By Ryan Holland

At a recent seminar at GWU, Joseph Damore of Premier Consulting Solutions spoke about Accountable Care Organizations (ACOs).  During his presentation he pulled up a chart of average health care costs by U.S. city.  The mean cost was around $7,500 per person, but ranged from $5,000 (Honolulu), to $16,000 (Miami).  These prices are adjusted for age, sex, and cost of living, making the difference especially striking.

A 2009 article from the New Yorker addressed this price differential by visiting McAllen, Texas, where in 2006 Medicare paid an average of $15,000 per patient, putting it among the most expensive areas in the nation for health care.  In El Paso, Texas, which is very similar to McAllen in terms of demographics and public-health statistics, Medicare spent only $7,500 per patient.

After some lengthy detective work, the author concludes that the difference in McAllen is not quality of care, or some elaborate corporate scam, but culture.  Doctors in McAllen generally work fee-for-service, meaning they bill per procedure, not per patient or per visit.  This leads to overtreatment and unnecessary testing.  They are also shrewd businessmen; many have investments in clinics to which they can send their patients for additional care, or demand kickbacks from hospitals or biotech companies.  In short, they belonged to a financial-centered culture.

Areas with low health care costs achieve their savings through a focus on quality, not quantity.  Mayo Clinic, for example, has been very successful in building a culture of cooperation; their business model is to pool the revenues from doctors and hospital and pay fixed salaries.  This model is the essence of the ACO, which is, according to Damore, the only viable future for reigning in the exploding costs of health care.

Whether or not ACOs will prove to be the holy grail of cost reduction, it is clear that incentives are misaligned over much of the American health care system.  Reform is crucial to stem the tide of rising costs, and a good first step is to start demanding quality over quantity.