Health Care Dollars Well Spent
(cc photo by fw190a8)
There’s a lot of wasteful spending in our health care system, but of course it’s not all waste and just about everyone you speak with agrees with the point David Brown makes in the Washington Post, namely that increased health care capabilities are an important driver of increased health care costs. In other words, sometimes we invent a useful-but-expensive treatment and as it rolls into widespread use costs go up but so do survival rates.
And good for us. The US in 2008 is much richer than the US of 1968 and the extra wealth has to be spent on something. So why not better heart attack treatments?
But still it does strike me that there’s something at least a little bit odd about this. It’s not, after all, uniformly the case that technological progress makes things more expensive. The real price of new cars has, for example, declined over the past few decades which is one reason why car ownership has become so widespread:
In a different kind of case, when HDTVs were first introduced they were much more expensive than conventional televisions. Early adopter types went out and bought them anyway, which must have led to some kind of increase in television spending. But soon enough HDTV prices began to fall. And the presence of cheaper HDTVs on the market caused the price of conventional TVs to go way down, since what had formerly been a standard product became a downmarket product. Technological progress is driving quality up, in other words, but not really driving prices to march upward to nearly the same degree.
This gets back to some of the perversities of fee-for-service medicine. The current market creates strong incentives for people to develop “better and more expensive” methods of treatment, but almost no incentive to develop “as good but cheaper” methods of treatment. Both kinds of innovation, however, are extremely valuable. The world’s resources are limited, and the development of cheaper methods of treatment would allow for more overall treatment and thus better outcomes.
32 Responses to “Health Care Dollars Well Spent”
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July 27th, 2009 at 1:11 pm
This gets back to some of the perversities of fee-for-service medicine. The current market creates strong incentives for people to develop “better and more expensive” methods of treatment, but almost no incentive to develop “as good but cheaper” methods of treatment. Both kinds of innovation, however, are extremely valuable.
Well said. Extremely well said, in fact.
July 27th, 2009 at 1:13 pm
http://en.wikipedia.org/wiki/Baumol%27s_cost_disease
July 27th, 2009 at 1:21 pm
I’ve been thinking the exact same thing for a while, that part of the health care system’s broken-ness is due to the lack of pressure on the “as good but cheaper” innovation. That’s part of the argument for a more free-market health care system: that competition will drive the pressure to produce health care services more efficiently. I’m sure you’ve read about the flagship example of this — Lasik surgery, which isn’t (usually) covered by insurance and so has become dramatically cheaper (and better) over time. Whether and how the same price pressures can be extended to non-elective health care, I can’t say.
July 27th, 2009 at 1:27 pm
It is not just fee for service that is the problem it is the fact that the primary economic relationship is between health care provider and insurer, not health care provider and patient.
Insurance companies look at coverage kicking in and out not just on broad categories of coverage but also strict dollar limits. Whether those dollars are spent efficiently or inefficiently in the delivery of care is not of particular concern to them so long as they can adjust their premiums and coverages to account for changes in projected costs.
A patient would have a lot more incentive to get more bang for the buck of health care expenditure.
July 27th, 2009 at 1:28 pm
Not to mention that new, expensive treatments and increasing costs are only justifiable if the outcomes are improved as a result. But overall we’re way behind other countries in basic health indicators (life expectancy, for example). I’d be happy to pay extra for health care if it gave me 10 extra years of productive life. As it stands I’m paying a lot more for results that are no better–maybe worse–than what my parents got.
July 27th, 2009 at 1:44 pm
“Whether and how the same price pressures can be extended to non-elective health care, I can’t say.”
I’d say it can’t. If you are having a heart attack, you aren’t going to call up a bunch of hospitals to get price quotes. You’ll just go to the nearest hospital, regardless of their prices. And has anyone ever tried to get a price quote from a hospital? They don’t give them out. I tried when I fractured my skull and just wanted a cost for a cranial X-ray. They don’t really have standard pricing because they’ll charge different insurance companies different prices and then they’ll charge individuals much more. So they can’t tell you a price even for something as basic as an X-ray. All they would tell my is that I really need to come in if I have blood coming out of my ears. Which missed the point. I could go to three different hospitals, and I was certainly going to one of them. I just wanted to know which one would be cheaper. But without being able to get a price, the competition thing really didn’t work.
