In the Financial Times Mort Zuckerman makes the argument I’ve been making around here for a long time—that cost control needs to be the priority in healthcare reform. In his view the underlying problem is that Uncle Sam is always there to pick up the tab:
Why does it cost the US about $7,000 per person annually for our incomplete national healthcare system, while other major economic competitors provide universal coverage for about half that? The answer is quite simple: the federal government pays whatever the cost will be.
Virtually every expert agrees that the root of our runaway health inflation is the fee-for-service system. Every visit, test and exam is money in the bank for a doctor, hospital and test centre, so there is an incentive to do more of them. That is how doctors get paid – and also get protection from lawsuits. The cheapest malpractice insurance for a physician seems to be ordering multiple tests or CAT scans.
We have volume without value. There is no direct correlation between good health and higher hospital costs, doctors’ payments, drug prices and administrative costs. Atul Gawande and three medical experts recently reported in the New York Times a study of 10 regions that spent 16 per cent less per Medicare patient than the national average but had quality scores well above average. “If the rest of America could achieve the performances of regions like these, our healthcare cost crisis would be over.â€
In my view the problem is aggravated by the costs that were built into the system in the first twenty years of Medicare and Medicaid, during much of which Uncle Sugar just picked up the tab without looking at it. When the bills started amounting to more than pin money, high costs were already built into the system and will be hard to wring out unless there’s a fundamental change in the system.
Such changes will inevitably mean that those who’ve profited most by the system including insurance companies, hospitals, large for-profit healthcare systems, and other healthcare providers won’t be happy.
Some believe that all of our healthcare problems can be solved by eliminating excess demand. I’m skeptical that can be done in a way compatible with good public health and I note proponents of the view have little to fall back on to support their views other than first principles.
I think that excess demand is one component but that we can’t accomplish what most needs doing solely by reducing demand unless we’re willing to compromise public health along the way. That’s why I emphasize a combination of demand reduction, supply increase, and basic changes in the system. One can always dream.
Controlling costs is the most important issue. From my POV, the increase in costs has relatively little to do with who has paid for the insurance bills. It has more to do with how we get paid, technology (underrated factor IMHO) and turning medicine into a business. All aspects of medicine have become focused on maximizing profits. A patient comes in with a complaint (demand), but he is channeled into care that produces the best return for the provider. Whether you have private or governmental insurance, the patient is insulated from the economics of that decision, so they go along with whatever is suggested. This is further complicated by the fact that neither patient nor provider has any idea which treatments are actually more cost effective.
I suspect you are at least partially correct about supply being an issue, but the studies showing that places higher in doctor to patient ratios worry me as they tend to show an overall increase in spending. Supply is also difficult to institute as a remedy in a timely manner.
Steve
steve, do those studies distinguish btw/ the supply of general practitioners and specialists? I thought there tended to be negative relationships from overutilization of specialists.
PD-The primary care guys tout studies that increasing their numbers lowers costs, so yes, it is more of a specialist problem. I think we run about 70% specialist and 30% primary care, broadly speaking.
So, when Dave advocates for increasing supply, and to be fair I think he means something broader than numbers of docs, this worries me. We have a big supply of specialists and have not seen their costs decrease. How do we go about increasing the supply of primary care docs without governmental interference? To be fair here also, I have not read Dave long enough to know how much of a free marketeer he is.
Steve
My first line of attack in increasing the number of docs would be to increase the number of primary care providers. I like markets but I’m not doctrinaire about it.
If I were king, the way I’d approach increasing the number of primary care providers would be via reforms in the funding of medical education. So, for example, there could be low cost loans predicated on practicing as a primary care provider for so many years. And I definitely believe that the subsidies paid by the Medicare system for medical education should be more restrictive than they are now, paid for the education of primary care providers.
“Family medicine had the lowest average salary ($185,740) and the lowest percentage of filled residency positions among U.S. graduates (42 percent). Radiologists and orthopedic surgeons, who had an average salary of more than $400,000, had the highest percentage of filled residency positions among U.S. graduates (88.7 percent and 93.8 percent, respectively).”
