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Read the article about the cost conundrum

Please answer both questions in your essay:

1) How does McAllen, Texas become one of the most expensive health-care markets in the country? How does this relate to the inefficiencies we learned in the class: demand inducement, practice variation, and insurance moral hazard?

2) Suppose that you are the medical director of Blue Cross Blue Shield of Texas


. Should you directly intervene to reduce health spending in McAllen, Texas? What policies might you consider? What are the pros and cons of each option? Is your proposal scalable — can you implement it statewide at a reasonable cost?

JUNE 1, 2009
What a Texas town can teach us about health care.
By Atul Gawande
t is spring in McAllen, Texas. The
morning sun is warm. The streets are lined
with palm trees and pickup trucks. McAllen
is in Hidalgo County, which has the lowest
household income in the country, but it’s a
border town, and a thriving foreign-trade
zone has kept the unemployment rate below
ten per cent. McAllen calls itself the Square
Dance Capital of the World. “Lonesome
Dove” was set around here.
McAllen has another distinction, too: it is
one of the most expensive health-care
markets in the country. Only Miami—which
has much higher labor and living costs—
spends more per person on health care. In
2006, Medicare spent fifteen thousand
dollars per enrollee here, almost twice the
national average. The income per capita is
twelve thousand dollars. In other words,
Medicare spends three thousand dollars more
per person here than the average person
The explosive trend in American medical
costs seems to have occurred here in an
especially intense form. Our country’s health
care is by far the most expensive in the
world. In Washington, the aim of health-care
reform is not just to extend medical coverage
to everybody but also to bring costs under
control. Spending on doctors, hospitals,
drugs, and the like now consumes more than
one of every six dollars we earn. The
financial burden has damaged the global
competitiveness of American businesses and
bankrupted millions of families, even those
with insurance. It’s also devouring our
government. “The greatest threat to
America’s fiscal health is not Social
Security,” President Barack Obama said in a
March speech at the White House. “It’s not
the investments that we’ve made to rescue
our economy during this crisis. By a wide
margin, the biggest threat to our nation’s
balance sheet is the skyrocketing cost of
health care. It’s not even close.”
The question we’re now frantically
grappling with is how this came to be, and
what can be done about it. McAllen, Texas,
the most expensive town in the most
expensive country for health care in the
world, seemed a good place to look for some
Reprinted with permission of the author, originally published in the New Yorker
rom the moment I arrived, I asked
almost everyone I encountered about
McAllen’s health costs—a businessman I
met at the five-gate McAllen-Miller
International Airport, the desk clerks at the
Embassy Suites Hotel, a police-academy
cadet at McDonald’s. Most weren’t surprised
to hear that McAllen was an outlier. “Just
look around,” the cadet said. “People are not
healthy here.” McAllen, with its high poverty
rate, has an incidence of heavy drinking sixty
per cent higher than the national average.
And the Tex-Mex diet has contributed to a
thirty-eight-per-cent obesity rate.
One day, I went on rounds with Lester
Dyke, a weather-beaten, ranch-owning fiftythree-year-old cardiac surgeon who grew up
in Austin, did his surgical training with the
Army all over the country, and settled into
practice in Hidalgo County. He has not
lacked for business: in the past twenty years,
he has done some eight thousand heart
operations, which exhausts me just thinking
about it. I walked around with him as he
checked in on ten or so of his patients who
were recuperating at the three hospitals
where he operates. It was easy to see what
had landed them under his knife. They were
nearly all obese or diabetic or both. Many
had a family history of heart disease. Few
were taking preventive measures, such as
cholesterol-lowering drugs, which, studies
indicate, would have obviated surgery for up
to half of them.
Yet public-health statistics show that
cardiovascular-disease rates in the county are
actually lower than average, probably
because its smoking rates are quite low.
Rates of asthma, H.I.V., infant mortality,
cancer, and injury are lower, too. El Paso
County, eight hundred miles up the border,
has essentially the same demographics. Both
counties have a population of roughly seven
hundred thousand, similar public-health
statistics, and similar percentages of nonEnglish speakers, illegal immigrants, and the
unemployed. Yet in 2006 Medicare
expenditures (our best approximation of
over-all spending patterns) in El Paso were
$7,504 per enrollee—half as much as in
McAllen. An unhealthy population couldn’t
possibly be the reason that McAllen’s healthcare costs are so high. (Or the reason that
America’s are. We may be more obese than
any other industrialized nation, but we have
among the lowest rates of smoking and
alcoholism, and we are in the middle of the
range for cardiovascular disease and
Was the explanation, then, that McAllen
was providing unusually good health care? I
took a walk through Doctors Hospital at
Renaissance, in Edinburg, one of the towns
in the McAllen metropolitan area, with
Robert Alleyn, a Houston-trained general
surgeon who had grown up here and returned
home to practice. The hospital campus
sprawled across two city blocks, with a series
of three- and four-story stucco buildings
separated by golfing-green lawns and black
asphalt parking lots. He pointed out the
sights—the cancer center is over here, the
heart center is over there, now we’re coming
to the imaging center. We went inside the
surgery building. It was sleek and modern,
with recessed lighting, classical music piped
into the waiting areas, and nurses moving
from patient to patient behind rolling black
computer pods. We changed into scrubs and
Alleyn took me through the sixteen operating
rooms to show me the laparoscopy suite,
with its flat-screen video monitors, the hybrid
2|P a g e
operating room with built-in imaging
equipment, the surgical robot for minimally
invasive robotic surgery.
