James Hamiilton has a post on reforming the healthcare system that I commend to your attention. He begins with two premises:
- The historical growth of federal expenditures on health care is unsustainable.
- Changing the path requires denying some medical services for someone who would otherwise receive them.
and goes on to characterize the debate as among different strategies for deciding which services don’t get provided:
- (a) The government can limit the procedures it will pay for and the people who are eligible to receive them.
- (b) The insurance company or other third party can limit the procedures they will pay for and the people who are eligible to receive them.
- (c) If (a) and (b) both say no and you don’t have the money yourself to pay for it, then you do not receive the treatment.
Also of note is one of the comments to James’s post:
As a physician, here are some of my thoughts on this topic:
I agree with your first premise and your conclusion. On premise #2, I would differ in suggesting that some medical services need not be denied to someone who would otherwise receive them. One could, instead, dramatically slow or stop medical growth to bring costs inline with GDP growth. In this fashion, for example, a person could continue to get a cardiac stent for a heart blockage, but would not be automatically covered for some future $1million heart stem cell transplant. It is generally more palatable to not give someone something than to have to take away something already given. Perhaps the GDP denominator could grow will holding the medical expense numerator in check.
It is a common misconception that there exists a positive, more-or-less linear, correlation with cost of medical care and life span. The data, instead, support strong diminishing returns on health care investment. For example, sanitation, clean water, vaccinations, reductions in smoking, aspirin use, treatment of high blood pressure and cholesterol are all rather cost effective on a per capita basis. Many of these are actually public health issues and not strictly medical. More so, the most cost effective are those in the domain of public health and these are also most responsible for gains in years of life over the last century.
There are a several major reasons that costs continue to grow unsustainably in the United States, but most of these actually do relatively little to increase life span. Looking at CBO data, one would see that one of the biggest problems has been our growing appetite and adoption, over the same last 20 years, for new medical technologies and services.
Many of the other comments return to a common theme: other OECD countries spend a lot less why can’t we? I’ll address this question first. Other OECD countries began their healthcare systems with varying degrees of socialization at a significantly lower cost point and with a much lower demand for provider and patient autonomy than we have here. We could have a healthcare system with substantially lower costs but we can’t have our healthcare system at substantially lower costs. We can’t even transition to a system with a slower trajectory of rising costs at our present level of spending.
As to the other comment as I’ve said before I don’t believe that you can reasonably attribute the costs here to greater use of technology. The Japanese use more imaging that we do, not less, and the costs in their healthcare system aren’t growing out of control. Capital expenditures and consumables are declining in hospital budgets, not expanding. What is increasing is wages, for many if not all jobs in the healthcare sector.
I think that James’s prescription may be necessary but I don’t believe it’s sufficient. As has been said here before, physicians are capable of generating their own demand. Further, as we reduce what we’re willing to cover with tax dollars (or borrowing) providers will potentialize the areas that remain. Unless, that is, you believe that they are willing to take a pay cut. I don’t.
Consequently, I think that we’re going to need much more basic changes in our healthcare system to keep it within the bounds that we can afford and still maintain a reasonable level of public health. This is not a someday problem it’s a today problem. Healthcare costs are already making U. S. products less competitive than they otherwise would be on world markets and the healthcare sector, underwritten by government spending, is already sucking investment out of sectors that could use it to better effect.
With a couple of nudges, which I will speak to in a moment, this is effectively what I have been saying for years……..usually to a barrage of arrows and claims of being cruel and uncaring, or not understanding that health care is not an economic good. Rubbish.
“Changing the path requires denying some medical services for someone who would otherwise receive them.”
steve observes that single payer, specifically government run, systems have lower costs. Right. But that’s simply because they ration care. That’s the meat ax approach to cost control.
I have always observed that I would expose routine care to the fundamental price mechanism, and then insure over catastrophic expenditures. This would cause routine health care expenditures/decisions – and even the ability of doctors to create their own demand – to be exposed to the discipline of consumer price scrutiny. Further, it would cause health care “insurance” to behave more like home owners or car insurance, subject to those actuarial realities and economics. Funny thing, I don’t hear about a “crisis in home owners or car insurance costs.”
