Code Red: Two Economists Examine the U.S. Healthcare System

July 18, 2010

Donald Berwick and Rationing

Filed under: Efficiency,Health insurance,Health Reform,International Comparisons — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 8:02 am

Let me take time out from book writing to comment on the recent appointment of Dr. Donald Berwick to run Medicare. This was a recess appointment made by President Obama apparently to prevent Republicans in Congress from reviving the debate about health reform. Dr. Berwick seems vulnerable because he has frequently commented about rationing of medical services, even admiring programs for rationing that have been instituted in England and elsewhere. Dr. Berwick’s critics want to argue that rationing is un-American, even evil. But rationing simply means that individuals do not receives all the services they would like regardless of cost. All goods and services are rationed, even in market economies. Health care services are no exception. There is no way around it – America rations health care services.

Unfortunately, U.S. market-based rationing of health services is highly problematic, for reasons that I have described in previous blogs. One problem is moral hazard due to health insurance. The only way to fix this problem is to completely eliminate health insurance (high deductibles slightly mitigate the problem), but this exposes individuals to unwanted financial risk, a solution that may be worse than the cure. This is the Catch-22 of health care. The other problem is inadequate and asymmetric information about medical need and outcomes, which leads to demand inducement and practice variations. Health insurers could intervene to correct these problems but they might have incentive to encourage under treatment. In any event, last decade’s backlash against managed care has tied insurers’ hands. For these reasons, U.S. market-based rationing is woefully inefficient. Health services researchers are in near unanimous agreement on these points and Dr. Berwick stands on solid ground.

Dr. Berwick looks to other models for rationing. England’s National Institute for Clinical Excellence offers perhaps the most sophisticated model. NICE rations by relying on cost-effectiveness data and restricts access to medical treatments that cost “too much” – generally more than $60,000 per “quality adjusted life year”. Interestingly, if we had true market-based rationing without insurance, many of the technologies rationed by NICE would be unaffordable to the average American so there might not be much difference. English-style is not without its faults. It is a one size fits all solution to medical decision making. It does not adequately account for the learning curve associated with many new, costly technologies and does not account for innovation spillovers (when using a technology for one purpose sparks other innovative uses.) It also begs the question of how to choose the cutoff – is a year of life worth only $60,000? Who gets to decide?

We should all agree that market-based rationing with health insurance is problematic. Doing without health insurance may be even worse. We can also agree that English-style rationing has its own faults. Who is to say which form of health care rationing is the lesser evil? The Republicans think they know the answer without really understanding the question. The President wants to avoid the question altogether.

Isn’t that a debate worth having?

February 10, 2010

The Audacity of Denying Hope

Filed under: Health insurance,Health Reform,Health spending,International Comparisons — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 9:46 am

A very close acquaintance was recently diagnosed with a life threatening condition.  As he receives treatment, our entire healthcare system is being laid bare before me.  If there have been any surprises, it is the way that the strengths and problems of the system are magnified when academic concerns becomes personal.

Our healthcare system has so many strengths.  My friend has access to some of the best specialists in the world; the same doctors treat patients from across the socioeconomic spectrum.  He has received a battery of tests that helped his doctors refine the diagnosis and even change the treatment regimen.  I wonder if he would have been so fortunate if he lived abroad.  And he is now receiving a regimen of drugs that cost a fortune to develop but arguably would not have reached the market if the drug maker could not charge high prices in the U.S.  In short, my friend is getting the best care money can buy.

Yet at the end of the day, my friend’s prognosis is not good.  Most of the spending is buying hope, not an actual cure. Some would decry this as wasteful spending.  But until the doctors tell my friend “there is nothing more we can do,” his future remains unwritten.  For the next few months, hope is all that he and his family have.  I could hear it in their words and see it in their eyes.

With hope for his health has come aggravation about finances.   Here are just some of the comments my friend has twittered:

“A refill of a painkiller was denied, because I shouldn’t have used so many so quickly. [The pain had its   own schedule].”

“The literal headaches from awaiting test approvals, outpatient, inpatient, overnight, justification to keep overnight, all of it is nauseating.”

“The endless statements from (my providers) and (my insurer) are impenetrable.”

“I have had my hands full with this crap.”

To any who want to blow up the U.S. healthcare system, this is a familiar litany of complaints.  Yet within a week, things were squared away with insurance and my friend and his family have refocused their energy on survival.  Aggravating, yes.  But reason enough for the government to take over the system?  I don’t think so.   At best, my friend would have been spared some administrative nightmares. That would have been most welcome, especially at this stressful time.  But what about hope?  Would he have had the same access to all of these tests, procedures, and drugs?  I just don’t know.  But I suspect the worst.