I was impressed. The place had virtually
all the technology that you’d find at Harvard
and Stanford and the Mayo Clinic, and, as I
walked through that hospital on a dusty road
in South Texas, this struck me as a
remarkable thing. 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
At McAllen Medical Center, I saw an
orthopedic surgeon work under an operating
microscope to remove a tumor that had
wrapped around the spinal cord of a fourteenyear-old. At a home-health agency, I spoke to
a nurse who could provide intravenous-drug
therapy for patients with congestive heart
failure. At McAllen Heart Hospital, I
watched Dyke and a team of six do a
coronary-artery bypass using technologies
that didn’t exist a few years ago. At
Renaissance, I talked with a neonatologist
who trained at my hospital, in Boston, and
brought McAllen new skills and technologies
for premature babies. “I’ve had nurses come
up to me and say, ‘I never knew these babies
could survive,’ ” he said.
And yet there’s no evidence that the
treatments and technologies available at
McAllen are better than those found
elsewhere in the country. The annual reports
that hospitals file with Medicare show that
those in McAllen and El Paso offer
intensive-care units, advanced cardiac
services, PET scans, and so on. Public
statistics show no difference in the supply of
doctors. Hidalgo County actually has fewer
specialists than the national average.
Nor does the care given in McAllen stand
out for its quality. Medicare ranks hospitals
on twenty-five metrics of care. On all but two
of these, McAllen’s five largest hospitals
performed worse, on average, than El Paso’s.
McAllen costs Medicare seven thousand
dollars more per person each year than does
the average city in America. But not, so far
as one can tell, because it’s delivering better
health care.
ne night, I went to dinner with six
McAllen doctors. All were what you
would call bread-and-butter physicians: busy,
full-time, private-practice doctors who work
from seven in the morning to seven at night
and sometimes later, their waiting rooms
teeming and their desks stacked with medical
charts to review.
Some were dubious when I told them
that McAllen was the country’s most
expensive place for health care. I gave them
the spending data from Medicare. In 1992, in
the McAllen market, the average cost per
Medicare enrollee was $4,891, almost
exactly the national average. But since then,
year after year, McAllen’s health costs have
grown faster than any other market in the
country, ultimately soaring by more than ten
thousand dollars per person.
“Maybe the service is better here,” the
cardiologist suggested. People can be seen
faster and get their tests more readily, he
Others were skeptical. “I don’t think that
explains the costs he’s talking about,” the
general surgeon said.
3|P a g e
“It’s malpractice,” a family physician
who had practiced here for thirty-three years
“McAllen is legal hell,” the cardiologist
agreed. Doctors order unnecessary tests just
to protect themselves, he said. Everyone
thought the lawyers here were worse than
That explanation puzzled me. Several
years ago, Texas passed a tough malpractice
law that capped pain-and-suffering awards at
two hundred and fifty thousand dollars.
Didn’t lawsuits go down?
“Practically to zero,” the cardiologist
“Come on,” the general surgeon finally
said. “We all know these arguments are
bullshit. There is overutilization here, pure
and simple.” Doctors, he said, were racking
up charges with extra tests, services, and
The surgeon came to McAllen in the
mid-nineties, and since then, he said, “the
way to practice medicine has changed
completely. Before, it was about how to do a
good job. Now it is about ‘How much will
you benefit?’ ”
fundamental had changed since the days
when health-care costs in McAllen were the
same as those in El Paso and elsewhere. Yes,
they had more technology. “But young
doctors don’t think anymore,” the family
physician said.
The surgeon gave me an example.
General surgeons are often asked to see
patients with pain from gallstones. If there
aren’t any complications—and there usually
aren’t—the pain goes away on its own or
with pain medication. With instruction on
eating a lower-fat diet, most patients
experience no further difficulties. But some
have recurrent episodes, and need surgery to
remove their gallbladder.
Seeing a patient who has had
uncomplicated, first-time gallstone pain
requires some judgment. A surgeon has to
provide reassurance (people are often scared
and want to go straight to surgery), some
education about gallstone disease and diet,
perhaps a prescription for pain; in a few
weeks, the surgeon might follow up. But
increasingly, I was told, McAllen surgeons
simply operate. The patient wasn’t going to
moderate her diet, they tell themselves. The
pain was just going to come back. And by
operating they happen to make an extra seven
hundred dollars.
I gave the doctors around the table a
scenario. A forty-year-old woman comes in
with chest pain after a fight with her
husband. An EKG is normal. The chest pain
goes away. She has no family history of heart
disease. What did McAllen doctors do fifteen
years ago?
Send her home, they said. Maybe get a
stress test to confirm that there’s no issue, but
even that might be overkill.
And today? Today, the cardiologist said,
she would get a stress test, an
echocardiogram, a mobile Holter monitor,
and maybe even a cardiac catheterization.
“Oh, she’s definitely getting a cath,” the
internist said, laughing grimly.
To determine whether overuse of medical
care was really the problem in McAllen, I
turned to Jonathan Skinner, an economist at
Dartmouth’s Institute for Health Policy and
Clinical Practice, which has three decades of
expertise in examining regional patterns in
Medicare payment data. I also turned to two
private firms—D2Hawkeye, an independent
4|P a g e
company, and Ingenix, UnitedHealthcare’s
commercial insurance data for McAllen. The
answer was yes. Compared with patients in
El Paso and nationwide, patients in McAllen
got more of pretty much everything—more
diagnostic testing, more hospital treatment,
more surgery, more home care.
The Medicare payment data provided the
most detail. Between 2001 and 2005,
critically ill Medicare patients received
almost fifty per cent more specialist visits in
McAllen than in El Paso, and were twothirds more likely to see ten or more
specialists in a six-month period. In 2005 and
2006, patients in McAllen received twenty
per cent more abdominal ultrasounds, thirty
per cent more bone-density studies, sixty per
cent more stress tests with echocardiography,
two hundred per cent more nerve-conduction
studies to diagnose carpal-tunnel syndrome,
and five hundred and fifty per cent more
urine-flow studies to diagnose prostate
troubles. They received one-fifth to twothirds more gallbladder operations, knee
replacements, breast biopsies, and bladder
scopes. They also received two to three times
defibrillators, cardiac-bypass operations,
carotid endarterectomies, and coronary-artery
stents. And Medicare paid for five times as
many home-nurse visits. The primary cause
of McAllen’s extreme costs was, very
simply, the across-the-board overuse of
his is a disturbing and perhaps
surprising diagnosis. Americans like to
believe that, with most things, more is better.