One comment by the physician commentor that I suppose identifies a difficult “in between” consideration is something like blood pressure medication. I’d say that is routine care, no different than fixing your roof before it rots to the point of failing, or changing the oil in your car before you ruin the cylinders. The consumer should pay. But perhaps certain things are so efficacious that they prevent the down the road stroke or quadruple bypass and its in the insurers best interest to avoid paying for that by covering medication. But that’s the slippery slope to broad subsidy and the problem we have now. If you go that route you need material deductibles.
Why not? That is what the commenter you quote is arguing for. Why is he wrong?
How so? I don’t see the logic.
In every OECD country healthcare is paid for by primarily by employers either directly (in the U. S. through employer-subsidized health insurance) or indirectly through employer taxes. Let’s take one example: autos.
It’s estimated that healthcare represents roughly $1,600 of each car manufactured. We pay three times as much as, say, Japan, Germany, or France for roughly the same healthcare. That means that what costs, say, GM $1,600 costs Toyota (in Japan) something like $500. All other things being equal American cars will be something like $1,000 more expensive than a Japanese car.
I don’t think it really works this way. You are ignoring the very basics of price theory that it is supply and that set the price. Thus, while costs are indeed on factor they are only one factor amongst many. So the idea that if we could lower health care costs the price of cars would drop by $1,000 is a very dubious claim. The price might not change at all an some of that $1,000 may go to workers and the rest to the firm.
Dang it…
the above part, “supply and….” should read as, “supply and demand….”
Steve, I think that GM’s life and death is so tied to the high-margin SUV is the well-known demonstration for Dave’s claim.
We were told GM could not make small cars at a profit because their assembly line benefits costs were too high.
Bookmark that as one more reason we don’t have a fuel tax that even covers highway construction and maintenance.
BTW, I’m for transformation, just grabbing a working model and appropriating it.
BUT, what that doctor is really saying is that “rationing” doesn’t have to mean “no care for you.” It can mean “stint for you.”
Of course I know that supply and demand interact in determining the price. But cost is the floor and our costs are higher.
“steve observes that single payer, specifically government run, systems have lower costs. Right. But that’s simply because they ration care.”
Probably true for the NHS, true largely for Canada, but not true for the rest of Europe or the rest of the OECD. Choose your procedure and you can often find another country that does more than we do, though in totality, I think we do have a lead.
“What is increasing is wages, for many if not all jobs in the healthcare sector.”
You need data to support that. Our wages are higher, but not nearly high enough to account for the differences between us and the rest of the world in total health care spending. The biggest difference by far for the US is our spending on outpatient procedures, ie imaging/testing/ambulatory surgery. It has long looked to me like tech costs are a large part of our problem.
http://theincidentaleconomist.com/wordpress/what-makes-the-us-health-care-system-so-expensive-–-health-care-workers/
“The Japanese use more imaging that we do, not less, and the costs in their healthcare system aren’t growing out of control.”
I was talking with a GE rep about Japanese Cat scans last week. He claimed that they use much simpler machines that cost much less for most of their scanning. They scan a lot more, but with lower cost machines. At any rate, I trust you know how Japan keeps down costs. It is really a kind of price control.
“BUT, what that doctor is really saying is that “rationing†doesn’t have to mean “no care for you.†It can mean “stint for you.â€
Every time I am on call we are doing very expensive procedures on very old people who will see minimal life extension from these procedures. A lot of our chemo treatments are hideously expensive and increase lives by months, not years. We are always using the latest drug pharma is pushing, even it is minimally better than its (off patent) predecessor.
Steve
Sure. Here’s a start:
Occupational and Employment Data—Healthcare Practitioner and Technical Occupations, 2009
Occupational and Employment Data—Healthcare Practitioner and Technical Occupations, 2008
Occupational and Employment Data—Healthcare Practitioner and Technical Occupations, 2001
Intervening years are easily findable by searching the BLS web site. Don’t just look at the wages, look at the number of people. That’s quite a sharp increase from 2001 to 2009.
I’ve already documented here that capital expenditures and consumables aren’t rising. Drugs aren’t a large enough proportion of the whole to explain the increases. What’s left is wages.
And I’m not trying to explain why our healthcare is more expensive than France’s, I’m trying to explain why our healthcare costs are rising now.