July 27th, 2009 at 1:48 pm
I’ve got to say, this is one of the best blog posts I’ve ever read!
July 27th, 2009 at 1:57 pm
In cars, and other technology, there’s state-of-the-art and state-of-the-market, and prices for a product drop as it moves from one state to the other. A $30 DVD players is good enough for me; let some other people who care more play more for a Blu-Ray player.
But in health care, having people settle for less expensive and indeed lesser solutions is not socially viable. We all want the best cancer treatments, the best heart attack treatments, etc. There is not a market for treatments that were once state of the art but are now OK.
In some fields, we’ve reached an endpoint where there’s not much utility in pushing forward, so prices have come down significantly. Computers come to mind. But as long as we remain mortal, there will always be benefit to improved treatments, which will mean more research and more $$.
July 27th, 2009 at 2:02 pm
If there is a car that is 10% less desirable but costs half as much, I’ll take the car that costs half as much. If there is a drug that is 10% less effective but costs half as much, as long as I have insurance that covers both I’ll take the more effective drug every single time- what reason do I have not to? If there is a wildly expensive surgery that is marginally more effective of course I’ll take the expensive surgery as long as someone else is paying the bills. Unless people have reason to care about how much healthcare they consume there is just no incentive in the system anywhere to control costs.
July 27th, 2009 at 2:06 pm
The other big factor in this is that lasik surgery (which I’ve had) is something you can do WITHOUT. If you didn’t had the money, you kept using glasses, as you had always done, and nothing terrible happened. But if you have cancer, you can’t do that and of course, price shopping is out of the question too (getting a good price may take months, which in this case you don’t have). Basically, there is no incentive anywhere to provide a cheaper product.
July 27th, 2009 at 2:09 pm
And of course, comparing quality of treatments (or doctors, hospitals, etc.) is extremely difficult, if not outright impossible. There is a good chance that the state-of-the-art, brand new, very expensive treatment is exactly as effective as the old, cheap treatment, and you don’t have many ways of knowing it.
July 27th, 2009 at 2:15 pm
But in health care, having people settle for less expensive and indeed lesser solutions is not socially viable. We all want the best cancer treatments, the best heart attack treatments, etc. There is not a market for treatments that were once state of the art but are now OK.
Really? Because I’m pretty sure this is exactly what happens right now. Those who are rich or have gold-plated insurance plans get the best cancer and heart attack treatments, and everyone else gets the ones which were once state of the art but are now OK. Well, not everyone else. A lot of people get nothing. Getting them the medium-level stuff would be a pretty big upgrade.
July 27th, 2009 at 2:18 pm
Insurance effect and malpractice effect.
Insurance effect–if the end cost to me is the same because insurance covers both, choose the better treatment. Offsetting that is what deductibles are designed to combat.
Malpractice effect: as a doctor friend of mine put it. If you have a life-threatening condition, and I have a $1 treatment that works 75% of the time and a $1000 treatment that works 76% of the time, I can’t give you the $1 treatment.
July 27th, 2009 at 2:19 pm
“There is not a market for treatments that were once state of the art but are now OK.”
There is one, it’s just a small market. Those of us without health insurance are that market. And I have gone with less state-of-the-art treatments to save money. Consider that skull fracture. They recommended an expensive MRI after giving me the X-ray. I couldn’t afford it, so I said no. They were concerned about fluid build up, which is a very real concern. So asked them how they detected the fluid build-up prior to the invention of the MRI. And they said that the fluid build-up was extremely painful and the patients would let them know about the pain. So I told them I could go with the old method. And that’s what we did. But I’ll admit that the doctor was very surprised to have that conversation. He was also surprised that this wasn’t the first time I’d fractured my skull. He counted at least two previous occasions, which is weird, because I could only remember one.
July 27th, 2009 at 2:22 pm
The dirty little secret is that private insurance provides doctors with higher demand while also insulating them from market forces wrt cost. There is an economic reason why the AMA has historically opposed “socialized medicine”.
July 27th, 2009 at 2:36 pm
Don’t forget our old friend Baumol’s Cost Disease.
ttp://en.wikipedia.org/wiki/Baumol%27s_cost_disease
The healthcare gatekeeper role (the triage tent, if you will) should be pushed as far down the value chain as possible. Whether its by a physician assistant, nurse or paramedic, if the simple problems can be addressed (and drugs prescribed) by following established diagnosis and treatment protocols, it’d save money for the payer (patient or insurer) and save the doctor’s time for more serious cases.
