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April 27, 2009

Obama's Unrealistic Assumptions About Health Care Costs

The One has a close encounter with the real world:

Some of the proposed solutions, while advancing one of President Obama’s goals, could frustrate others. Increasing the supply of doctors, for example, would increase access to care but could make it more difficult to rein in costs.

The need for more doctors comes up at almost every Congressional hearing and White House forum on health care. “We’re not producing enough primary care physicians,” Mr. Obama said at one forum. “The costs of medical education are so high that people feel that they’ve got to specialize.” New doctors typically owe more than $140,000 in loans when they graduate.

Lawmakers from both parties say the shortage of health care professionals is already having serious consequences. “We don’t have enough doctors in primary care or in any specialty,” said Representative Shelley Berkley, Democrat of Nevada.

Senator Orrin G. Hatch, Republican of Utah, said, “The work force shortage is reaching crisis proportions.”

Even people with insurance have problems finding doctors.

Miriam Harmatz, a lawyer in Miami, said: “My longtime primary care doctor left the practice of medicine five years ago because she could not make ends meet. The same thing happened a year later. Since then, many of the doctors I tried to see would not take my insurance because the payments were so low.”

And the Obama solution to the critical shortage of doctors is... what? To increase demand and allow government to set prices based, not on a rate that attracts people to enter the field, but on what they can afford to pay now that we're guaranteeing reimbursement of medical expenses to a much larger group of people?

How long will it be until the quality of medical care declines unacceptably and Congress and this administration pass a Patient Bill of Rights that drives up the costs of providing medical even further? You can't ignore forces on the supply side of the equation simply because you "care" about the demand side of the equation.

This is the problem with so many progressive policy prescriptions: because they are grounded entirely in normative ethics - they think government should make laws that reflect how the world ought to be rather than how the world actually works - they completely ignore the way human beings in the real world respond to tradeoffs. It doesn't take a brain surgeon to figure out that if you make a law which assumes people will react one way (in fact, one that requires people to act this way to produce the intended results) but people actually react in the opposite manner, there will be unintended and undesireable consequences.

Why are medical costs in the U.S. so high? Well, for one thing, we receive more - and more advanced - medical services than other industrialized nations:

What really drives health spending, the study finds, is that Americans receive more costly medical services than do other peoples, and they pay more for them. On a population-adjusted basis, the number of CT scans in 2005 was 72 percent higher in the United States than in Germany; U.S. reimbursement rates were four times higher. Knee replacements were 90 percent more frequent than the average in other wealthy countries. In 2005, there were 750,000 knee and hip replacements, up 70 percent in five years, reports the journal Health Affairs.

Given than there is already a critical shortage of doctors, does the Obama administration really believe that if we pay doctors less, more Americans will be incented to undergo years of difficult study and take on massive debt? Really?

Who acts like this in the real world?

Nationalized health insurance means a massive influx of new patients (none of whom will have to pay for their own care, a situation which nearly always results in overuse of a resource) into an already overtaxed system.

As our own history shows, reducing out of pocket costs for health care raises rather than lowers health care costs:

Economist Amy Finkelstein of MIT has estimated that roughly half the real increase in per capita health spending from 1950 to 1990 reflected the spread of comprehensive health insurance. In 2006, consumers' out-of-pocket spending represented 13 percent of total health spending, down from about half in 1960. Unfortunately, this semi-automatic system may now frustrate other national goals by displacing other spending and spawning ineffective or unneeded care.

On paper, there are various ways to control health spending: stricter regulation of prices and the availability of care; "market mechanisms" to push consumers toward more efficient or skimpier care. All have foundered, because they cannot be used aggressively. The reason is politics. There is no major constituency for controlling spending. Because most patients don't pay medical bills directly, they have little interest in using less care or shopping for lower-priced services. Providers (doctors, hospitals, drug companies) have no interest in limiting care. What others call "health costs" are their incomes -- wages, salaries, profits.

Another obstacle to controlling health care costs is that we are victims of our own success. In this sense, health care is like poverty: as average well-being increases, we experience "expectation inflation":

Two years ago, another group of researchers, led by Harvard economist David M. Cutler, looked at the money spent on health care from 1960 to 2000 and asked the crucial question: What did it get us? Their answer: Plenty -- but improvements are costing more all the time.

Their study found that over those 40 years, the life expectancy of people of all ages had increased. Not surprisingly, investments in the health of children were more cost-effective than investments in 60-year-olds. What's more interesting is that extending life cost more as the 20th century progressed, even taking inflation into account. In the 1970s, it took $46,870 to add a year to the life expectancy of 65-year-olds. By the 1990s, it cost $145,000.

As we become healthier, it takes more effort to extend our lives than it did in a time when we were less healthy (and dying prematurely). Fifty years ago, American medicine picked the low-hanging fruit of life-extension as clean water, vaccines, antibiotics, insulin and other cheap innovations became available to everyone. Now, we're going after the higher and more expensive stuff.

