Possible Insight

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.

Now that we’ve solved the problem of the uninsured, it’s time to move on to the problem of doctor’s visits. Spending on physician and clinical services was $479B in 2007, 22% of total health care spending. Only hospital spending accounts for a larger share at 32% (I’ll be addressing this category in a subsequent post).

First, let me say that I have no problem with increased spending per se.  We’ve increased spending on entertainment as well as health care and almost nobody has a problem with that. They’re both signs of increased prosperity.  However, our current system encourages an economically inefficient level of spending. That’s the problem we need to fix.

If we want to get close to the efficient level of spending on doctor’s visits, here’s what we need to do:

1. Eliminate insurance payment of primary care. The risk pooling benefits of insurance only work for rare events or unknown losses. When you use insurance to pay for common events of known magnitude, you are playing the Diner’s Dilemma and most people overconsume. Moreover, you get additional social losses from administrative overhead and reduced incentive to compete on quality. So we should tax any insurance plan that covers primary care (excepting organizations like Kaiser that are paying for essentially all of your care).
2. Establish personal Health Savings Accounts (HSAs). To reduce the sticker shock of (1), we should give people the ability to pay into personal HSAs roughly the same way they pay into personal IRAs. They will still respond to pricing incentives in the outpatient services market, but the use of pre tax dollars will soften the blow and encourage saving.
3. Require pricing disclosure. Partly due to strategic behavior in negotiating reimbursement from insurance companies and partly due to wanting to extract the maximum surplus from patients, doctors and labs are reluctant to disclose their prices.  Unfortunately, this behavior makes it difficult for patients to respond to pricing signals and decreases service innovation by obscuring differentiation. Therefore, we should require doctors and labs to publicly disclose their general price lists and give patients specific estimates before rendering services.
4. Eliminate barriers to “Wal-Mart Medicine”. Doctor’s probably like (1). The are probably mixed on (3).  They probably won’t like this. One of the reasons that trips to the doctor’s office are so expensive is that they just aren’t very efficient operations. Normally, competition would squeeze out inefficiency but doctors are effectively insulated from competition through a variety of subtle and not-so-subtle regulations.  Among the biggest are local restrictions on “retailer clinics” through companies like Wal-Mart and state restrictions on the use of Nurse Practitioners (NPs) and Physician Assistants (PAs). Retailer clinics cost substantially less and provide equivalent care (at least for some basic needs) according to a recent study. Then if you look at salary data from PayScale, NPs and PAs cost about 40% less than family practice doctors. Here, I depart from my usual libertarian bent and advocate using the withholding of federal funds to blackmail encourage local and state authorities to comply.
5. Fund startups in health advisory and tracking. The first four measures will create a much more open and transparent market for outpatient services. As in other such markets, there are probably a lot of advisory and tracking services that could improve decision making and efficiency. Imagine a self-help applications that advises when a trip to a Wal-Mart clinic is sufficient versus when it’s worth the money to go to a more boutique operation. Or a sophisticated rating and cost comparison services by zip code.

With these measures in place, we would most likely get a richer market that spans Wal-Mart clinics staffed primarily by NPs and PAs that cost $35-50 per visit to high end boutiques where a 30 minute consultation with a star doctor costs $300-$500. Each person would spend much closer to the economically efficient level given their personal circumstances and preferences.

Yes, I’ve decided to wade into the health care waters again.  One of the problems with the current debate is that it confounds several distinct problems.  So I’m planning to briefly address each one individually in the hopes of achieving some clarity.  First up, the uninsured.

Most of us don’t want people to die simply because they can’t afford basic health care.  So I ran the numbers on what it would cost to solve just this problem.  The most cost effective approach I know of is a major medical plan plus a health savings account (HSA).  According to this Forrester analysis of eHealthInsurance data, the average annual cost of an individual major medical plan in 2007 was $1896.

Premiums have obviously gone up since 2007.  However, let’s be optimistic and assume two points of cost savings: having a very large group and following my recommendation of not using insurance for primary care.  Let’s put the optimistic annual premium estimate at $1500.  Of course, we’re talking about poor people so a no-primary-care major medical plan isn’t enough.  We’ll also give them a $300 per year HSA allowance, enough to cover a couple of office visits and some generic drugs plus save up some to pay for a hospital stay.  Not that generous, but I’m trying to figure out the minimum cost.  Total cost per person: $1800/year.

So how many uninsured are there?  Well, estimates vary.  But the Census Bureau released a pretty detailed report in 2007.  Looking at Table 6 on page 22, we see that there were just over 28,000 uninsured with household incomes below $50K.  Now, if we offered a government program means tested to $50K, we’d probably get some  people dropping their private insurance for the government insurance.  I think only a 25% cross-over would be optimistic.  So we have to cover a minimum of 35,000 people at $1800/year.  Total cost: $63B/year.

Call it an even $100B due to my optimistic estimates.  It will probably add close to $1000/year to my tax bill.  I’m willing to pay that.  So let’s just do it and then move on to the next problem.