But research suggests that where medicine is
concerned it may actually be worse. For
example, Rochester, Minnesota, where the
Mayo Clinic dominates the scene, has
fantastically high levels of technological
capability and quality, but its Medicare
spending is in the lowest fifteen per cent of
the country—$6,688 per enrollee in 2006,
which is eight thousand dollars less than the
figure for McAllen. Two economists working
at Dartmouth, Katherine Baicker and
Amitabh Chandra, found that the more
money Medicare spent per person in a given
state the lower that state’s quality ranking
tended to be. In fact, the four states with the
highest levels of spending—Louisiana,
Texas, California, and Florida—were near
the bottom of the national rankings on the
quality of patient care.
In a 2003 study, another Dartmouth
team, led by the internist Elliott Fisher,
examined the treatment received by a million
elderly Americans diagnosed with colon or
rectal cancer, a hip fracture, or a heart attack.
They found that patients in higher-spending
regions received sixty per cent more care
than elsewhere. They got more frequent tests
and procedures, more visits with specialists,
and more frequent admission to hospitals.
Yet they did no better than other patients,
whether this was measured in terms of
survival, their ability to function, or
satisfaction with the care they received. If
anything, they seemed to do worse.
That’s because nothing in medicine is
without risks. Complications can arise from
hospital stays, medications, procedures, and
tests, and when these things are of marginal
value the harm can be greater than the
benefits. In recent years, we doctors have
markedly increased the number of operations
we do, for instance. In 2006, doctors
performed at least sixty million surgical
5|P a g e
procedures, one for every five Americans. No
other country does anything like as many
operations on its citizens. Are we better off
for it? No one knows for sure, but it seems
highly unlikely. After all, some hundred
thousand people die each year from
complications of surgery—far more than die
in car crashes.
To make matters worse, Fisher found that
patients in high-cost areas were actually less
likely to receive low-cost preventive services,
such as flu and pneumonia vaccines, faced
longer waits at doctor and emergency-room
visits, and were less likely to have a primarycare physician. They got more of the stuff
that cost more, but not more of what they
In an odd way, this news is reassuring.
Universal coverage won’t be feasible unless
we can control costs. Policymakers have
worried that doing so would require
rationing, which the public would never go
along with. So the idea that there’s plenty of
fat in the system is proving deeply attractive.
“Nearly thirty per cent of Medicare’s costs
could be saved without negatively affecting
health outcomes if spending in high- and
medium-cost areas could be reduced to the
level in low-cost areas,” Peter Orszag, the
President’s budget director, has stated.
Most Americans would be delighted to
have the quality of care found in places like
Washington, or Durham, North Carolina—all
of which have world-class hospitals and costs
that fall below the national average. If we
brought the cost curve in the expensive
places down to their level, Medicare’s
problems (indeed, almost all the federal
government’s budget problems for the next
fifty years) would be solved. The difficulty is
how to go about it. 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.
had what I considered to be a reasonable
plan for finding out what was going on in
McAllen. I would call on the heads of its
hospitals, in their swanky, decoratordesigned, churrigueresco offices, and I’d ask
The first hospital I visited, McAllen
Heart Hospital, is owned by Universal Health
Services, a for-profit hospital chain with
Pennsylvania, and revenues of five billion
dollars last year. I went to see the hospital’s
chief operating officer, Gilda Romero. Truth
be told, her office seemed
churrigueresco than Office Depot. She had
straight brown hair, sympathetic eyes, and
looked more like a young school teacher than
like a corporate officer with nineteen years of
experience. And when I inquired, “What is
going on in this place?” she looked surprised.
Is McAllen really that expensive? she
I described the data, including the
numbers indicating that heart operations and
catheter procedures and pacemakers were
being performed in McAllen at double the
usual rate.
“That is interesting,” she said, by which
she did not mean, “Uh-oh, you’ve caught us”
but, rather, “That is actually interesting.” The
problem of McAllen’s outlandish costs was
new to her. She puzzled over the numbers.
She was certain that her doctors performed
surgery only when it was necessary. It had to
be one of the other hospitals. And she had
one in mind—Doctors Hospital at
6|P a g e
Renaissance, the hospital in Edinburg that I
had toured.
She wasn’t the only person to mention
Renaissance. It is the newest hospital in the
area. It is physician-owned. And it has a
reputation (which it disclaims) for
physicians to become investors and send
patients there. Physicians who do so receive
not only their fee for whatever service they
provide but also a percentage of the
hospital’s profits from the tests, surgery, or
other care patients are given. (In 2007, its
profits totaled thirty-four million dollars.)
Romero and others argued that this gives
physicians an unholy temptation to
Such an arrangement can make physician
investors rich. But it can’t be the whole
explanation. The hospital gets barely a sixth
of the patients in the region; its margins are
no bigger than the other hospitals’—whether
for profit or not for profit—and it didn’t have
much of a presence until 2004 at the earliest,
a full decade after the cost explosion in
McAllen began.
“Those are good points,” Romero said.
She couldn’t explain what was going on.
The following afternoon, I visited the top
Renaissance. We sat in their boardroom
around one end of a yacht-length table. The
chairman of the board offered me a soda. The
chief of staff smiled at me. The chief
financial officer shook my hand as if I were
an old friend. The C.E.O., however, was
having a hard time pretending that he was
happy to see me. Lawrence Gelman was a
fifty-seven-year-old anesthesiologist with a
Bill Clinton shock of white hair and a weekly
local radio show tag-lined “Opinions from an
Unrelenting Conservative Spirit.” He had
helped found the hospital. He barely greeted
me, and while the others were trying for a
how-can-I-help-you-today attitude, his body
language was more let’s-get-this-over-with.
