The High Cost of Technology

My guess is that the guys who run the machines in the US make more than their foreign counterparts.

I think you're right: a friend had a CT scan just a few days ago, for $4000. He's retired military, so at least he has good insurance. He's also of the opinion, after speaking to another doctor, that the scan was almost certainly unnecessary; that other, cheaper, tests they did first were quite conclusive.

We're all curious how they justify $4000 for 15min on the CT machine. So keep us posted.

Maybe if there was better information about the costs of procedures at different hospitals, and for different patients, competition would drive costs down?

Apparently he mis-heard, and the real number is $1,500. Still larger than other countries, but not quite as outrageous.

At least that was the explaination I heard a decade ago. Each hospital has to have the latest and greatest. But, if it is a capital intensive device, and it is not utilized nearly 100% of the time, then lots of money is being wasted. And it is not just the number of machines, but the quality/cost. It might make sense for every hospital to have a lower end machine that can handle 90% of the local cases, but only a few regional centers get the deluxe model. But then a lot of egos would get deflated.

Ezra confirms in a correction that it was 1500, not 15000.
I'm surprised he passed along the 15000 figure.

-Bill Arnold

So what accounts for the fantastic cost difference? And why don't insurance companies bargain the price down?

The high cost of US scans may be the official "real" price that the uninsured are charged not taking into account that most are paid for by insurance as a much lower negotiated rate.

This is basically a form a tax fraud where if the "real" price is 2X or 5X the insurance price, and someone who is uninsured doesn't pay their bill, then the "real" loss actually generates a tidy profit as a tax writeoff against total profits.

A CT scan costs more because we are convinced it is worth more. Has nothing to do with costs. A lot of times the supply curve and the demand curve are independent, and the US health care system has gone so price crazy that anyone can make up a price.
What would be the mechanism for bringing the price down? As far as I know, all CT referrals are more or less in-house - a doctor refers you to his CT or his buddy's, and a hospital sends you to its own CT.
If the insurers try to negotiate, the doctor/hospital/clinic drops their plan. It's easier to go with the flow, especially when your own profit is a % of the final price.

1. Because they can, at least insofar as commercial payers are concerned.

2. Because Medicare hasn't cracked the whip yet.

It is a career unto itself to understand the relationship between Medicare and provider costs and reimbursement. For imaging tests of all kinds, in establishing a fee schedule, Medicare assigns a projected average rate of use -- it used to be 35% or something like that (as in, during an average week, what percentage of the time is the machine actually being used). A few years ago it raised the average to 50%, and the reimbursement dropped and sales of new equipment dropped too. It now wants to raise the average again, to 90%, and radiologists and GE and anyone else who bought or manufacturers one of these are all having coronaries.

It ain't rocket science: if you pay for it, they will buy it and charge whatever they can.

I'm not going into fixes. It all depends on what way you want to go -- fee for service or bundled models of reimbursement, but CMS's reform is the least that it should be doing in this arena.

In some areas where several machines serve the local population, after the machines are paid for, if there was true competition the cost per scan should come down. But they don't. In this case, there is collusion among providers to keep the costs high. They basically can do this by hiding the costs from the patients. And the insurers let them get by with it.

I was just wondering why Kevin thinks it's not strange for doctors and drugs to be so much more here? Why is it that doctors are happy to be doctors for far less money in other countries than here?

And, why does it make sense for drugs to be more expensive here?!? I'm confused.

With a little bit of spreadsheeting you can easily figure out what it should cost.

If the CT scanner costs $1.0 million, has a useful life (and tax life) of 7 years, and it costs $200K to operate per year (electricity insurance, rent of space, maintenance), then the key variables are revenue related.

Assume 8 scans per day (365 day year) at an hour per procedure, which is only a 33% fill rate, the price should be no more than $138 per procedure assuming a 12% return on capital on the machine itself. (Not including any charges for the Doctor and support staff)

Increase the usage rate the price goes down; decrease the usage rate, the price goes up.

Normally, with an oversupply situation the price would go down, but we do not have a "competitive" market, so the suppliers collude on price.

In the meantime, unnecessary scans are increasing health costs and while at the same time bringing down capital costs by increasing opportunities for amortizing the investment. One possible explanation is that there is an expectation for too high a return on investment. This is what is killing manufacturing in the US. Unlike factories, health care does not outsource well to overseas. Although a very interesting case can be made for outsourcing medicine to Cuba.

I broke my arm a few years ago, the orthopedic surgeon send me for a CT scan. I didn't have insurance, the imaging center said it would be $1000 on a payment plan or $300 up front. But the scan was unnecessary, I had to go back to England a few weeks later so I saw an orthopedic doctor there. He had X-Rays took from 3 different angles and said and said a CT scan was not warranted for the injury I had. The other point here is CT scans expose you to more radiation than X-Rays and should not be done as a matter of routine.

Kevin's right, of course, about the cost of, say, a head CT scan. It's between $600 and $1,000 for one without contrast and probably $100-200 more with. In the aggregate, though, that Kaiser fellas number might be closer to the truth when you look at the inordinate number of CT scans done in the U.S. where the goal seems to be to put one on every street corner (next to a Starbucks so you can get some goodies before and after). This is one of those stark areas where the idea of "competition" in U.S. health care is purely mythologic if one expects the large number of scanners to result in decreasing prices. It not only hasn't happened but it may have actually increased the cost of each individual scan to the consumer. After all, the scanners were bought with the idea of making a huge profit (many time by doctors, leaving the possibility of illegal closed-loop referral always there). So not only do scan costs not go down but in order to really generate the maximum return on that scanner, the owners find ways to run it 24/7/365. Although there are so many stories from which to choose, that of CT, and now MR, scanning in American health care is emblematic of the problem of overuse and abuse of medical equipment (tests, procedures) all in the name of profit.