For why our costs are so much higher than other OECD countries you’ve got to go back 40 years. I’ve done that at length, producing copious documentation. Bottom line: as Uwe Reinhardt puts it, it’s the prices, stupid.
That GM let their costs get away from them does not prove Dave’s claim. It proves that GM had horrible management.
So what? So long as the price is above our cost floor it doesn’t matter. And given that firms can also let the wage float to absorb some of these increases I’m not convinced.
I think I’ll stick with Mankiw and Elmendorf.
More here.
In other words, Dave is saying that total compensation is also too high here in America. However, if the labor market is competitive and employer provided health care were abolished by fiat, the wage rate would rise to the point of total compensation. The only way out of this is to assume that the labor market is not competitive…as possibly was the case with GM and labor unions which absolutely do reduce the competitive nature of a labor market.
In other words, you’d have to make this very same argument if wages were rising rapidly too.
That may or may not work. There are differences in terms of populations, both size, demographics and possibly even culturally. The Swiss system, while not without problems, is working pretty well. Growth in health care costs might be a tad high, but they could conceivably get that under control…but the Swiss are not Americans as Dave can testify too. So their model might work, or it could be a complete flop or do nothing. So just taking what works in country X may not work here. A considerable amount of care and thought needs to go into the process, and I don’t think any American politician has the stomach for that.
I’ve been accused of “anecdotal evidence” here before. On this point, I’ll agree, but I still think its instructive.
So I’ve had 4 herniated/degenerative cervical discs. 3 have been fused in two surgical procedures. My surgeon has done so many MRI’s and X-rays I can’t count. But in an interesting exchange, he told me he absolutely knew where the problems were without it. C4-5 nerve roots serve this part of the shoulder, arm and hand…..you have these symptoms. C5-6 serve this etc, etc. You can look on the internet for radiculopathy symptons and know which nerve root is involved without a medical degree, unless you have strange anatomy.
So then he says, “we had you do the pre-surgery MRI to make sure we knew what we were going to find when we actually went in – stenosis, spurs, definitive disc……….
I have no problem with the pre-op imaging, but how much did “we” spend before nut crunching time came????
My parents had a good story, doing an Alaskan cruise, meeting their table and the back surgeon. Good time. By the end of the trip the surgeon is a little hammered and says “look, most people don’t need back surgery. most things get better.”
So there is my “anecdotal evidence†on US medical costs.
“That GM let their costs get away from them does not prove Dave’s claim.”
To bad “other major American auto makers” is such a limited set.
“By the end of the trip the surgeon is a little hammered and says “look, most people don’t need back surgery. most things get better.†”
Its a tad more complicated, as I’m sure steve could attest to, but discs many times resolve themselves. One of mine did. But its true. And it was not operated on. In fact, the surgeon refused to do it until we saw how it was going to resolve itself.
That said, it can be painful as hell. There is nothing in my life except burn pain that compares with serious nerve impingement. I have a very high tolerance for pain, but with this you want drugs, and NOW!!
As Reinhardt also showed, it is primarily utilization which is driving costs, including physician wages. Physician fees have increased much more slowly than it costs to run a practice. As I keep saying, the most important spending affiliated with docs is the spending they create. While I think doc salaries do need to come down, I think that you underestimate how much tech, especially imaging and outpatient surgery, is adding to costs.
http://theincidentaleconomist.com/wordpress/physician-services-spending-medicare-vs-private-insurers/
http://theincidentaleconomist.com/wordpress/what-makes-the-us-health-care-system-so-expensive-–-health-care-workers/
Steve
When I say “wages” I don’t just mean physician wages. I mean wages throughout the sector.
I don’t know much about the specifics of specific back injuries. I just thought that the newly retired back surgeon suddenly dropped that on his table was amusing.
There are some 5 million Americans living overseas who will presumably be required to carry health insurance in their “home” state or pay the penalty. This is dumb, since they could get cheaper treatment in the foreign country where they reside, especially if it’s Mexico, Brazil, Thailand, India, Hungary or the Czech Republic.
Another problem with Obamacare is that it will make all healthcare workers, including docs and nurses, into virtual government employees. This will lead to a rise in prices, since most people in their right mind will charge more if forced to be an employee of the government. There may even be some like me, who would quit before I’d work for the government.