Take implantable cardioverter-defibrillators, or ICDs. These "ambulances in the chest" shock hearts out of the fatal rhythms that are a major hazard for people who survive large heart attacks. Vice President Cheney has one wired into his heart.

Three years ago, a team of researchers calculated that putting an ICD into a heart-attack survivor added one to three years to the person's life expectancy. The cost? Between $30,000 and $70,000 for every year of life gained. In the world of "cost-effectiveness analysis," that's judged to be worth it, the convention being that a treatment that buys an extra year of life for $50,000 or less is "affordable."

Medicare estimates that about 500,000 Americans now qualify for an ICD on medical grounds. Undreamed of when our parents and grandparents were having heart attacks, these devices are keeping or will keep thousands alive. So who's going to give one up in the interest of slowing the growth of health care spending? Not I. And I suspect not you, either.

Mandatory national health insurance is not a recipe for controlling costs. When you reduce the out of pocket costs of obtaining medical services, people have little or no incentive to limit their consumption. After all, expensive tests and invasive procedures don't cost them anything. Physicians have no incentive to limit recommendations for such measures and considering the risk of being sued for malpractice if they miss something, considerable incentive to cover themselves by recommending more tests than are warranted.

Costs provide an important means of helping consumers assess the value of various alternatives. Eliminating or passing on individual costs to other taxpayers won't control health care costs in the aggregate because it provides no reason for individuals to forego any medical procedure, even it it's completely unnecessary.

Our own history has shown that as more medical services become available and the out of pocket costs of these services decreases, people consume more. As Samuelson notes, there are ways to control rising health care costs, but they all involve passing the costs of health care back down to consumers:

We need mass constituencies that favor cost control. But our consistent policy has been to conceal the burden of health spending by burying it in untaxed corporate fringe benefits or government budgets.

We could change this. We could charge the elderly more for Medicare. We could tax employer-provided health insurance as ordinary income. We could create a dedicated federal tax to cover government health costs -- if health spending increased more than revenue, the tax would automatically rise. People would quickly feel the costs of our present system. Of course, that would be unpopular, because it would compel Americans to face a discomforting issue -- how important is health care compared with other priorities?

This, of course, is precisely what Barack Obama maintains we shouldn't have to do: decide for ourselves how important health care is to each of us. And centuries of experience with human nature provide little reason to think that people who don't have to face the consequences of their own actions will manage resources responsibly.

What makes this situation any different?

Posted by Cassandra at April 27, 2009 08:39 AM

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“We don’t have enough doctors in primary care or in any specialty...”

Can you say, "Rising Malpractice Insurance Costs"?

KtLW's primary care GP for the past ten years just pulled the pin on his practice because his insurance rates went through the roof due to a negligence suit brought against a doctor three blocks away. My guess is that his insurers figured malpractice is a contagious disease.

Doc is now doing pondscaping -- using *my* tools...

Posted by: BillT at April 27, 2009 11:13 AM

"Can you say, "Rising Malpractice Insurance Costs"?"

You beat me to it. I remember talking with my primary care doc in NC just before we PCS'd. She told me that many of her doctor friends and she were considering changes to, or leaving altogether, their practices based solely on malpractice insurance premiums. She dropped the OB side of her practice because of the insurance. This was a very popular and successful doctor in a town without many female docs. Her children were out of the house, husband had a very successful photography business -- and she still found herself unable to afford the *On Account* insurance. A lot of mothers-to-be lost a very good, very compassionate doc in that town.

Posted by: DL Sly at April 27, 2009 11:40 AM

Hallelujah! Thanks, Cassandra, for pulling together the information about better care being more expensive and therefore raising health care costs. I've gotten kind of tired of people assuring me that we can get those costs under control if only we did something simple and (apparently although not actually) benign like get all our medical records digitized.

The issue of medical malpractice is interesting. I'm certainly willing to believe malpractice insurance costs are driving doctors out of medicine or out of "dangerous" specialties like ob/gyn and pediatrics into safe ones like dermatology which would certainly contribute to doctor shortages. I'd like to see malpractice law reformed to help that. Interestingly, however, in the articles you linked to, I don't remember seeing figures on how much malpractice costs add to our health care costs overall. That would be nice to know.

I'm afraid I'm never going to be able to believe that anyone would voluntarily go a doctor or have an MRI or (shudder) get blood drawn more often than absolutely necessary regardless of whether the visit costs them money. (Although I am beginning to believe that people might demand such services for their children more often than necessary if they don't have to pay.) So I don't worry that national health insurance will increase health costs by increasing the number of unneeded procedures. Instead, I believe it will increase health costs by increasing the number of people who can afford procedures they genuinely need.

To me, that just makes the whole issue more difficult. We are then not asking people to manage resources responsibly by giving up stuff they don't really need but by giving up stuff they could genuinely use. Or we commit to paying for everything for everyone which is sounds like is going to be ultimately unsustainable.