Everyone wants to cut healthcare spending and my friend is a poster child for the extravagance of the U.S. system.  But don’t tell me that the money saved by skimping on my friend’s care could be better spent on prevention or covering the uninsured.  Health spending is not a zero sum game.  Our economy survived even as health spending grew to 17% of GDP; we can stand to spend even more on health and less on other stuff. (Watching the Super Bowl commercials, I was struck by how much crap we purchase even during a recession.)  I am not saying that we should spend money on health services that have no value, that offer no hope.  Perhaps some of the tests and procedures were excessive and perhaps we can one day figure out a system that cuts the fat without cutting the bone.  But we should tread cautiously.

We all cling to life, hoping that the next day will hold something special.  Who would deny my dear friend his sliver of hope?

November 11, 2009

I’m Convinced

Filed under: Health insurance,Health Reform,International Comparisons — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 1:29 pm

I want the Canadian healthcare system, with one proviso.  I want Canada to run it.

After last week’s vote in the House of Representatives, where the key issue in the health reform debate turned out to be coverage for abortion, it now seems that if Congress has its way, politics will infiltrate every corner of the healthcare system.  What services are covered, who can provide them, even how they are provided – the opportunities for meddling are endless.

The problem is not with the bold ideas that underlay the health reform proposals.  The problem is with our political system.  Party primaries in Gerrymandered Congressional Districts send political extremists from both ends of the spectrum to Washington, where they think that the issue of abortion rights is important enough to hold hostage an overhaul of a $2 trillion system.  In a parliamentary system, the parties need to govern from the middle.  The middle of the House of Representatives is an empty aisle.  We can only hope that the Senate keeps its sanity.

I remember one of the provisions of Clinton’s healthcare reform proposal that scared me stiff.  Clinton proposed his own version of the health insurance exchange in which consumers could choose from approved insurance plans.  The catch was that local appointed boards would be charged with granting approval.  So if you lived in Chicago, you would get to choose from insurers approved by the Mayor, the Governor, and the Cook County Board President.  I can see it now – the Combine Insurance Company.  And I can see even worse once Congress decides that since it is spending “its own” money on healthcare, it deserves to call the shots.

I want to thank the House of Representatives for shaking me out of my doldrums.  I am now convinced about the Canadian system.  If we tried it here, it would be a catastrophe.

October 5, 2009

Some Good News about the U.S. System!

Filed under: Health services research,Health spending,International Comparisons — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 12:50 pm

Like Rodney Dangerfield, the U.S. healthcare system gets no respect.  There is no denying that we spend twice as much per capita as anywhere else in the world.  And our health statistics are nothing to crow about, with average life expectancy and below average infant mortality.   For those whose heads spin when trying to compute a tip at a restaurant, this is enough data to draw damning conclusions.  For those of even the slightest analytic bent, the statistics raise more questions than they answer.

Here is the most important question of all:  What would our health statistics look like if we didn’t spend as much as we do?  Or how about this corollary:  What would life expectancy and infant mortality (and other measures of health status) be in an obese, work-obsessed, poverty-ridden, drug and violence-prone nation that did not lead the world in health spending?

(I recall my recent visit to Paris, where perhaps 2 out of every 100 people I saw on the streets was obese.  And those two were Americans – I could tell from the Hawaiian shirts and Fodor’s guides!)

It has been difficult for researchers to sort out the reasons for elevated U.S. spending and subpar U.S. health outcomes.  The system?  Maybe.  Health behaviors? Maybe.  What is cause and what is effect?  It boggles the mind.  But a recent study by Samuel Preston and Jessica Ho from the University of Pennsylvania provides compelling evidence that perhaps we really do get our money’s worth out of the U.S. system.  I am not the first to blog about this study, but I think it is important enough to do all I can get the message out.

Preston and Ho correctly observe that aggregate data mix together system effects and health behaviors.  So they drill down to a handful of conditions where, in their words, “behavioral factors do not play a dominant role.”  They find that mortality rates in the U.S. from prostate cancer and breast cancer have both declined precipitously over the past 20 years when compared with the rest of the developed world.  U.S. mortality rates from prostate cancer are nearly 25 percent lower than elsewhere and rates for breast cancer are now slightly lower.  Preston and Ho attribute these success stories to aggressive use of diagnostic and therapeutic technologies.   Examining all malignancies, Preston and Ho find that 5 year survival rates in the U.S. are about 63% (women) and 66% (men) versus 56% and 47% in Europe.  They cannot determine whether this is due to earlier detection or better treatment in the U.S.; either way, the U.S. comes out the winner.

It is possible to put these health gains into dollars.  Economic studies suggest that a year of life is worth $100,000 or more in other goods and services.  Canada, England, and other nations that explicitly put a dollar value on life peg it closer to $50,000.  On average, each cancer patient in the U.S. has about a 13 percent higher chance of living at least 5 years.  In expected value, this is worth at least $32,000-$65,000.  Not a bad return for our higher spending.

For any number of reasons, Americans are an unhealthy lot.  We are our health system’s worst enemy and we spend a lot of money to repair the damage.  Preston and Ho’s study suggests that we are emerging with something quite valuable.  We are emerging with our lives.

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