Dave- Yes there are other workers, but I trust you are aware of the shortage of nurses and several other categories of support personnel through the 2000s.
Steve
I trust you are aware that there are waiting lists for admission to nursing schools and any number of other categories of support personnel.
“I trust you are aware that there are waiting lists for admission to nursing schools and any number of other categories of support personnel.”
Now. With lots of unemployment. Through most of the 2000s it was difficult to hire as many nurses as were needed. A good part of that wage inflation was a response to high demand.
Steve
I’d like to some sort of comparison of wages for doctors and nurses between the USA and other industrialized countries. Their wages are a large factor in the cost of healthcare it would be interesting to see where the USA is. If anyone could point me in the direction of a study on that I’d very appreciative.
Todd, be sure also to compare “procedures” between those same nations.
Cant vouch for the source, but here is one.
Todd-Go to second link above.
Steve
Todd-Go to second link above on my earlier comment.
Steve
Dave, given the first chart of the first link that Steve provided, demonstrating that per-procedure payments have been increasing at a sluggish pace, how is it that everyone in the health care industry is managing to make so much more money?
There are a couple of answers. Before commenting further (if I have time), I just want to make sure that we’re on the same page. (To be clear: This is not a question of “where is the money going?” but rather “how are they getting it?”)
First, when prices and wages, generally, are declining sharply any increase in a particulat field is a major increase. Second, for healthcare costs to rise it doesn’t matter whether the cost per procedure is rising slowly or rapidly. The question is whether the sum of fees for all procedures performed is rising at all.
And that brings up what I think is a critical point. When one-sixth of the economy is growing at the rate of 5% per year while the general economy is growing at 3% per year or less, that means that other sectors are growing much, much more slowly or even declining. You’ve got to measure the increase in that one-sixth of the economy not against the general economy (which includes the one-sixth that’s growing at the rate of 5% per year) but against the economy other than that one-sixth. Relative to that healthcare costs are skyrocketing.
It’s not just that per-procedure rates aren’t rising, Dave. It’s that they’re not rising at the rate of operational costs (if Reinhardt’s chart is to be believed – McKinsey shows something similar, though it’s not as stark) or even (if Reinhardt is correct that the chart does not adjust for inflation) or at half the rate of inflation. I consider this important because if per-procedure rate increases are not responsible for the increase in overall price, then it’s uncertain whether a decrease in per-procedure rates will have the desired effect without substantial side-effects.
The question is whether the sum of fees for all procedures performed is rising at all.
Right. So why is it rising when the procedure rate is rising at a rate slower than the rate of inflation? That was a question, not an attempt to suggest that health care costs aren’t “really” rising (in the aggregate).
Since you didn’t answer, I’ll go ahead and answer (and hope that we’re on the same page): increased utilization, increased efficiency, and more efficient billing practices.
So how do we tackle this? It seems to me that there are two ways to do it (that don’t involve single-payer or some other complete restructure).
First, a reduction in utilization. Rationing. Decreasing incentives for more care rather than better care. And so on. Since we pay on a per-procedure basis, this would have the effect of lowering overall costs (and, for that matter, wages within the health care industry). But it also means less health care, which may not be good depending on how it’s rationed out.
Second, which I gather Dave (moving to the third person now, because I’m not specifically talking to Dave anymore) supports, is expecting something similar to the same amount of output for lower costs than are currently projected.
While asking providers to do the same amount of work for less money may seem unfair, it’s the way of the world most of the time. Either you increase efficiency (without windfall profits after everyone else catches up), or you go out of business. The health care industry has been unique in its ability to reap the vast majority of the rewards for its increased efficiency and utilization. Economy of scales do not apply.
So, in order to accomplish this, we would need to reduce reimbursements in a way that avoids the following:
1) Doctors dropping Medicare/Medicaid. All doctors can’t do this, of course, because private insurance does not insure enough people to keep all doctor’s occupied. But as doctors and hospitals build up their privately-insured patient-base, many of them will. Fields like geriatrics will be avoided like the plague. Areas where there is a greater shortage of doctors, and therefore doctors can more easily choose their patients, could be problematic. So for those doctors, you might need to lower reimbursements less or not lower them at all. Or accept the fact that people with Medicare are going to be last-resort patients with far fewer options for basic care.