Having said that, I do like the ideas that make people face what health care is costing: taxing employer-paid health insurance benefits; a dedicated tax for health care programs; on-the-spot copays; whatever. It's not that I think these keep people from over-using health care themselves but more that I think they make people realize health care does have an actual cost. It's the same reason I think every single person should pay income tax - even if at a very low rate - on every penny they get: salary, welfare, limo and driver, food stamps, whatever. It's the best way to make sure people understand that what they get costs real money.

Finally - and I've said this before - if we're going to expand health insurance, I'd like to see us try Bill Bradley's old idea of letting anyone who wants to but into the Federal employees health insurance plan. Charge a premium to outsiders for administrative costs, let the Feds (I'd prefer the States but that ship has sailed) subsidize those who can't afford it, see how it goes, and adjust as necessary.

Posted by: Elise at April 27, 2009 12:45 PM

Well Elise, I can tell you that when the LG was pregnant we consented to at least one procedure (a test requiring blood drawing) because it was "free" (insurance paid 100%). Was the test "needed"? Not at all. It was a simple screening for Down's Syndrome, Spina Bifida, and other birth defects that could have showed up on the ultrasound a couple months later. But it was "free" so what the helk? Why not?

So, even if someone would not make a special trip for a free service they certainly will do so for "Since you're already here" stuff as well as upgrades (MRI vice X-ray).

But I think that many would make a special trip for unnedded services. Just look at the number of people going to the ER with the common cold. Do they "need" a doctor? Not. There's nothing the doctor can really do for it ("Go home, be sick, you'll get over it in a couple of days.") and yet people still do it. Why? Because an ER can not, by law, turn you away due to inability to pay. They *must* see you. So the ER isn't just an ER, it's a free clinic as well and you never know, maybe it isn't a cold. Make them pay $20, however, and suddenly they think to themselves "Maybe, I'll wait a couple of days and see if I get better on my own".

Posted by: Yu-Ain Gonnano at April 27, 2009 01:21 PM

I can certainly understand getting another blood test thrown in when it's offered for free although why on earth would the insurance company pay 100% for something unnecessary? As for:

Just look at the number of people going to the ER with the common cold.

If you say so. But I'm afraid it is always going to be simply beyond my comprehension that anyone would set so much as a tippy-toe in an Emergency Room without being pretty at death's door.

Posted by: Elise at April 27, 2009 02:13 PM

Because unnecessary and beneficial aren't mutually exclusive.

I can think of several possible reasons. From least likely to most:

1) Let's say the cost of an unexpected surgery for spina bifida is $50,000 and the cost of an expected surgery for spina bifiday is $25,000. The blood test costs $250. In that case, if the extra "unnecessary" blood test caught 1 extra case out of 100 the test pays for itself.

2) The tests are part of the standard "in-patient visit" for prenatal care for which the patient pays a set co-pay per visit. The patient may decline the test, but it will have no effect on their co-payment.

3) Malpractice suit prevention. A lawsuit for missing a genetic disease that a simple blood test would have found would make the cost of the test trivial. If the patient is offered the test but declines, then there is no liability.

But I'm afraid it is always going to be simply beyond my comprehension that anyone would set so much as a tippy-toe in an Emergency Room without being pretty at death's door.

For anyone with a lower middle income or possibly upper-lower income, maybe so. But to a person making $7000/year working part time at McDonald's, it's the only medical care they're going to get. And since it's free, they go for *everything*.

Posted by: Yu-Ain Gonnano at April 27, 2009 02:59 PM

But I'm afraid it is always going to be simply beyond my comprehension that anyone would set so much as a tippy-toe in an Emergency Room without being pretty at death's door.

One of the reasons the sole remaining hospital in Trenton has announced it's moving to the suburbs is the number of people who walk into the ER demanding "a shot" for a mild cold, an X-ray and a doctor for a splinter removal, or a bottle of "medicinal" booze.

Ambulances have responded to 9-1-1 calls for stabbings only to discover the caller just wanted a ride somewhere and didn't have cab fare.

The mayor of Trenton naturally described the decision as "bigoted against the poorest of our citizens"...

Posted by: BillT at April 27, 2009 03:39 PM

Well, there are a lot things in this world that are beyond my comprehension: string theory, how to hit a golf ball, why designers consider brown a suitable color for Spring dresses. I guess voluntarily going to the ER is just one more on the list.

Posted by: Elise at April 27, 2009 04:11 PM

...why designers consider brown a suitable color for Spring dresses.

It's gotta be that exotic *Oriental* influence, Elise -- the color of a newly-fertilized rice paddy....

Posted by: BillT at April 27, 2009 04:21 PM

Oh, thanks a lot, BillT. Now I'll *really* never be able to wear brown again.

Posted by: Elise at April 27, 2009 04:51 PM

That's me! Saving the world from haute couture -- one earthtone at a time.

Next target: mauve!

(and to those doubters who aver that mauve is not an earthtone, lemme just say, "Haven't been to Chernobyl lately, have you...?")

Posted by: BillT at April 27, 2009 06:43 PM