As I mentioned a couple of weeks ago, Alaska has gone pretty far down this road with its Community Health Aide Program.
http://yglesias.thinkprogress.org/archives/2009/07/healthtopia.php#comment-1632224
July 27th, 2009 at 2:40 pm
Thanks, fostert — “no market” is probably too strong. Maybe “no desire” or “little desire?” I suspect that if you had your druthers, you would have gotten the MRI. And I’m not sure you’d accept a third party telling you you had to go with the old method.
July 27th, 2009 at 3:09 pm
I was too flippant with the triage tent comment because for a low level gatekeeper, anything more serious than their training and protocol manual covers should referred and/or transported to a physician.
To use Fostert’s case as an example (and I’m glad he’s made it through three skull fractures OK), no one would expect a physician assistant or paramedic to handle that on their own.
The military gives broader responsibility to its medics than the civilian world (there are no malpractice lawyers in foxholes, after all) but a quick check of the Air Force Independent Duty Medical Technician Manual shows no protocol for treating fractured skulls except for the head trauma section which calls for immediately contacting a doctor.
http://www.e-publishing.af.mil/shared/media/epubs/AFMAN44-158.pdf
July 27th, 2009 at 3:25 pm
This is the same thing as the refrigerator post. The marginal utility of the $4000 frige over the $500 one is small. In a normal market, some company is going to see the vast majority of consumers that want a cheap, functional good/service and serve those needs (see appliances, generic drugs, cars, etc). A lot of the reason there is not similar behavior in medicine is almost entirely due to the technology, materials, and labor.
For example, expensive drug therapies for HIV or cancer can not be mass produced cheaply in some factory in China by unskilled workers (how we got cheap friges). Drugs are batch products requiring intensive control mechanism and highly refined starting materials. Mass production could only occur if continuous processes were utilized (like oil refineries), but contamination would cause very expensive product losses so it is unfeasable.
Prosthetics are made to the individual and therefore require a lot of highly skilled hands on labor. And, the materials are advanced composites whose processing is also very costly (and high-tech). The only way to lower these costs would be to develop better robotics technology (and robots are also expensive to make and maintain).
Point is that we already have the “low end” solutions and the cost reduction will occur in other areas by engineers, not doctors. But the elephant in the room is that the way to reduce the cost of healthcare is to prevent people from becoming chronically ill by promoting education (including sex), healthy diets, and exercise. Unfortunately, we want to have our cake and eat it too.
Any, on a side note, as car prices went down, I think quality did too. My first car (90 accord) ran till it had 400,000 miles and was like 13 years old. Cars don’t do that any more.
July 27th, 2009 at 3:29 pm
“I suspect that if you had your druthers, you would have gotten the MRI.”
I often wonder about that. I guess these days, I can afford it. But I kind of thought the fluid build-up wasn’t going to be a problem given that I was already leaking blood an pus out of my ears. And I didn’t have any problems, so I guessed right. But I’d probably get the MRI now. That MRI might reveal some other issues, anyway. I’ve had eleven concussions and three skull fractures, so an MRI would probably be a good idea anyway.
“And I’m not sure you’d accept a third party telling you you had to go with the old method.”
Well, I wouldn’t be happy about it. But then again, that third party would be an insurance company, which would imply that I had insurance. And having insurance would be a good thing. I’m shut out of the insurance market now. Would I trade my full control over choices for having insurance? Absolutely. As it now, I couldn’t afford cancer treatment, so I’ll just die if I get cancer. Given that everyone in my family who is now dead died from cancer, the odds aren’t looking too good for me. And my sister now has cancer. If she had my insurance situation along with it, she’d have a few months to live. Instead, she’s got a 60% five year survival rate.
July 27th, 2009 at 3:43 pm
“Prosthetics are made to the individual and therefore require a lot of highly skilled hands on labor.”
That’s less true in some countries. There a program in Cambodia to teach landmine victims how to make prosthetics. They are obviously low-tech, but that’s all people can afford anyway. And the market for prosthetics in Cambodia is very large. There’s still a lot of undiscovered land mines there, so there are a lot of people missing limbs. But I don’t think we should do that here. Our need for prosthetics comes mostly from the military, and those guys deserve the best. When I was taking care of my roommate, he got his cancer treatment at the Denver VA. You enter that hospital in the prosthetics ward. And it was pretty shocking. I’d say it was standing room only there, but most of them aren’t standing yet.
