General principles for evaluating Medicare reforms

by on April 4, 2011 at 7:36 am in Economics, Medicine | Permalink

You’ll be hearing lots about the Paul Ryan entitlement reform proposals, but here are a few more general points to keep in mind:

1. As health care develops, it becomes impossible for Medicare (or Medicaid) to cover every treatment.

2. One reform option has government experts rule which treatments are eligible for coverage, with varying degrees of Congressional input.

3. Another option is to let individuals choose in advance which treatments they will be covered for, and which not.

4. #3 can but need not be bundled with voucher and privatization ideas.  Without privatization, the government offers people different Medicare packages and they choose one over the others.  Government may also recommend a Medicare benefits package for an individual, without requiring that it be chosen.

5. Most plausible policy reforms involve some mix of expert restrictions (#2 )and individual choices (#3) and the real question is to figure out the right mix of the two approaches. When evaluating #2, do keep in mind the potential input of Congress, if only as a background threat.

6. Does individual choice (#3) make more sense for nursing homes and dental care (preferences really matter?), but maybe expert judgment (#2) makes more sense for cancer treatments (expertise really matters?)?  I am not endorsing that comparison, it is simply an example to illustrate the issue at hand.

7. If #5 isn’t being addressed, you’re probably just getting polemics.  Obligatory citation of David Hume, commit it to the flames, etc.

Slocum April 4, 2011 at 7:58 am

You have a numbering problem #2 is ‘expert restrictions’ and #3 is ‘individual choices’.

One obvious (and I would argue desirable) way to mix #2 and #3 is:

1. competing groups of experts (working for insurance companies) putting together coverage packages for sale and

2. another set of competing groups of experts (working for independent organizations like Consumers Union) performing analyses and ratings of those insurance packages.

Individuals then choose an expert-designed package based on expert analysis and ratings.

Andrew April 4, 2011 at 9:53 am

Brilliant.

chris April 4, 2011 at 12:47 pm

…except you still have the problem that the individuals aren’t qualified to evaluate the merit of the expert criticisms of the other experts. If that kind of thing worked, nobody would go to quacks while Quackwatch exists; but it does and they do. The freedom to be cheated isn’t the kind I, for one, want to preserve.

Also, how long do the independent organizations stay independent? Why? What protects them from what happened to the bond rating agencies? Government is a long way from incorruptible but at least it has elections and FOIA. “Independent” public agencies would have neither.

Slocum April 4, 2011 at 1:04 pm
Slocum April 4, 2011 at 1:04 pm

Damn closing tags. Can we have a preview, please?

chris April 4, 2011 at 2:53 pm

So you are unable to interpret Consumer Reports auto-reliability ratings?

I could interpret what they say, but I have no way of knowing if they’re right until I try the same product for myself. At that point I probably have some idea of the relatively easy-to-perceive aspects of quality.

Government agencies are routinely captured and corrupted, but they never go out of business because of that.

Why would you say that? Plenty of government agencies have been abolished over the years. I’d bet at least some of them because of corruption. Someone has to expose the corruption, but that’s true of private-sector self-appointed watchdogs too.

On the other hand, it would be a death blow for Consumers Union to be found taking bribes for favorable ratings.

Sure, just like those financial rating agencies. They just about perished of humiliation after everyone found out about the “AAA” CDOs.

Anyway, if one consumer disinformation agency were exposed as an industry front group, another could be founded to replace it. If this sort of thing had much relevance to consumer decisions it would instantly become the focus of the marketing industry. I don’t know why you imagine that disinterested people with no source of funding could win against that. It would be hard enough to find enough disinterested people to administer public funds toward that purpose without them getting corrupted, but the same small supply of disinterested people *without* any funds would be hopelessly outshouted by the marketing pros.

In any case, there’s no harm from having both sets of watchdogs — if they are honest they will mostly agree, and if they don’t agree someone might look into why.

Note, too, that the rise of the internet has made this a golden age of consumer information.

And yet consumers make no smarter decisions than before. Possibly because it’s also a golden age of consumer misinformation?

…No, actually, the golden age of consumer misinformation was the age of snake oil. I.e. before the government started actively policing quacks. Maybe you think that timing is purely coincidental? I’m sure there were plenty of private doctors denouncing the quacks, but apparently not as many people listened to them. Government was tried only *after* the private sector had already failed at the same task. So anyone proposing turning back the clock had better have a good reason history wouldn’t simply repeat itself.

