4 Insights from Atul Gawande's Influential 'Cost Conundrum' Article

Gawande's articles in The New Yorker lend some perspective to what he sees as the major drivers of high medical costs and how to address them. 

Following the announcement by Amazon, Berkshire Hathaway, and JPMorgan Chase that Dr. Atul Gawande had been selected to serve as CEO of their joint healthcare enterprise, focus is now shifting to his plans on containing high medical costs.

Anyone looking for clues on how Gawande might approach his new job has plenty of material to pull from. His journalistic work has been impressing powerful business people and policymakers for years.

Related: Atul Gawande Named CEO of Amazon, Berkshire Hathaway, JPMorgan Healthcare Initiative

When the initiative was announced in January, Berkshire Hathaway CEO Warren Buffett compared the current healthcare system to "a hungry tapeworm." That rhetoric sounds similar to Gawande’s work for The New Yorker, including a particularly influential 2009 article in which Gawande wrote that the U.S. has "the most wasteful and the least sustainable health-care system in the world."

"Universal coverage won’t be feasible unless we can control costs," Gawande wrote in "The Cost Conundrum." The piece examined McAllen, Texas, the nation's most expensive healthcare market, prior to the passage of the Affordable Care Act.

The article caught the attention of the White House and was required reading for staffers during weeks of debate on the landmark legislation. It also caught the attention of Buffett’s longtime investing partner Charlie Munger, who sent a $20,000 check to the magazine for Gawande as a gift of appreciation for having written the piece, as CNBC reported.

It is worth revisiting Gawande's influential essay not only for its effect on the national healthcare debate nearly a decade ago, but also for addressing the financial factors that still affect healthcare today. In the article, Gawande discusses the challenges health systems have when dealing with public and private insurers, the paradox between high-cost treatment options and low-quality outcomes, as well as anticipating the rise of accountable care organizations (ACOs).

What initially drew Gawande to McAllen were the costs: Medicare spent $15,000 per enrollee in 2006, nearly twice the national average and $3,000 more than the income per capita for residents. The expenditures were also more than triple what Medicare had spent on McAllen enrollees in 1992, which was in line with the national average.

Gawande approaches the issue from a national perspective, arguing that if expensive healthcare markets can bend the cost curve to that of low-cost areas, then the larger problems facing Medicare can be solved.

"The difficulty is how to go about it," he wrote. "Physicians in places like McAllen behave differently from others. The $2.4-trillion question is why. Unless we figure it out, health reform will fail."

Below are four observations from "The Cost Conundrum" on problems and solutions to the national healthcare market, as Gawande ascends to head one of the most closely watched healthcare projects in recent memory:

1. Overuse is the primary cause of extreme healthcare costs.

• Gawande cites multiple university studies that found an increase in healthcare spending and treatment did not improve patient health, and in some cases was detrimental.

• "Rich towns get the new school buildings, fire trucks, and roads, not to mention the better teachers and police officers and civil engineers. Poor towns don’t. But that rule doesn’t hold for health care," he wrote.

• One Dartmouth study he cited found high-cost areas were less likely to provide low-cost preventative services to patients, with Gawande observing: "They got more of the stuff that cost more, but not more of what they needed."

2. Physicians are incentivized to request high-cost treatment options.

• Some physicians are oblivious to the financial implications of their treatment options, while others consciously use insurance money to maximize their profits, Gawande’s piece argues.

• This applies to physicians demanding kickbacks for hospital service and negotiating with home health agencies.

• "So here, along the banks of the Rio Grande, in the Square Dance Capital of the World, a medical community came to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers," Gawande wrote.

Related: Dr. Atul Gawande's Commencement Address at U.C.L.A. Medical School

3. We should look to the Mayo Clinic model.

• Gawande cites the Mayo Clinic as the standard for breaking through the financial incentives for physicians to shift focus from patient to profit.

• While admitting it is not an easy task, Gawande said the Mayo Clinic recognized the need to eliminate financial barriers by pooling the system and physicians' money together and paying by salary.

• "Mayo promoted leaders who focussed first on what was best for patients, and then on how to make this financially possible."

• Gawande also points to a similar approach by physicians in Grand Junction, Colorado, who agreed to a system that pays fees so as to discourage choosing between patients based on federal or commercial insurance coverage.

• He added that the early creation of what would become ACOs have produced "enviably higher quality and lower costs," compared to the average American city.

4. There’s a "battle for the soul of American medicine."

• He compared healthcare delivery to building a house, noting that the task requires "experts, expensive equipment and materials, and a huge amount of coördination."

• "When it comes to making care better and cheaper, changing who pays the doctor will make no more difference than changing who pays the electrician. The lesson of the high-quality, low-cost communities is that someone has to be accountable for the totality of care. Otherwise, you get a system that has no brakes. You get McAllen."

• Gawande said insurers, both public and private, have proven they can't manage the full complexity of medical care and instead suggests turning to local medical communities.

• "The decision is whether we are going to reward the leaders who are trying to build a new generation of Mayos and Grand Junctions. If we don’t, McAllen won’t be an outlier. It will be our future."