So I asked him why McAllen’s healthcare costs were so high. What he gave me
was a disquisition on the theory and history
of American health-care financing going
back to Lyndon Johnson and the creation of
Medicare, the upshot of which was: (1)
Government is the problem in health care.
“The people in charge of the purse strings
don’t know what they’re doing.” (2) If
anything, government insurance programs
like Medicare don’t pay enough. “I, as an
anesthesiologist, know that they pay me ten
per cent of what a private insurer pays.” (3)
Government programs are full of waste.
“Every person in this room could easily go
through the expenditures of Medicare and
Medicaid and see all kinds of waste.” (4) But
not in McAllen. The clinicians here, at least
at Doctors Hospital at Renaissance, “are
providing necessary, essential health care,”
Gelman said. “We don’t invent patients.”
Then why do hospitals in McAllen order
so much more surgery and scans and tests
than hospitals in El Paso and elsewhere?
In the end, the only explanation he and
his colleagues could offer was this: The other
doctors and hospitals in McAllen may be
overspending, but, to the extent that his
hospital provides costlier treatment than
other places in the country, it is making
people better in ways that data on quality and
outcomes do not measure.
“Do we provide better health care than El
Paso?” Gelman asked. “I would bet you two
to one that we do.”
7|P a g e
It was a depressing conversation—not
because I thought the executives were being
evasive but because they weren’t being
evasive. The data on McAllen’s costs were
clearly new to them. They were defending
McAllen reflexively. But they really didn’t
know the big picture of what was happening.
And, I realized, few people in their
position do. Local executives for hospitals
and clinics and home-health agencies
understand their growth rate and their market
share; they know whether they are losing
money or making money. They know that if
their doctors bring in enough business—
surgery, imaging, home-nursing referrals—
they make money; and if they get the doctors
to bring in more, they make more. But they
have only the vaguest notion of whether the
doctors are making their communities as
healthy as they can, or whether they are more
or less efficient than their counterparts
elsewhere. A doctor sees a patient in clinic,
and has her check into a McAllen hospital for
a CT scan, an ultrasound, three rounds of
blood tests, another ultrasound, and then
surgery to have her gallbladder removed.
How is Lawrence Gelman or Gilda Romero
to know whether all that is essential, let alone
the best possible treatment for the patient? It
isn’t what they are responsible or accountable
Health-care costs ultimately arise from
the accumulation of individual decisions
doctors make about which services and
treatments to write an order for. The most
expensive piece of medical equipment, as the
saying goes, is a doctor’s pen. And, as a rule,
hospital executives don’t own the pen caps.
Doctors do.
f doctors wield the pen, why do they do it
so differently from one place to another?
Brenda Sirovich, another Dartmouth
researcher, published a study last year that
provided an important clue. She and her team
surveyed some eight hundred primary-care
physicians from high-cost cities (such as Las
Vegas and New York), low-cost cities (such
as Sacramento and Boise), and others in
between. The researchers asked the
physicians specifically how they would
handle a variety of patient cases. It turned out
that differences in decision-making emerged
in only some kinds of cases. In situations in
which the right thing to do was well
established—for example, whether to
recommend a mammogram for a fifty-yearold woman (the answer is yes)—physicians
in high- and low-cost cities made the same
decisions. But, in cases in which the science
was unclear, some physicians pursued the
maximum possible amount of testing and
procedures; some pursued the minimum. And
which kind of doctor they were depended on
where they came from.
Sirovich asked doctors how they would
treat a seventy-five-year-old woman with
typical heartburn symptoms and “adequate
health insurance to cover tests and
medications.” Physicians in high- and lowcost cities were equally likely to prescribe
antacid therapy and to check for H. pylori, an
ulcer-causing bacterium—steps strongly
recommended by national guidelines. But
when it came to measures of less certain
value—and higher cost—the differences
were considerable. More than seventy per
cent of physicians in high-cost cities referred
the patient to a gastroenterologist, ordered an
upper endoscopy, or both, while half as many
in low-cost cities did. Physicians from high8|P a g e
cost cities typically recommended that
patients with well-controlled hypertension
see them in the office every one to three
months, while those from low-cost cities
recommended visits twice yearly. In case
after uncertain case, more was not
necessarily better. But physicians from the
most expensive cities did the most expensive
Why? Some of it could reflect
differences in training. I remember when my
wife brought our infant son Walker to visit
his grandparents in Virginia, and he took a
terrifying fall down a set of stairs. They
drove him to the local community hospital in
Alexandria. A CT scan showed that he had a
tiny subdural hematoma—a small area of
bleeding in the brain. During ten hours of
observation, though, he was fine—eating,
drinking, completely alert. I was a surgery
resident then and had seen many cases like
his. We observed each child in intensive care
for at least twenty-four hours and got a repeat
CT scan. That was how I’d been trained. But
the doctor in Alexandria was going to send
Walker home. That was how he’d been
trained. Suppose things change for the
worse? I asked him. It’s extremely unlikely,
he said, and if anything changed Walker
could always be brought back. I bullied the
doctor into admitting him anyway. The next
day, the scan and the patient were fine. And,
looking in the textbooks, I learned that the
doctor was right. Walker could have been
managed safely either way.
There was no sign, however, that
McAllen’s doctors as a group were trained
any differently from El Paso’s. One morning,
I met with a hospital administrator who had
extensive experience managing for-profit
hospitals along the border. He offered a
different possible explanation: the culture of
“In El Paso, if you took a random doctor
and looked at his tax returns eighty-five per
cent of his income would come from the
usual practice of medicine,” he said. But in
McAllen, the administrator thought, that
percentage would be a lot less.