From a September Science Daily (2008). The most recent projections I have seen are for students to come out with about $250,000 in loans. I think our new med school will charge about 60k per year, so that sounds about right. I think you will need one heck of a low cost loan. Second part sounds better.
Steve
“Virtually every expert agrees that the root of our runaway health inflation is the fee-for-service system. Every visit, test and exam is money in the bank for a doctor, hospital and test centre, so there is an incentive to do more of them.”
This is just terrible commentary/analysis. This is not unique to medicine. Car dealers get paid for selling more cars. And have you ever been hit up for the service agreements? Waiters get tipped more when you order an extra side and desert. Every retailer in town has impulse items at the checkout counter. Ever hear of volume discounts? ……..and so it goes. Personally, I don’t believe that doctors are crass merchants. A lifetime of experience tells me differently, although I’m sure it occurs.
But the real difference here – the real issue – is that the consumer has to pay for that extra desert, or the checkout line item outside the medical care areana. And that creates discipline. However, the health care consumer gets a third party to pay. Its “free.” And I wouldn’t be so fast to dismiss that as “first principles.” They may be “first,” but the evidence of price/cost behavior in medicine says that they are empirically correct.
“Some believe that all of our healthcare problems can be solved by eliminating excess demand. I’m skeptical that can be done in a way compatible with good public health..”
“All” is an over reach. And I’d like to know how price in health care is inconsistent with good public health. As I’ve noted before, having growen up in a medical family, so much expenditure on “healh cvare” is unwarranted, and its elimination would not in any way be inconsisent with “good public health.”
Because when they economize healthcare consumers economize both on necessary and unnecessary treatment. That’s what the only empirical study that I know of on the subject found. Yes, consumers economize. No, their priorities in choosing what to buy aren’t right.
This is a knowledge problem. That’s the reason that non-surgeon physicians exist at all.
And, Drew, there’s a difference between healthcare and other markets. When you go to buy a car, you buy a car. Nobody, except those unfortunates with Munchausen’s, goes to the doctor for tests. They go to the doctor to buy health and they’re billed for tests.
“Because when they economize healthcare consumers economize both on necessary and unnecessary treatment. That’s what the only empirical study that I know of on the subject found. Yes, consumers economize. No, their priorities in choosing what to buy aren’t right.”
I don’t doubt that there may some economization for “needed” expenditures. But how is that different from economization in many venues, with “public health” implications? And how is it the predicate for eliminating economization from health care, which leads to the cost mess we are in?
If you want to be pretty damned sure you won’t die in a traffic accident you can buy a Porsche Cayenne or a GM Denali instead of an econobox. But all people don’t. They economize at a risk to their health.
Further, if the government wanted to eliminate all “bad public health consequences” with respect to transport, they could legislate a 10 mph speed limit and enforce it vigorously. Traffic deaths would approach zero. But they don’t. They economize.
How about buying nothing but the best lean cuts of meat vs fatty chicken necks and wings? People purchasing protein economize, at a risk to their health.
I could go on. You get the point.
And yet health care occupies this hallowed position as the one arena in which we supposedly can’t economize. Its irrational.
Just take this one step further. Is every man, woman and child in America entitled to the care provided at Hopkins, Mayo, Chicago, Mass Gen, UCLA……………..or are some going to get less than the best?
Of course they are not. Its not practical. We economize.
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“This is a knowledge problem. That’s the reason that non-surgeon physicians exist at all.”
Not to be prickly, but “say what?”
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“And, Drew, there’s a difference between healthcare and other markets. When you go to buy a car, you buy a car. Nobody, except those unfortunates with Munchausen’s, goes to the doctor for tests. They go to the doctor to buy health and they’re billed for tests.”
Uh, well, no. People go to doctors with the sniffles, or little aches and pains, or (trust me on this) because they just want someone to spill their guts to. Further (personal experience just last week) they go because their 11 year old daughter bumped her heal on the concrete at the swimming pool and Dad can’t convince Mom to just give it a few days. Instead: Doctor visit and XRay – negative, naturally. All because a $10 co-pay makes it easy to go. Result? 11 year old daughter 5 days later can’t even remember why she went to doctor; heal is fine. Doctor? Cha-ching. Insurance company? Sad face. Effect on public health? Jack squat. And this is repeated millions of times each month.
