

New technologies for medical treatment can push prices sharply higher, even when the benefits are modest. Low-tech solutions can be more effective

Why do medical costs keep going up? Walk into the University of Maryland Medical Center for a heart bypass operation and you'll see one reason. Maryland is one of the few hospitals in the country to use a robot for heart surgery. Developed first by the military and then for commercial use by Intuitive Surgical (ISRG), the da Vinci robot is manipulated by a surgeon seated several feet away from the patient. The machine takes minimally invasive surgery to a new level, allowing the tiniest of incisions and enabling doctors to operate in extremely tight places. The robot is already a popular option for prostate surgery, and proponents praise its ability to trim patient recovery time by a third.

It does not, however, do the same for the hospital bill. A da Vinci robot costs $1.5 million, and every time it is used in the operating room, some $2,000 worth of parts must be replaced (for safety reasons). It takes a surgeon 12 to 18 months to learn how to use the machine, and a da Vinci operation usually takes longer than a hands-on procedure. Consequently, a University of Maryland study estimates that the robot adds about $8,000 to the price of bypass surgery.

Another study from Dartmouth Hitchcock Medical Center points out that it's tough for most hospitals to earn back the price of the machine, if it wasn't donated. On top of all that, "There is really no convincing evidence that the da Vinci is any better than standard surgery," says Paul Levy, president of Boston's Beth Israel Deaconess Medical Center (which does not have one). "Doctors and hospitals that have one are promoting it, and patients are demanding it," Levy says. Patients are usually unaware of the increased cost of the robot, since their insurance pays the bills. Also there's no competitive pressure to lower costs, as Intuitive Surgery is the only company that makes a surgical robot.

Medical Price Inflation to Blame?

Price insensitivity on behalf of customers, lack of competition, technological complexity—they all adds up to immense inflationary pressures on health-care costs. Technological advances go hand in hand with productivity gains in most industries, but in medicine, better technology almost always means higher expenses. PricewaterhouseCoopers estimates that medical costs will rise 9.9% this year and 9.6% in 2009, even though the overall inflation rate for the most recent quarter was 4.2%.

Some of this higher spending can be attributed to the greater medical demands of an aging, overweight population. But the California Healthcare Foundation says medical price inflation, not increased use, drives 51% of the growth in health-care spending. The federal Agency for Healthcare Research & Quality (AHRQ) found that from 2000 to 2004, the mean cost of a hospital stay per patient rose 15%.

If You Build It, Patients Will Come

Rising costs could be seen as a sign of progress: The cheapest medical outcome, after all, is death. Major advances in the treatment of heart disease, cancer, pulmonary disorders, and a broad range of once-fatal diseases have prolonged life, but the longer the life, the higher the medical costs. "We're not realizing cost reductions as a result of increased longevity," says Michael Thompson, principal with PriceWaterhouse Coopers. Survive a heart attack, for example, and you raise your chances of living long enough to die of cancer or Alzheimer's disease, two of the most expensive diseases. Not to mention the cost of the drugs and follow-up care you'll need to avoid another heart attack.

Medical costs are also affected by the Field of Dreams syndrome. If you build it, patients will come. Develop or improve a treatment for an unmet medical need, and demand will soar. Take anesthesia: Studies by the Kaiser Family Foundation show that better anesthetic drugs have resulted in faster patient recoveries and lower cost per patient. But the improvements also made it possible to perform surgery on patients once considered too frail, adding to the health-care burden. These patients are inevitably costlier to treat than their more robust counterparts.

Better medical technology is rarely simpler technology. Implantable cardiac defibrillators, used to regulate the heartbeat of patients who have suffered serious damage to the heart, took decades to perfect. These tiny and complex devices, made by Medtronic (MDT) and St. Jude Medical (STJ), can reduce the risk of death from a heart attack by 30%, a significant benefit. Almost half of heart attack survivors now receive one, up from 9.5% in 1995. But the cost of implanting one can run anywhere from $68,000 to $102,000.

Different Rules from National Health Care

At least the value of the implantable defibrillator is well established. The Congressional Budget Office has estimated that less than half of all medical treatments are supported by rigorous evidence proving they work. And cost-benefit analysis, required by many countries before a new treatment can be approved, is almost taboo in the U.S. The Food & Drug Administration is forbidden by law from considering the cost of a new device or drug when deciding whether to approve it. Thus treatment with the new generation of highly individualized, targeted cancer drugs, such as Genentech's (DNA) Avastin or ImClone's (IMCL) Erbitux, can cost $100,000 or more, though they add only a few months of life for most patients. They do offer, however, a slim chance of a longer benefit to some patients. So cancer victims demand them, and doctors recommend them in the hope they might get lucky.

That doesn't happen in countries with universal health care. In Europe, for example, the cost-benefit of a new treatment is part of its evaluation. Britain's powerful National Institute for Health & Clinical Excellence (NICE) just recommended against using Avastin for early treatment for lung and breast cancer because it didn't believe data support the high price. In the U.S., an insurer will rarely deny payment for a treatment based on price. Also in other nations, drug prices are determined by the national health service, a bargaining power legally denied Medicare.

Expensive Learning Curve

New treatments can also go quite wrong, expensively wrong, especially early in their product life as doctors adjust to using them. Bernard Friedman, senior economist with the AHRQ, says complications and malfunctions are among the main causes of the rising cost of individual treatments. Bariatric surgery, which reduces the stomach size of severely obese patients, can dramatically improve health outcomes, but as many as 14% of patients may end up back in the hospital from complications. Spine surgery, one of the more common surgical procedures, also has a notably high complication rate, and the sophisticated tools used to perform the operation are becoming more and more costly. As a result, the cost of a spinal fusion rose 93.6% from 2000 to 2004, to an average of $50,000.

The one area of medicine where innovation has been rare and costs are still low is prevention. "Right now, we spend a lot on the last 30 days of a patient's life," says Dr. Daniel Jones, chief of minimally invasive medicine at Beth Israel. "We could think of improving the quality of a patient's life rather than the length, by spending more money on preventive care." Getting patients to lose weight, quit smoking, and exercise more would go a long way toward reducing medical costs, he said. In medicine, the low-tech solution can be the most productive.

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