He knew of doctors who owned strip
complexes—or imaging centers, surgery
centers, or another part of the hospital they
“entrepreneurial spirit,” he said. They were
innovative and aggressive in finding ways to
increase revenues from patient care. “There’s
no lack of work ethic,” he said. But he had
often seen financial considerations drive the
decisions doctors made for patients—the
tests they ordered, the doctors and hospitals
they recommended—and it bothered him.
Several doctors who were unhappy about the
direction medicine had taken in McAllen told
me the same thing. “It’s a machine, my
friend,” one surgeon explained.
No one teaches you how to think about
money in medical school or residency. Yet,
from the moment you start practicing, you
must think about it. You must consider what
is covered for a patient and what is not. You
must pay attention to insurance rejections
and government-reimbursement rules. You
must think about having enough money for
the secretary and the nurse and the rent and
the malpractice insurance.
Beyond the basics, however, many
physicians are remarkably oblivious to the
financial implications of their decisions.
They see their patients. They make their
recommendations. They send out the bills.
And, as long as the numbers come out all
9|P a g e
right at the end of each month, they put the
money out of their minds.
Others think of the money as a means of
improving what they do. They think about
how to use the insurance money to maybe
install electronic health records with
colleagues, or provide easier phone and email access, or offer expanded hours. They
hire an extra nurse to monitor diabetic
patients more closely, and to make sure that
patients don’t miss their mammograms and
pap smears and colonoscopies.
Then there are the physicians who see
their practice primarily as a revenue stream.
They instruct their secretary to have patients
who call with follow-up questions schedule
an appointment, because insurers don’t pay
for phone calls, only office visits. They
consider providing Botox injections for cash.
They take a Doppler ultrasound course, buy a
machine, and start doing their patients’ scans
themselves, so that the insurance payments
go to them rather than to the hospital. They
figure out ways to increase their high-margin
work and decrease their low-margin work.
This is a business, after all.
In every community, you’ll find a
mixture of these views among physicians, but
one or another tends to predominate.
McAllen seems simply to be the community
at one extreme.
In a few cases, the hospital executive told
me, he’d seen the behavior cross over into
what seemed like outright fraud. “I’ve had
doctors here come up to me and say, ‘You
want me to admit patients to your hospital,
you’re going to have to pay me.’ ”
“How much?” I asked.
“The amounts—all of them were over a
hundred thousand dollars per year,” he said.
The doctors were specific. The most he was
asked for was five hundred thousand dollars
per year.
He didn’t pay any of them, he said: “I
mean, I gotta sleep at night.” And he
emphasized that these were just a handful of
doctors. But he had never been asked for a
kickback before coming to McAllen.
Woody Powell is a Stanford sociologist
who studies the economic culture of cities.
Recently, he and his research team studied
why certain regions—Boston, San Francisco,
biotechnology while others with a similar
concentration of scientific and corporate
talent—Los Angeles, Philadelphia, New
York—did not. The answer they found was
what Powell describes as the anchor-tenant
theory of economic development. Just as an
anchor store will define the character of a
mall, anchor tenants in biotechnology,
whether it’s a company like Genentech, in
South San Francisco, or a university like
M.I.T., in Cambridge, define the character of
an economic community. They set the norms.
The anchor tenants that set norms
encouraging the free flow of ideas and
collaboration, even with competitors,
communities, while those that mainly sought
to dominate did not.
Powell suspects that anchor tenants play
a similarly powerful community role in other
areas of economics, too, and health care may
be no exception. I spoke to a marketing rep
for a McAllen home-health agency who told
me of a process uncannily similar to what
Powell found in biotech. Her job is to
persuade doctors to use her agency rather
than others. The competition is fierce. I
opened the phone book and found seventeen
pages of listings for home-health agencies—
10 | P a g e
two hundred and sixty in all. A patient
typically brings in between twelve hundred
and fifteen hundred dollars, and double that
amount for specialized care. She described
how, a decade or so ago, a few early agencies
began rewarding doctors who ordered home
visits with more than trinkets: they provided
tickets to professional sporting events,
jewelry, and other gifts. That set the tone.
Other agencies jumped in. Some began
paying doctors a supplemental salary, as
“medical directors,” for steering business in
their direction. Doctors came to expect a
share of the revenue stream.
Agencies that want to compete on quality
struggle to remain in business, the rep said.
Doctors have asked her for a medical-director
salary of four or five thousand dollars a
month in return for sending her business.
One asked a colleague of hers for privateschool tuition for his child; another wanted
“I explained the rules and regulations and
the anti-kickback law, and told them no,” she
said of her dealings with such doctors. “Does
it hurt my business?” She paused. “I’m O.K.
working only with ethical physicians,” she
finally said.
About fifteen years ago, it seems,
something began to change in McAllen. A
few leaders of local institutions took profit
growth to be a legitimate ethic in the practice
of medicine. Not all the doctors accepted
this. But they failed to discourage those who
did. 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.
he real puzzle of American health care, I
realized on the airplane home, is not
why McAllen is different from El Paso. It’s
why El Paso isn’t like McAllen. Every
incentive in the system is an invitation to go
the way McAllen has gone. Yet, across the
country, large numbers of communities have
managed to control their health costs rather
than ratchet them up.
I talked to Denis Cortese, the C.E.O. of
the Mayo Clinic, which is among the highestquality, lowest-cost health-care systems in
the country. A couple of years ago, I spent
several days there as a visiting surgeon.
Among the things that stand out from that
visit was how much time the doctors spent
with patients. There was no churn—no
shuttling patients in and out of rooms while
the doctor bounces from one to the other. I
accompanied a colleague while he saw
patients. Most of the patients, like those in
my clinic, required about twenty minutes.
But one patient had colon cancer and a
number of other complex issues, including
heart disease. The physician spent an hour
with her, sorting things out. He phoned a
cardiologist with a question.
“I’ll be there,” the cardiologist said.