2) Practices and hospitals clustering around only the most profitable procedures, specialties, and so on. You’d need to target the most profitable areas of medicine, without making them so non-profitable that people don’t want to do them anymore. So you might, for instance, lower reimbursements for MRIs and the like, so that it’s not worthwhile for docs to have a machine in their own clinic but make sure that high-volume locations can still stay afloat. The government could hire them (geriatricians and other specialties/generalities that rely on Medicare) itself, but pay would still be in comparison to the more profitable fields. You’d need more doctors, which would have costs in and of itself, but (a) could result in better care and (b) could save money ultimately. Maybe.
2b) The McAllen model prevailing. One of the biggest concerns I would have with reimbursements being altered downward in the wrong way is that places like the Mayo Clinic would simply go under for lack of aggressiveness in treatment while places like McAllen figure out more and better ways to hang on to their incomes as possible. I’m really not sure what the solution to this is, other than the government taking over the Mayo Clinic or assuming “good riddance” on the basis that Mayo was insufficiently aggressive in treatment.
3) Providers simply turning around and charging private insurance more. Historically, when government reimbursements go down, private reimbursements go up. It may be good for the government in the direct sense, but it would create a health care crisis among non-Medicare recipients the burden of which would almost certainly fall on the government. On the other hand, this is a potential back-door to single-payer. If private insurance payouts remain the same or increase, we go back to #1 where doctors spend more time jockeying for the lucrative private insurance reimbursements and only see Medicare patients when they have the time or, worse, not at all because they value their leisure time more than they value what Medicare pays.
4) Hospitals don’t just start closing down.
These are not insurmountable obstacles, but they are pretty substantial ones. Dave might be right that the best way to reduce overall costs is with reimbursement cuts rather than decreased utilization, but if we go that route I sure hope we do it right.
Trumwill,
It seems to me that it’s fee-for-service that causes all sorts of problems and, IMO, it should be the first thing to go in any reform.
Let me give a few examples that I know at first hand to have happened. A podiatrist comes into a geriatric nursing home and fits everybody in it with orthotics, whether they want them or not. Waste, fraud, abuse, or increased utilization?
An otolaryngologist (ENT) comes in and fits everybody with hearing aids whether they want them or not. Waste, fraud, abuse, or increased utilization?
Steve’s examples: tests and treatments that don’t provide meaningful prolonging of life for terminal patients. Waste, fraud, abuse, or increased utilization?
They’re all increased utilization, which is in no way mutually exclusive with waste, fraud, and abuse.
Dave,
In a FFS system, those types of things are normal.
I worked for a couple of years in a FFS system as an cable TV and internet installer. We got paid by “the piece” and there was a set fee for everything we did. When I got called to a house to, for example, replace a single bad line to a single TV, I’d get paid $15 for that. If that’s all I did, I would not make any money after accounting for travel and other expenses (we were independent sub-contractors to the cable company). So, depending on the circumstances, I’d try rewire the entire house. If I’m in the attic pulling a wire anyway, why not pull another 4 and turn that $15 into $60? Then I could drop a new line from the pole, and see if the customer wanted anything else, like a new outlet or additional services. The cable company (Time Warner) encouraged this because they believed it increased system reliability and cut down on service calls. They wanted us to run new wiring whenever possible. Of course, from my end, I would make a judgment as to whether something was worth it or not to replace. Obviously, if a wire was bad, it would get replaced regardless, but if a cable was marginally in spec and was difficult or time-consuming to replace, then I’d leave it. Neighborhoods with easy-to-wire houses were therefore very desirable from an installers point of view because one could, obviously, increase one’s income by doing more “procedures” because more could be done in the same amount of time. Some neighborhoods and complexes were dregs from our standpoint because replacing a single wire could take hours (or might not be possible at all) and a complete rewiring simply wasn’t possible given our tight schedules. You simply couldn’t make any money if you worked those neighborhoods every day. I always suspected that cable service in those neighborhoods was worse as a result, but Time Warner never shared such data with us.
This, are the two categories mutually exclusive?