Health Care Costs

The New York Times has a published long, unsigned editorial on health care costs, The High Cost of Health Care. I don't know whether to praise the Times for trying to tackle the issue, or criticize it for presenting such a superficial summary which, as it seems, nobody on their editorial staff wished to sign. Maybe both?

The editorial starts out by being simplistic:

Almost all economists would agree that the main driver of high medical spending here is our wealth. We are richer than other countries and so willing to spend more. But authoritative analyses have found that we spend well above what mere wealth would predict.

If you look at health care costs and their growth, the U.S. was pretty much in line with other developed nations until those nations developed national health care plans. It was at that point that our health care costs started to rise at a disproportionate rate. The fact that we are increasingly recognizing that reform to limit health care costs is necessary reflects that, if anything, our nation's wealth allowed us to delay addressing the issue. To the extent, though, that our wealth plays a role in our health care costs, it seems to be primarily in our tolerance for waste (about 20% of each health care dollar) and bureaucratic inefficiencies:

This is mostly because we pay hospitals and doctors more than most other countries do. We rely more on costly specialists, who overuse advanced technologies, like CT scans and M.R.I. machines, and who resort to costly surgical or medical procedures a lot more than doctors in other countries do. Perverse insurance incentives entice doctors and patients to use expensive medical services more than is warranted. And our fragmented array of insurers and providers eats up a lot of money in administrative costs, marketing expenses and profits that do not afflict government-run systems abroad.

People may neglect the fat and waste in their budgets when they have a lot of discretionary income, but it becomes harder to do so when that discretionary income is reduced due either to increased cost or other priorities. What we should not do is pretend that individual consumer choices can affect health care costs or waste, or that people are "choosing" to spend more on health care - individuals have next to no influence on the cost of health care, which is primarily determined by the amount insurance companies deem appropriate for particular medical services.

If citizens of an extremely wealthy nation like the United States want to spend more on health care and less on a third car, a new computer or a vacation home, what’s wrong with that? By some measures, Americans are getting good value. Studies by reputable economists have concluded that spending on such advanced treatments as cardiac drugs, devices and surgery; neonatal care for low-birth-weight infants; and mental health drugs have more than paid for themselves by extending lives and improving their quality.

And again, the canard that this is an individual choice - that people choose between an extravagance (such as a "third car") or an overpriced health care system, and choose the latter. The "reputable economists" thing... Not one is named. And I think any reputable economist would also concede that other industrialized nations get the same or better results while spending far less money per capita.

The first proposed "solution" involves noting that health care outcomes are often the same in rural hospitals as they are in far more costly urban hospitals. Most likely to some degree higher salaries, specialist referrals and infrastructure costs, but I would venture that the leading contributing factor is health care technology. Cutting edge diagnostic technology is expensive, and when hospitals have it they will seek to recover the cost of their investment, as well as the continuing costs of staff and maintenance. When a hospital doesn't have a huge number of expensive diagnostic imaging machines, it can't order a CT scan for a suspicious headache - in most cases that's going to turn out to be an unnecessary expense that significantly inflates an emergency room visit. If the Times is sincere in suggesting this as a leading point for "reform", it needs to confront the fact that our access to expensive health care technologies is one of the leading factors that proponents of the status quo use to argue the superiority of U.S. health care over that of other nations. ("Our outcomes may be no better, or even worse, but we have all the cool toys.")

The second proposed solution is to "stick to what works", with the Times observing quite reasonably that a lot of medical care is not science based - it flows from a doctor's impressions or experiences. The problem here is differentiating between what medical science can quantify and what it cannot - it is not necessarily going to be an improvement to require doctors to follow checklists and protocols in a primary care setting. Sometimes the doctor's patient questioning or intuition is what will bring about the proper diagnosis, while that may not be immediately apparent from the standard tests or questions. Where treatment is symptomatic, it may not matter whether the science is behind the treatment - if palliative care works, the patient feels better even if the diagnosis is incorrect. Also, as is noted here, the human body is not a machine and the same treatment may produce very different results in different patients. I am a huge proponent of science-based medicine, but it is not a panacea.

The editorial presents a nebulous comment about managed care - it might reduce costs, but it might also produce a backlash if it (again) resulted in the denial of care. This is a peculiar issue as insurance companies don't have to pay for treatment that is not medically necessary, so in theory people could already be required to pay for their discretionary care above and beyond that level. The bigger problem with managed care was its broad effort to categorize expensive, potentially life-saving techniques as "experimental" and to deny them on that basis. People dying of cancer did not enjoy hearing that bone marrow transplants were "experimental" and thus not covered. If the Times wants to go back to that form of "managed care", yes, there will be a backlash.

The fourth proposal is that the U.S. should catch up with the world in health care information technologies. This alone should evidence how our so-called health care "market" has failed - when these costs can be passed to the consumer, insurance companies are happy to do just that. When the sky is not the limit and costs must be contained, health care systems typically act to contain these costs. It is no surprise that the V.A. is a domestic leader in health care information technology, while "private insurers" trail far behind the rest of the world.

The Times makes a valid point about prevention - there is an enormous potential for cost savings in prevention, but there is also an enormous cost in implementing a broad system of preventive medicine. The Times notes that there is potential for improvement in disease management for the chronically ill, but that there is little evidence to date that this will result in any appreciable savings.