But people also go for good purposes. Like the yearly exam. Is it so terrible to think this should be a non-insured cost of living? Like car payments, house payments, clothing, food, the annual vacation or many other things? Is health care maintenance the goal? Or is catastrophic disease/surgical care the purpose of insurance. If anyone thinks the former, I suggest they immediately stop complaining about cost escalation, for they support a structural cost escalator.
Returning the discipline of price economization and the real concept of insurance must be central to any health care “reform” package. I’m sorry, if this is not central, its all just political and academic whackin’ off.
I found this pretty interesting. Listen to the podcast.
Yes, it’s interesting, Andy, and I certainly agree that the incentives are completely out of whack. However, there’s another issue that may be a factor WRT hospitals.
Essentially, hospitals can only remain not-for-profit if they don’t employ physicians. Otherwise they lose their status because wages are just too darned high. Honestly, I think that the relationships among specialists, hospitals, and patients need to be reorganized to fit the modern era. But, as the economist points out, none of them have incentives to do that.
“I don’t doubt that there may some economization for “needed†expenditures. But how is that different from economization in many venues, with “public health†implications? And how is it the predicate for eliminating economization from health care, which leads to the cost mess we are in?”
Perhaps because essentially every market based solution still relies on some form of catastrophic insurance coverage. If people do not engage in needed care to save money, say not taking care of potential diabetic complications , seeing a nephrologists, whatever, there may very well be increased usage of that catastrophic insurance leading to overall increases in costs to the system.
BTW, how will marketing work for health care when it breaks so many basic rules? When you buy commodities, you have the option of walking away, as does the seller. This is often not the case in medicine. The purchase is often time sensitive, having to decide in minutes, hours or days. There are geographical limitations for most people. Markets assume a relative equality in either knowledge or power between buyer and seller. Health care purchasers are often at their most vulnerable, which makes for an imbalance in power between the two parties.
These are some of my concerns about applying market theory to health care. Given that no place in the world (with first world medicine) uses markets as the sole mechanism for pricing health care perhaps the invisible hand has pushed us in that direction?
Steve
“Essentially, hospitals can only remain not-for-profit if they don’t employ physicians.”
I work at a non-profit that employs many physicians. Are you sure about this?
Steve
Steve –
Both you and Dave have resorted to citations of relatively rare and serious diseases as the predicate for “overcare” (my words) and the observation that market based solutions might not work.
Here would be my response. The majority of health care transactions are not life or death, rare or serious disease oriented transactions. They simply are not. If I follow the thread, you are a doctor. You know this. The problem is that we have developed a system where every conceivable heath care transaction is covered by a third party. The natural result is costs gone wild. Hence, when we now have to deal with the serious health issues, we have a bankrupt system prone to pressures for cost minimization as a goal, not health care optimization. This of course is a terrible predicament. I think this is Dave’s essential concern, not put words in his mouth.
I simply attempt to make two points: 1) in fact we economize wrt health outcomes every single day. We just don’t acknowledge it (the 10 mph speed limit example) 2) health care reform needs to split routine care from dire care. Hence:
We did this to ourselves by not following a sensible market approach to health care: separate the routine from the catastrophic. The consumer covers the routine, like paying the rent, school supplies, mowing the lawn. Insurance covers the catastrophic, in a different context: like a tornado taking down the house.
So, as you might surmise, I’m not buying your commodities walk away argument. I am in no way shape or form saying we shouldn’t have insurance provisons available when you can’t walk away. What sensible person would say that?
But removing the price equation between consumer and provider in health care has proven to be a debacle. In my humble opinion, routine – not dire – health care transaction decisions are not so removed from other market decisions as Dave suggests. I’m 52. If I have to pay for my annual rectal out of pocket is that any different from paying out of pocket for checking the brakes on the car?
Failure to do either is a routine cost of living. Failure to do either is also stupid. But what do we do? Should we have universal government brake insurance, out of a fear for “reduced public health”?