Fifteen minutes later, he was. They
mulled over everything together. The
cardiologist adjusted a medication, and said
that no further testing was needed. He cleared
the patient for surgery, and the operating
room gave her a slot the next day.
The whole interaction was astonishing to
me. Just having the cardiologist pop down to
see the patient with the surgeon would be
unimaginable at my hospital. The time
required wouldn’t pay. The time required just
to organize the system wouldn’t pay.
11 | P a g e
The core tenet of the Mayo Clinic is
“The needs of the patient come first”—not
the convenience of the doctors, not their
revenues. The doctors and nurses, and even
the janitors, sat in meetings almost weekly,
working on ideas to make the service and the
care better, not to get more money out of
patients. I asked Cortese how the Mayo
Clinic made this possible.
“It’s not easy,” he said. But decades ago
Mayo recognized that the first thing it needed
to do was eliminate the financial barriers. It
pooled all the money the doctors and the
hospital system received and began paying
everyone a salary, so that the doctors’ goal in
patient care couldn’t be increasing their
income. Mayo promoted leaders who
focussed first on what was best for patients,
and then on how to make this financially
No one there actually intends to do fewer
expensive scans and procedures than is done
elsewhere in the country. The aim is to raise
quality and to help doctors and other staff
members work as a team. But, almost by
happenstance, the result has been lower costs.
“When doctors put their heads together
in a room, when they share expertise, you get
more thinking and less testing,” Cortese told
Skeptics saw the Mayo model as a local
phenomenon that wouldn’t carry beyond the
hay fields of northern Minnesota. But in
1986 the Mayo Clinic opened a campus in
Florida, one of our most expensive states for
health care, and, in 1987, another one in
Arizona. It was difficult to recruit staff
members who would accept a salary and the
Mayo’s collaborative way of practicing.
Leaders were working against the dominant
medical culture and incentives. The
expansion sites took at least a decade to get
properly established. But eventually they
achieved the same high-quality, low-cost
results as Rochester. Indeed, Cortese says
that the Florida site has become, in some
respects, the most efficient one in the system.
The Mayo Clinic is not an aberration.
One of the lowest-cost markets in the country
is Grand Junction, Colorado, a community of
a hundred and twenty thousand that
nonetheless has achieved some of Medicare’s
highest quality-of-care scores. Michael
Pramenko is a family physician and a local
medical leader there. Unlike doctors at the
Mayo Clinic, he told me, those in Grand
Junction get piecework fees from insurers.
But years ago the doctors agreed among
themselves to a system that paid them a
similar fee whether they saw Medicare,
Medicaid, or private-insurance patients, so
that there would be little incentive to cherrypick patients. They also agreed, at the behest
of the main health plan in town, an H.M.O.,
to meet regularly on small peer-review
committees to go over their patient charts
together. They focused on rooting out
problems like poor prevention practices,
unnecessary back operations, and unusual
hospital-complication rates. Problems went
down. Quality went up. Then, in 2004, the
doctors’ group and the local H.M.O. jointly
created a regional information network—a
community-wide electronic-record system
that shared office notes, test results, and
hospital data for patients across the area.
Again, problems went down. Quality went
up. And costs ended up lower than just about
anywhere else in the United States.
Grand Junction’s medical community
was not following anyone else’s recipe. But,
like Mayo, it created what Elliott Fisher, of
12 | P a g e
Dartmouth, calls an accountable-care
organization. The leading doctors and the
hospital system adopted measures to blunt
harmful financial incentives, and they took
collective responsibility for improving the
sum total of patient care.
This approach has been adopted in other
places, too: the Geisinger Health System, in
Danville, Pennsylvania; the Marshfield
Intermountain Healthcare, in Salt Lake City;
Kaiser Permanente, in Northern California.
All of them function on similar principles.
All are not-for-profit institutions. And all
have produced enviably higher quality and
lower costs than the average American town
hen you look across the spectrum
from Grand Junction to McAllen—
and the almost threefold difference in the
costs of care—you come to realize that we
are witnessing a battle for the soul of
American medicine. Somewhere in the
United States at this moment, a patient with
chest pain, or a tumor, or a cough is seeing a
doctor. And the damning question we have to
ask is whether the doctor is set up to meet the
needs of the patient, first and foremost, or to
maximize revenue.
There is no insurance system that will
make the two aims match perfectly. But
having a system that does so much to
misalign them has proved disastrous. As
economists have often pointed out, we pay
doctors for quantity, not quality. As they
point out less often, we also pay them as
individuals, rather than as members of a team
working together for their patients. Both
practices have made for serious problems.
Providing health care is like building a
house. The task requires experts, expensive
equipment and materials, and a huge amount
of coordination. Imagine that, instead of
paying a contractor to pull a team together
and keep them on track, you paid an
electrician for every outlet he recommends, a
plumber for every faucet, and a carpenter for
every cabinet. Would you be surprised if you
got a house with a thousand outlets, faucets,
and cabinets, at three times the cost you
expected, and the whole thing fell apart a
couple of years later? Getting the country’s
best electrician on the job (he trained at
Harvard, somebody tells you) isn’t going to
solve this problem. Nor will changing the
person who writes him the check.
This last point is vital. Activists and
policymakers spend an inordinate amount of
time arguing about whether the solution to
high medical costs is to have government or
private insurance companies write the
checks. Here’s how this whole debate goes.
Advocates of a public option say government
financing would save the most money by
having leaner administrative costs and
forcing doctors and hospitals to take lower
payments than they get from private
insurance. Opponents say doctors would
skimp, quit, or game the system, and make us
wait in line for our care; they maintain that
private insurers are better at policing doctors.
No, the skeptics say: all insurance companies
do is reject applicants who need health care
and stall on paying their bills. Then we have
the economists who say that the people who
should pay the doctors are the ones who use
them. Have consumers pay with their own
dollars, make sure that they have some “skin
in the game,” and then they’ll get the care
they deserve. These arguments miss the main
13 | P a g e
issue. 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.