July 27th, 2009 at 3:46 pm
I think fostert has hit on the essential tension.
Certainly it would be a good think if fostert had health insurance, and thus access to medical technology that is a generation behind.
But the rest of us currently have access to the current generation, and MY’s post implied that we ought to be willing to accept the previous generation’s technology, just as many of us stay a generation behind in consumer goods and thus don’t pay the premium.
I don’t know if Americans, especially those fortunate enough to currently have good health insurance, will swallow it. I’m not sure I swallow it. What if fostert’s sister only had access to state-of-the-market cancer treatments? Maybe her 5 year survival rate would be 40% rather than 60%. Would it be worth it if it meant fostert’s survival rate in case he got cancer went from 5% to the same 40%?
Asking Americans to give up on excess consumption is one thing. Having them accept a real increased possibility of death is another. From an equality standpoint, it seems like something we should do, but it’s hard to actually pull the trigger on increasing your own (or your children’s) chance of death.
July 27th, 2009 at 4:57 pm
Another thing about health cost trending is that everyone is extrapolating a constant rate of growth, but no one knows exactly why costs are growing. It is quite possible, even likely that the growth rate will naturally self moderate due to intrinsic constraints.
July 27th, 2009 at 5:19 pm
“Maybe her 5 year survival rate would be 40% rather than 60%. Would it be worth it if it meant fostert’s survival rate in case he got cancer went from 5% to the same 40%?”
Well, now there’s a dilemma that hits home. Fortunately for my sister, her treatment isn’t really all that special. It’s just basic chemo, then ripping a lot of things out (breasts and lymph nodes), then reconstruction, and finally radiation. It’s all twenty year old technology. It will still cost about a million dollars. And it will by no means be pleasant. Oddly enough, she’d have the option of more state-of-the-art treatment had it been caught earlier. But the newer treatments aren’t much better in survivability, they are just a lot less radical in the surgery aspect. But as for the dilemma, in principle I’d opt for better average outcomes. But in the specific case of me and my sister, I want the best for her, and if I don’t get treatment in the future, so be it. The decisions we make get a lot tougher when it’s a loved one. How can you tell someone you love to settle for less than the best? It’s easier to tell someone you don’t know that they are out of luck. And that’s pretty much what we do. I can’t blame anyone for this attitude. I can’t ask anyone to forgo treatment for themselves or a loved one. It just sucks being the guy getting screwed. But someone has to get screwed, I guess.
July 28th, 2009 at 7:49 am
America’s problem with healthcare is an insurance problem not a health services problem. That said it’s important to recognize that self employed people need access to affordable health care plans that provide the self employed with a business deduction for health insurance premiums. Self employed individuals are not currently allowed to include the cost of their healthcare premiums as a business expense. They also have no leverage in establishing the price for the insurance. Corporations and bigger businesses can deduct the costs of health insurance they purchase for employees because the purchase is considered group health insurance. They can also buy coverage for lower per capita premiums. The consequence of denying the self employed the business deduction on their business return is that the self employed have to pay self employment tax (over 15%) before they are allowed to take a deduction for health care premiums on their personal tax return. As a self employed individual I pay nearly $1,100 per month to cover just myself in a basic HMO that is one step above a basic hospitalization plan. I pay self employment taxes on that money before I pay the premium. My total monthly health care cost, which includes the monthly premium plus the self employment tax, will go down by an amount equal to the self employment tax if my health insurance premium is treated as a business expense. The monthly premium will go down if there are provisions in the new plan so that the self employed can access group rates. Any health reform plan that levels the playing field for the self employed by permitting us to write off health insurance premiums as a business deduction on schedule C and provides for access to group rates will be supported wholeheartedly by the self employed. Any politician who opposes those basic reforms for the self employed will be driven out of office by the very same self employed voters that they claim to represent.
July 28th, 2009 at 12:16 pm
There is also the problem with the CPI discounting the quality improvements to the car CPI. The BLS even has a web site where they attempt to reassure everybody that they are accurately separating out the change in cost for a product from the quality improvement in the product.
