Behind Rising Health-Care Costs

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The idea for "Behind Rising Health-Care Costs" came from Mike Saha. A software developer living in Los Angeles, Mike has been an avid consumer of BusinessWeek since college.

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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.

Arnst is a senior writer for BusinessWeek based in New York.