One afternoon in McAllen, I rode down
McColl Road with Lester Dyke, the cardiac
surgeon, and we passed a series of office
plazas that seemed to be nothing but homehealth agencies, imaging centers, and
medical-equipment stores.
“Medicine has become a pig trough
here,” he muttered.
Dyke is among the few vocal critics of
what’s happened in McAllen. “We took a
wrong turn when doctors stopped being
doctors and became businessmen,” he said.
We began talking about the various
proposals being touted in Washington to fix
the cost problem. I asked him whether
expanding public-insurance programs like
Medicare and shrinking the role of insurance
companies would do the trick in McAllen.
“I don’t have a problem with it,” he said.
“But it won’t make a difference.” In
McAllen, government payers already
predominate—not many people have jobs
with private insurance.
How about doing the opposite and
increasing the role of big insurance
“What good would that do?” Dyke asked.
The third class of health-cost proposals, I
explained, would push people to use medical
savings accounts and hold high-deductible
insurance policies: “They’d have more of
their own money on the line, and that’d drive
them to bargain with you and other surgeons,
He gave me a quizzical look. We tried to
imagine the scenario. A cardiologist tells an
elderly woman that she needs bypass surgery
and has Dr. Dyke see her. They discuss the
blockages in her heart, the operation, the
risks. And now they’re supposed to haggle
over the price as if he were selling a rug in a
souk? “I’ll do three vessels for thirty
thousand, but if you take four I’ll throw in an
extra night in the I.C.U.”—that sort of thing?
Dyke shook his head. “Who comes up with
this stuff?” he asked. “Any plan that relies on
the sheep to negotiate with the wolves is
doomed to failure.”
Instead, McAllen and other cities like it
have to be weaned away from their untenably
fragmented, quantity-driven systems of
health care, step by step. And that will mean
rewarding doctors and hospitals if they band
together to form Grand Junction-like
accountable-care organizations, in which
doctors collaborate to increase prevention
and the quality of care, while discouraging
overtreatment, undertreatment, and sheer
profiteering. Under one approach, insurers—
whether public or private—would allow
clinicians who formed such organizations
and met quality goals to keep half the savings
they generate. Government could also shift
regulatory burdens, and even malpractice
liability, from the doctors to the organization.
Other, sterner, approaches would penalize
those who don’t form these organizations.
This will by necessity be an experiment.
We will need to do in-depth research on what
makes the best systems successful—the peerreview committees? recruiting more primarycare doctors and nurses? putting doctors on
salary?—and disseminate what we learn.
14 | P a g e
Congress has provided vital funding for
research that compares the effectiveness of
different treatments, and this should help
reduce uncertainty about which treatments
are best. But we also need to fund research
that compares the effectiveness of different
systems of care—to reduce our uncertainty
about which systems work best for
communities. These are empirical, not
ideological, questions. And we would do
well to form a national institute for healthcare delivery, bringing together clinicians,
hospitals, insurers, employers, and citizens to
assess, regularly, the quality and the cost of
our care, review the strategies that produce
recommendations for local systems.
Dramatic improvements and savings will
take at least a decade. But a choice must be
made. Whom do we want in charge of
managing the full complexity of medical
care? We can turn to insurers (whether public
or private), which have proved repeatedly
that they can’t do it. Or we can turn to the
local medical communities, which have
proved that they can. But we have to choose
someone—because, in much of the country,
no one is in charge. And the result is the most
wasteful and the least sustainable health-care
system in the world.
improve quality if it means sacrificing
In El Paso, the for-profit health-care
executive told me, a few leading physicians
recently followed McAllen’s lead and opened
their own centers for surgery and imaging.
When I was in Tulsa a few months ago, a
fellow-surgeon explained how he had made
up for lost revenue by shifting his operations
for well-insured patients to a specialty
hospital that he partially owned while
keeping his poor and uninsured patients at a
nonprofit hospital in town. Even in Grand
Junction, Michael Pramenko told me, “some
of the doctors are beginning to complain
about ‘leaving money on the table.’ ”
As America struggles to extend healthcare coverage while curbing health-care
costs, we face a decision that is more
important than whether we have a publicinsurance option, more important than
whether we will have a single-payer system
in the long run or a mixture of public and
private insurance, as we do now. 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. ♦
omething even more worrisome is going
on as well. In the war over the culture of
medicine—the war over whether our
country’s anchor model will be Mayo or
McAllen—the Mayo model is losing. In the
sharpest economic downturn that our health
system has faced in half a century, many
people in medicine don’t see why they
should do the hard work of organizing
themselves in ways that reduce waste and
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On June 23, 2009, Dr. Gawande addressed the questions raised about his article,
“The Cost Conundrum.” His response follows, and can also be found online at:
June 23, 2009
In my June 1st article, “The Cost Conundrum,” I explored the question of why two
border towns in Texas of similar size, location, and circumstances—McAllen and El Paso—
should cost Medicare such enormously different amounts of money. In 2006, McAllen cost
$14,946 per enrollee, which is the second-highest in the United States and essentially double El
Paso’s cost of $7,504 per enrollee. Analysis of Medicare data by the Dartmouth Atlas project
shows the difference is due to marked differences in the amount of care ordered for patients—
patients in McAllen receive vastly more diagnostic tests, hospital admissions, operations,
specialist visits, and home nursing care than in El Paso. But quality of care in McAllen is not
appreciably better, and by some measures, it is worse. Indeed, studies have shown that the care
for patients in the highest-cost regions of the country tends to go this way—with more high-cost
care across the board, but less low-cost preventive services and primary care, and equal or worse
survival, functional ability, and satisfaction with care. The causes that I found locally was a
system of care that was highly fragmented for patients and often driven to maximize revenues
over patient needs. And I pointed to positive outliers across the country, including Grand
Junction, Colorado, and the Mayo Clinic that deliver markedly lower-cost, higher-quality care.
