Possible Insight

Fixing Health Care III: Hospitals

with 3 comments

Having addressed the uninsured and doctor’s visits, the next health care problem on my list is hospital spending. It represents the largest share health care costs, $696.5B in 2007 or roughly 32%.

Now, it’s worth repeating that I don’t object to increased spending per se. It might be perfectly normal given personal preferences and growing wealth. I do object to distortions caused by the current system. I have identified three areas where we could save money through eliminating distorting policies.

Barriers to Competition

Hospitals are a highly protected industry.  I found this Forbes article an excellent overview of the problem. Generally, competition from so-called “specialty hospitals” improves care and reduces costs for both specialty hospital patients and community hospital patients (see this overview of the relevant research). However, like most businesses, community hospitals don’t like competition so they engage in anti-competitive practices and regulatory capture games.

Eliminating such abuses could save 2.4%, the cost reduction that the entrance of specialty hospitals into a market produces  according to this study.  That would be close to $20B/year.  But I would go farther.  I would require all hospitals to publish costs and outcomes for different treatments.  Moreover, they would have to further disclose the price discounts they offered to insurance networks. A more transparent market would drive costs down even farther.

The standard objections to these measures are typical anti-competitive propaganda. Opponents say specialty hospitals duplicate infrastructure, which drives up costs.  Tell that to PC manufacturers.  They had to duplicate all their infrastructure but look at how costs have plummeted due to competition.  Why are hospitals any different?  Opponents say that doctors who own hospitals have a conflict of interest.  Tell that to Apple who has to make phones that people really want if they are going to make any money.  Why are hospitals any different?  And the list goes on…

Drug Development Restraints

Excepting cosmetic procedures, almost everyone would prefer to avoid consuming hospital care if they could at reasonable cost. The biggest substitute for hospital care is taking drugs that prevent hospitalization. Unfortunately, the market for drugs (and medical devices) is tightly controlled, increasing costs and stifling innovation in the drug market. I contend that these factors increase hospitalization beyond the efficient level.

This review article claims that $100B/year worth of hospitalization stems from people not adhering to their medicine regimens. Obviously, formulations and devices that improved adherence would reduce this number.  Moreover, I believe it also implies that there are a substantial number of other hospital admissions that could be avoided if more drugs were available.

As I’ve advocated before, eliminating Phase III trials (in favor of some sort of probationary approval) and reducing the term of patent protection would accelerate drug discovery and reduce costs.  I also think that streamlining the approval of drug delivery devices in particular would help address the issue of adherence.

Inability to Commit to a Lower Standard of Care

Lastly, we the problem of end-of-life care. There has been a lot of angst over the so-called “Death Panels” discussed as part of health care reform. I admit that it gives me the willies.  But I think the problem is that the government is pursuing an interest in getting you to die quietly.

But consider a private alternative.  You’re somewhere between 40 and 60.  You’re pretty healthy.  You have a choice of two major medical insurance plans.  One covers heroic end-of-life measures for terminal conditions.  One doesn’t.  The second one is 30% cheaper.  Personally, an extra few months hooked up to machines in intensive care plus a vanishingly small chance of a miracle recovery isn’t worth it to me.  I prefer to spend my money on safety and prevention thank you very much.  But that’s just my personal choice.  You could chose differently.

This decision doesn’t give me the willies.  People make all sorts of decisions that statistically shorten their lives by this amount: where they live, what activities they pursue, and what jobs they do. This is a completely voluntary decision well in advance of the event.  The only problem is that providers must be convinced that such agreements are enforceable. Otherwise the providers can’t count on the savings and premiums remain high. This is a problem the government can do something about: assign rights and enforce contracts.

All in all, I think these three measures might save a couple of hundred billion per year.  They would certainly lead to a more efficient outcome.

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Written by Kevin

October 17, 2009 at 12:24 pm

3 Responses

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  1. “Studies have shown that the 5% of Medicare patients who die each year account for 30% of Medicare’s costs, with 78% of last-year-of-life expenses occurring in the month before death. A March 9 Archives of Internal Medicine study of 603 dying cancer patients at seven hospitals, oncology clinics and hospices found that care for patients who had end-of-life discussions with their physicians cost $1,295, compared with $2,780 for patients who did not have such talks.”

    i think the end of life debate is the crux of the moral issues. I like you approach, but:
    1. i wonder if 30% price difference is close to what it would be or if its materially higher/lower.
    2. some may argue that a 30% difference means that two kids born to different families have very different options for battling their leukemia.

    I don’t really know where i land on this issue. The willies are quite disturbing one way or another. On the one hand, it’s such an inelastic service – last year or month of life (in a drug induced coma possibly). On the other hand, this is precisely the voting mechanism that is needed to extend those moments. if everyone’s indifferent to how it gets paid for, then innovation won’t focus on it.

    Alex Golubev

    October 19, 2009 at 2:51 pm

    • The leukemia point is a bit of a red herring. First, I wouldn’t call childhood leukemia definitely “terminal” in most cases. Second, people are free to write whatever contract they want. If kids are that important, the contracts will except them. But there are undoubtedly a lot of cases where there is very little percentage in continuing treatment. By specifying those up front, you save.

      kevindick

      October 22, 2009 at 11:14 am

  2. […] may recall, I previously posted about my recommendations for fixing health care (Part I, Part II, Part III). Recently, I had to navigate the current system and thought I’d share my experience in the […]


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