The Times endorses allowing Medicare to negotiate for discounts when purchasing pharmaceuticals and, while this may not produce windfall savings, it seems like a no-brainer. The various private insurers which the government subsidizes to compete with Medicare are permitted to negotiate discounts.

In terms of who would "pick up the tab", the Times proposes paying providers less. The Times notes that this will make them unhappy, but seems to take a "but what are they going to do about it" approach to the issue. If we act before things reach a total crisis, we shouldn't have to cut reimbursement rates (save perhaps as adjusted for inflation) - the long-term outcome would likely be the same, but doctor's don't have to take an actual pay cut in order for us to get back on track.

In terms of emphasizing primary care, which the Times endorses, perhaps an alternative would be to compensate all doctors at primary care rates if their services could have been performed by a primary care physician. Specialists could accept the reduced compensation, or could defer that type of treatment to lower-cost providers.

The Times endorses requiring a consumer contribution to health care costs. I agree with that - there should be a means-tested copayment for medical services and pharmaceuticals, perhaps capped on an annual basis, even for those on Medicaid. (The amount may have to be negligible or subject to waiver for some health care recipients, but even if it's 50 cents a copayment can inspire some level of thought as to whether a visit to the doctor is necessary. At low income levels a copayment might also be applied once per course of treatment, so that people are not discouraged from seeking follow-up care.)

To support this, the Times references a study which occurred from 1974 to 1982, tracking health care expenditures by people who received varying subsidies of their medical care (with copayments capped at $1000):

A classic experiment by Rand researchers from 1974 to 1982 found that people who had to pay almost all of their own medical bills spent 30 percent less on health care than those whose insurance covered all their costs, with little or no difference in health outcomes.

The findings must be considered in association with health care costs - my guess is that the same study, conducted today, would find an even greater savings due not to need but due to health care inflation. But it also ties back to what the Times observed earlier - it is difficult to put a value on preventive care. Some of the savings comes from people not seeking care for a cold or flu that gets better by itself - as most illnesses will. Some of the savings is documented as coming from people not being treated for high blood pressure - something that may not result in much cost savings over eight years, but could result in significant long-term savings for treatment of heart attacks and strokes. The study's findings in a bit more detail,

At the end of the experiment, the researchers concluded that the “use of medical services responds unequivocally to changes in the amount paid out of pockets.” Per capita expenses on the free plan were 45 percent higher that those on the 95 percent coinsurance plan. For outpatient services, adults on the 25 percent coinsurance plans spent only 78 percent as much as those on the free plan. For children in that group the figure was 74 percent. On the 95 percent coinsurance plan adults spent 60 percent as much as those on the free plan and children 59 percent as much.

The goal in setting a copayment would be to provide people with an incentive to think before incurring medical costs, but not to create an impediment to their seeking necessary medical care. Short-term cost savings is not so important that people should not be discouraged from having high blood pressure or obstructive sleep apnea diagnosed or treated, or from having their infant examined for an ear infection or acute respiratory illness. Also, as the Times notes, we have to respect the fact that individuals lack the expertise to manage their own medical treatment - they need a doctor's guidance.

The times also correctly notes that individual choice will have little overall impact, because health care costs are not evenly distributed:

Most health care spending is racked up by a small percentage of individuals whose bills are so high they are no longer subject to cost sharing; they will hardly be deterred from expensive care they desperately need.

Right now we have the worst of all worlds - when these people are uninsured or underinsured, we force them to treat at emergency rooms - the most expensive source of medical care. When they are insured, but become disabled from work, we allow their insurance to lapse such that they become uninsured. (Wouldn't an easy short-term fix to this to be to mandate that health insurance policies include a disability provision which will cover a patient's premiums until the person either recovers from or succumbs to a disabling illness?) Then, when the patient is financially ruined, we finally step in with Medicare and Medicaid.

This is exceptionally simplistic:

Deep in their hearts, many liberals yearn for a single-payer system, sometimes called Medicare-for-all, that would have the federal government pay for all care and dictate prices. Such a system would let the government offset the price-setting strength of the medical and pharmaceutical industries, eliminate much of the waste due to a multiplicity of private insurance plans, and greatly cut administrative costs.

But a single-payer system is no panacea for the cost problem — witness Medicare’s own cost troubles — and the approach has limited political support. Private insurers could presumably eliminate some of the waste through uniform billing and payment procedures.

There are many flavors of "single payer" that we could implement, including versions which allow consumers to choose between private insurance plans (much like the present cafeteria of health care plans offered by many employers), and most plans (like Medicare) would also allow private supplemental insurance. To hope that private insurers will suddenly take it upon themselves to implement cost-savings methodology that would either benefit other insurers, or cause them to incur costs which might cause their premiums to briefly be higher than their competitors' before dropping to a lower level due to new efficiencies? A pipe dream.

As previously noted, government-paid health care systems, domestically and internationally, lead in this area. Market purists may wish to ignore the facts, but the same logic applies as with consumers - if the health care provider is forced to absorb the costs, it will seek greater efficiencies - with the primary difference being that providers actually have the power and control necessary to effect change. U.S. health insurers don't - they just increase insurance premiums and pass along the cost.