The depth of response the piece received has been orders of magnitude greater than I
anticipated. The most gratifying for me has been the overwhelming volume of supportive letters,
e-mails, and blog postings from fellow physicians, nurses, and other clinicians who felt that it
captured the difficulties they’ve had struggling against a system that pushes them for quantity
over quality and fragments care in ways that are costly and dangerous to patients.
But there have also been a few skeptics, who claim, in essence, that the costs of care in
McAllen are what they should be for good medicine. They raise three major objections to the
article’s findings.
1. What about McAllen’s many “Winter Texans”—retirees who live elsewhere but come for
the warm weather in the winter and inflate the local costs of care? But in the Dartmouth
Atlas, the Medicare costs for an enrollee are counted against their permanent place of
residence. The cost of these “snowbirds” are excluded for McAllen.
2. The real culprit is medical malpractice. McAllen is a “judicial hellhole” and doctors are
practicing defensive medicine, ordering unnecessary tests to protect themselves against
lawsuits, and that is driving the difference. Yet El Paso and McAllen function under the
same Texas malpractice laws that capped malpractice awards in 2003. As doctors there
noted to me, premiums have gone down substantially, reflecting the major drop in
lawsuits. And even if McAllen doctors were especially fearful of lawsuits, it is hard to
imagine that “defensive medicine” would lead to McAllen’s vastly greater number of
pacemaker insertions, knee replacements, carotid operations, coronary artery stents, or
home-nursing visits. Certainly the doctors I spoke to there did not think lawsuit fears
affect their decisions for surgical therapies and other such interventions.
Reprinted with permission of the author, originally published in the New Yorker
3. McAllen is three times poorer and unhealthier—and has legions more illegal
immigrants—than low-cost, well-served communities like Grand Junction, Colorado.
That’s why the comparison in health-care delivery was between McAllen and El Paso.
The purpose of discussing these places was to understand what medical communities that
have low-cost and high-quality care do differently. They find ways to blunt financial
incentives that drive unnecessary care, ways for clinicians to collaborate much more
effectively for patients, and ways for the organization to accept accountability for
improving the overall results of both outpatient and inpatient care. There are, in fact,
examples of exactly this in Texas itself. Scott and White Memorial Hospital has brought
Temple, Texas, higher Medicare quality scores than McAllen hospitals, higher patient
satisfaction, and the lowest costs in the state ($7,015 per enrollee) by building an
accountable care organization that we could learn a great deal from.
As I noted in the piece, McAllen is indeed in the poorest county in the country (Hidalgo
County), with a relatively unhealthy population and the problems of being a border city. They
have a very low physician supply. The struggles the people and medical community face there are
huge. But they are just as huge in El Paso—its residents are barely less poor or unhealthy or
under-supplied with physicians than McAllen, and certainly not enough so to account for the
enormous cost differences. The population in McAllen also has more hospital beds than four out
of five American cities. Here are a few salient facts for comparison:
City median household income, 2007 $39,727
Poverty rate, 2007
Hispanic population
Per capita income rank by county 2007
Per capita income, county, 2007
Unemployment, 2006
Unemployment, 2008
Deaths from Cardiovascular Disease,
Rate per 100,000
Asthma rates among adults 2001-2006
Cases of AIDS/Rate per 100,000
Infant Deaths/Rate per 1,000
Cancer Incidence, Rate per 100,000 2001-2005
Physician supply,
# per 100,000 (rank)
Hospital beds,
# per 100,000 (percentile rank)
El Paso
Hidalgo County
#1 poorest in U.S.
El Paso County
#6 poorest in U.S.
McAllen Hospital Referral
114 (#1 worst)
El Paso Hospital Referral
144 (#10 worst)
3.2 (83rd percentile)
2.3 (42nd percentile)
2|P a g e
By any measure, McAllen’s poverty and poor health fails to account for its differences
from El Paso. St. Louis is located in another county that is just as poor as McAllen (it is the thirdpoorest county in the U.S.). Its cost per Medicare enrollee? $8,306. Poverty and poor health are
grievous problems for many communities. But in addressing these problems, they don’t spend
twice the national average on health care, while achieving no better results than similar
One last point worth remembering here: McAllen’s spending was almost identical to El
Paso’s in the early nineteen-nineties. By the late nineties, however, it had become one of the most
expensive regions in the country for Medicare and it has continued that way. Yet, public data
show no sudden decline in health status or income for the McAllen population.
The biggest changes? A dramatic rate of overutilization during a period that saw a
marked expansion in physician-owned imaging centers, surgery centers, hospital facilities, and
physician-revenue-sharing by home-health agencies. Home-health agencies there, for example,
spent more than $3,500 per Medicare beneficiary—not only five times more than in El Paso, but
also more than half what many communities spend on all patient care. In the end, none of the
criticisms address either the pattern of overtreatment found in multiple studies of high-cost
communities or the specific instances I found of revenue-driven care among doctors and
executives in McAllen.
One methodological question is whether Medicare spending patterns differ from privateinsurance spending patterns. There are indeed differences, because the prices Medicare pays
doctors, hospitals, and others for services are not the same as the prices that private insurance
pays. But, as a series of Dartmouth studies have shown, when it comes to how many services are
provided per patient, the utilization patterns for the over-65 Medicare population are similar to
those in the under-65 population.
As we look across the enormous differences in health-care spending in our country, what
we are witnessing are enormous differences in the way medicine is practiced. There are lessons to
be learned from examining what the positive outliers do differently to prevent themselves from
going McAllen’s way. Studying what they have accomplished, and changing the financial
incentives in our system to replicate it, could make care far better for patients in McAllen. Indeed,
it could make care far better for patients across the country. ♦
3|P a g e
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