Given all of the reviews (including huge numbers of end-user reviews), defective products and shoddy practices are now virtually impossible to hide from minimally savvy prospective customers.

And yet, products that do nothing at all for the customer (e.g. homeopathy) continue to flourish, despite numerous well-reasoned expert exposes. It’s almost as if consumers aren’t as smart as you think they are.

Also: people who got a defective chair know it, they’re the ones sitting on the floor amid a pile of broken chair pieces. People who got bad health care may not know even in hindsight that their outcome could have been better with a different course of treatment. People who got *really* bad health care aren’t around to write reviews. Different industries are different. So Consumer Reports may not be all that relevant to something that isn’t consumer goods.

Henry April 4, 2011 at 6:08 pm

You mean agencies like Moody’s and Standard & Poor?

Komori April 5, 2011 at 11:03 am

You mean the handful of ratings agencies financial firms are _required by law_ to use?

Orange14 April 4, 2011 at 8:26 am

Is this the Republican version of “Death Panels?” Seriously, Paul Ryan cannot do anything about controlling costs through a voucher program without limiting choices as the cost of new treatments escalate. With more expensive oncology therapies coming out (with very limited efficacy) the program will necessarily provide limited choices ‘unless’ it is adjusted for increasing costs (in which case it doesn’t control costs – a classic conundrum that even we non-economists can recognize). Methinks the emperor has no clothes. One hopes that the President will call him out on this.

Cliff April 4, 2011 at 9:08 am

Not being able to afford something is not a death panel

mulp April 4, 2011 at 3:57 pm

But failing to provide the minimum level of care that is found in Canada, France, Germany, Japan, Israel,…., when spending almost twice as much per capita, is choosing to pick out losers who get inferior care leading to diminished lives.

Or to put it another way, US governments spend as much per capita as Canada spends per capita on health care, and Canada covers everyone with the same basic package while the US governments only cover a fraction, leaving the private sector to cover the majority for an amount per capita equal to what Canada spends per capita. The US performs no better than Canada on health out comes even after spending twice as much per capita, yet people in the US are denied health care they would get in Canada that would save their lives because we can’t afford to provide them care??

fischbone April 4, 2011 at 9:18 pm

Hmmm….any omitted variables between US and Canada, France, Germany, Japan, and Israel that would make this comparison worthless?

mulp April 5, 2011 at 3:27 pm

No one can identify any. Some have suggested the differences in overweight and obesity, but other nations with lower costs have higher obesity. Some have suggested genetics, but no other nation shows origin diversity causes higher costs in a consistent fashion. Some have suggested the US is older, but the US is on average younger than the rest. Some have suggested the cause is the US is younger, but other nations are younger with the lowest costs.

The other nation have one thing in common: universal coverage. They do not have in common the way universal coverage is provided. Germany, for one, uses private insurers and private providers. France and Canada has the equivalent of Medicare Part A for all, plus private insurance. The UK had a government run system with no insurance. Israel has four HMOs that grew out of the labor union system run as worker-patient coops. Everyone is included and everyone is served at a minimum level equally, so everyone has a common interest in common controls on both costs and quality. Everyone has a vote in the way their common collective health system operates.

In the US, the health community is split into voting blocks and this leads to one or more groups voting to favor their group with lower costs and better quality to their voting block at the expense of those with less voting power. You can cynically argue the unions, the greedy management, and the college graduates, the breast cancer risk group, and the elderly join together to take from the poor, the working poor, high school dropouts, and disabled to benefit themselves with government favored subsidies.

Joe April 4, 2011 at 9:11 am

I believe choose you own death panel is better than a single death panel by government decree. Let me gamble on what I get covered. I already gamble on which horse is going to win a race. I like gambling. As opposed to being told I have to pick the #3 horse, let me pick a winner/loser.

L. F. File April 4, 2011 at 10:19 am

Yeah, get me an insurance company where I vote for the CEO and Board of Directors!

lff

MikeP April 4, 2011 at 8:47 am

Here’s the most important point:

Medicare isn’t health insurance: It is inheritance insurance.

It is patently unfair to tax 18 year olds and hand it to retired upper middle class people so they don’t have to spend their own money that they will later give to other upper middle class people in the prime of their earning years.

Phase out Medicare with lump sum HSA payouts to anyone under 50, then apply #1-7 to Medicaid.

