Health-care costs in this country have risen from 5% of national productivity 50 years ago to 16% now, and it's just going to get worse as baby boomers hit retirement age over the next few years.
To put it in terms your wallet can understand, the average American family of four now faces health-care costs -- including insurance -- of $14,500 a year. That's about a third of median household income.
Employers are increasingly unwilling to eat the bill. General Motors says that it already has about $1,400 in medical costs priced into every vehicle.
And most families can't do it on their own.
So 47 million Americans now lack health-care insurance.
Without coverage, they often delay seeing a doctor. And as a result, people whose problems might have been easy to treat early on end up instead in the hospital -- at a huge cost to everyone.
We need to fix the system before it collapses on us. But how? 
Video: Healthier patients, richer docs?
Create more choice. Medicare now covers about 40 million seniors, gets high marks for customer satisfaction and whips the private sector on efficiency. Private insurers spend six times as much on administration, proportionally -- mostly to weed out costly customers or fight payment.
But Americans balk at handing over health care to a government agency. So instead of reducing consumer choice, Yale political scientist Jacob Hacker says to increase it: Allow individuals to choose either a private insurer or Medicare in a competitive marketplace. And require employers to either provide benefits through a company-negotiated private health plan or, in lieu of that, pay a 6% tax on payroll.
Hacker says this approach would build on existing systems and cover most of the uninsured (75% of whom are employees or their dependents) without incurring "staggering" new public costs. Small companies will balk at that 6% payroll tax. But Hacker says employers or individuals already spend at least that much, often for inadequate care, in the present system.
Stop fixating on how to cut benefits. Everybody just gets mad when insurers come between patients and doctors. Doctors waste huge amounts of time fighting back, and insurance companies dump billions of dollars down the drain trying to cut costs through "managed care." A smarter approach, according to Harvard economist David Cutler, is to spend more for good stuff that works.
Improvements in cardiac care, for instance, have cut the death rate from heart disease by more than half
over the past 50 years. The trick is to give doctors and hospitals incentives to do the things that keep patients healthy -- and ultimately cut costs. But how?
Pay for performance. Most health-care plans now pay by the visit or the procedure, inadvertently encouraging doctors and hospitals to run up costs. Doctors don't get paid to make regular phone calls to monitor diabetics and make sure they are following medical guidelines, for instance. They may even do better financially if the diabetic has a problem and needs to come in for a visit.
"You get what you pay for," says Robert Galvin, who oversees General Electric's $2.5 billion in annual health-care spending. So, he says, "Let's pay based on how well the patient is treated, and let's pay more for people who do a better job."
Some companies, including GE and HealthPartners, a Minnesota insurer, now actually compensate medical providers to make those regular phone calls -- and pay doctors more when their patients hit targets for blood sugar levels, cholesterol and other key indicators of good health.
The results look promising. HealthPartners says that the 20,000 diabetics in its plan, for instance, suffer 140 fewer amputations, 100 fewer heart attacks and 740 fewer eye complications each year than they would with conventional care. By spending more up front, HealthPartners says it has saved an average of $5,345 per diabetic patient in unneeded medical procedures over 10 years.
Make health insurance more portable. We like to think we have the best health-care system in the world. But more than half the time, patients don't even get the recommended medical care. As a result, we waste upward of $40 billion annually on disability, lost workdays and premature deaths -- for diabetes patients alone. That's on top of the $92 billion we spend each year giving them inadequate care. And that's just one disease. What's going on here?
If doctors don't have don't have much incentive to make patients do the stuff that's good for them over the long term, neither do insurers. Because people change jobs every five years on average, the payoff goes to some other company's insurer, or to Medicare. Congressional proposals to break the "job lock" and make insurance more portable would help foster long-term thinking by insurers and their customers.
Cut some patient co-pays -- but boost others. In a long-term relationship, insurance companies might do better just giving away the good stuff -- preventive measures like statins for people with high cholesterol, or beta blockers for people recovering from heart attacks. But to put the incentives in the right places, patients would have to pick up more of the cost of avoidable elective procedures -- for instance, a non-emergency angioplasty.
Tear up the paper. Incredibly, about three-quarters of all medical practices in this country still keep patient records in long racks of manila folders. Electronic medical records make it much easier to keep track of patients who need regular monitoring, to follow up when a patient fails to get a prescribed lab test -- or to check whether a doctor is actually making patients healthier, using indicators like cholesterol and blood sugar levels. Video: New tools in action
It's such a good deal that some insurers now pay medical practices to make the switch.
The bottom line. With medical costs continuing to soar, some alarmists are already talking about radical steps like rationing some forms of medical care. Chart: How much does health care cost? But there's plenty of room for improvement before it gets to that. The first step is to put the economic incentives on the same page with what we know about good medical practice. Do that, says Harvard's Cutler, and we can cut health-care costs by as much as half without any reduction in quality.
Talk back: Do you feel squeezed in the middle class?
Return to Middle Class Crunch home
Published Dec. 28, 2007