The quality improvement in “car” may be easier to measure than the quality improvement in “health”.
cite: http://www.bls.gov/cpi/cpiqa.htm#Question_4
“Is the use of “hedonic quality adjustment” in the CPI simply a way of lowering the inflation rate?”
“No. The International Labour Office refers to the hedonic approach as “powerful, objective and scientific”. Hedonic modeling is just one of many methods that the BLS uses to determine what portion of a price difference is viewed by consumers as reflecting quality differences. It refers to a statistical procedure in which the market valuation of a feature is estimated by comparing the prices of items with and without that feature. Then, for example, if a television in the CPI is replaced by one with a larger screen and higher price, the BLS can make an adjustment to the price difference by estimating what the old television would have cost had it had the larger screen size. “
July 28th, 2009 at 3:17 pm
[...] a comment » Matt Yglesias makes the point that the price of new cars has not increased as fast as inflation over time, nor have High Definition TVs which have seen costs come [...]
July 28th, 2009 at 3:38 pm
I have a few problems with the conclusion:
There are many examples of “as good, but cheaper” that are widespread:
The use of cath placed stents to treat heart artery blockage is wayyyyyy cheaper than bypass surgery.
In addition, laproscopic surgical techniques have resulted in signifincantly shorter hospital (i.e. less expensive) stays and have turned a host of invasive surgeries into outpatient procedures.
Also, I think you are confusing the per unit cost of something with the total spending.
On a per unit basis, HDTVs are cheaper. However, total spending on HDTVS has grown dramatically.
The cost of MRIs (as an example) has followed the HDTV model — the cost of an individual MRI is now relatively cheap on an per unit basis, so we using a very large volume of them.
July 28th, 2009 at 4:50 pm
One other factor: new medications costs many hundreds of millions of dollars to produce and get to market. Years are taken up with clinical trials involving thousands of subjects to established that they are safe and effective.
This doesn’t happen with cars and TVs.
BTW, I work at an academic health center and have access to the best and newest. I always chose generic drugs if I have a choice and they work for me.
That’s easy if you are knowledgeable, but so few patients are, whereas anyone can tell whether he or she likes the way a TV looks or a car rides.
July 29th, 2009 at 10:03 am
I consider the arguement to be nonsensical on a couple of levels. First, cars and flat screen televisions are expensive while they are being made in small quantity, and then become less expensive as demand goes into very high numbers and they become mass produced in very high volume. Comparing that to heatlh care is a non sequiter.
Second, cars and flat screen televisions are items that people can do without and can buy at leisure, while a new heart valve is not optional as to need or timing. So even if the cost of health care could be reduced by volume mass production, some sort of “I can do 100 heart valve replacements cheaper than I can do a single one,” the price shopping and need to convince the buyer to actually make the purchase would not be there.
July 29th, 2009 at 12:25 pm
The current market creates strong incentives for people to develop “better and more expensive” methods of treatment, but almost no incentive to develop “as good but cheaper” methods of treatment.
For Pharmaceuticals, I think the FDA actually won’t approve a drug that doesn’t show an improvement in efficacy over the current best treatment–with no consideration for cost.
So not only are there no incentives, such an innovation would actually be kept from the market.
July 30th, 2009 at 9:52 am
Even in a world where health-care technology stayed frozen over time, health-care costs would still increase because health care is inherently labor-intensive. It is difficult to imagine the technological breakthrough that would enable a doctor to see 100 patients an hour rather than four or five. But comparable improvements in productivity are seen in other sectors of the economy (over greater or lesser time intervals) so that fewer workers are needed to produce the same quantity of goods and services.
This explains part of the increase in health-care costs. It’s not really that much more expensive—it just seems that way compared to everything else. What other fields of activity have the same inflexibility of labor requirements? Hmmmm…. education, live theater, professional baseball–all of which are much more expensive than they used to be. Inevitably activities such as these will account for more and more of the economy as other activities such as auto manufacturing move in the direction of huge auto plants with a single guy inside pushing a button.
Another factor—drug prices are higher because of the artificial monopolies created by the government, which is to say drug patents. Whether or not you think this is good policy, it’s clear that it enables drug companies to charge far more than mere manufacturing costs for life-saving drugs. If the Chinese really wanted to do us a favor, maybe they could stop pirating DVDs and start pirating expensive drug treatments.