Bill April 4, 2011 at 10:59 am

Mike P–You are absolutely right that medicare is inheritance insurance.

And, it is inheritance insurance paid for by younger people and those without assets who will not inherit anything.

I would disagree with you on phasing out medicare. You can get to the same and fairer solution another way:

Here it is:

1. Everyone is responsible for the last six months of their healthcare costs. The last six months of healthcare costs would then come out of the estate (with an exclusion if there is a surviving spouse).

2. Two incentive effects happen.

a. The children with then take an active interest in the end of life decisions of the parents. No kid will want to see the parent on the ventilator in the critical care center, brain dead; whereas today, kids just walk away and figure the governments paying for it and why should I be involved. You don’t need death panels if the kids are informed.

b. Persons with assets (or their children) will purchase “last six month” healthcare insurance to protect assets in the parents estate.

fischbone April 4, 2011 at 9:21 pm

only with some treatments (esp. expensive oncology) it’s hard to know if you have six months left. Then who fronts the money? Then how do the kids decide?

Bill April 5, 2011 at 10:34 am

Medicare fronts the money in that case and then does a clawback from the estate.

Andrew April 4, 2011 at 8:48 am

The Democrat strategy now is label everything Death Panels. “Of course we need death panels, who ever said otherwise?!? Don’t listen to them, listen to us.”

Dasp April 4, 2011 at 2:30 pm

Without exaggerating in the slightest, I can say that this makes the least sense of anything I have read all month. The Democrats are unfairly labeling things death panels and are saying that we need death panels and denying that they were ever anti-death panel…. what?

mulp April 4, 2011 at 4:05 pm

What Ryan is saying is that his proposal is the same as Obama’s with one difference, so every conservative attack on Obama and Democratic health reform applies to Ryan reform, and Republicans if they embrace it.

The difference between Ryan and Obama is Obama sought to put everyone in the same boat so the cost controls hit everyone, while Ryan is calling for sacrificing the least able to afford the health care they need in order to benefit those who can most afford the health care they need less.

foosion April 4, 2011 at 8:48 am

Control costs. We’re at least twice the cost of any other country, with no corresponding benefit. License more doctors. Increase competition. Reduce patent monopolies. Learn which treatments are the most effective and which are the most cost effective.

Ryan’s plan is a naked attempt to shift resources from the general population to the very wealthy and does nothing meaningful to control costs. It’s hard to take it seriously other than as a giveaway to the wealthy and powerful at the expense of all others.

Cliff April 4, 2011 at 9:11 am

Explain how this shifts resources to the very wealthy??

Andrew April 4, 2011 at 9:29 am

“We’re at least twice the cost of any other country, ”

Not true as % GDP. Almost everything in the US is more expensive, and doctors are going to be at the top of the list.

“with no corresponding benefit. ”

We don’t know this, and I think it’s probably not true for reasons I’ve said many times.

We do most of the biotech research, 80% or so. So it could be perfectly understandable why we get the bleeding edge technologies first, and then we get to work out the kinks. You can’t cut a company’s R&D department and claim with a straight face to be doing it because “our department spends more and doesn’t get the same benefit as the rest of the company.” This isn’t all of it of course, and I’m not even claiming it’s a big part. But IMHO noone knows, least of all the people claiming to know.

Zach April 4, 2011 at 9:49 am

Health outcomes are measured in a variety of ways. I’m not aware of any result that’s showed that we’re getting our money’s worth… if we are disproportionately funding drug R&D, the benefit goes to the entire world immediately. It’s telling that folks opposing reforming, say, Medicare or private insurance regulation point to advanced drugs that aren’t covered by the British NHS rather than any actual deficiency in health outcomes. And, for the record, these drugs generally aren’t covered by American insurers without crippling co-pays because they aren’t proven to be cost effective. There’s also the usual complaint about people having to wait in line instead of getting instant care; it’s somewhat counterintuitive, but lines are a feature of an efficient healthcare system; not a bug.

odinbearded April 4, 2011 at 10:19 am

“Getting our money’s worth” is a value judgement. Is efficiency the goal, or absolute outcomes? Health care is full of diminishing returns, and where we draw the line is as much a normative question as a descriptive one.

albatross April 4, 2011 at 10:21 am

Yeah, I think you’re mixing two important but different things there:

a. In general, we spend a lot more per capita on health than anyone else, without any measurable benefit in terms of better health outcomes. Rich countries that spend a lot less per person than we do have similar or better statistics in terms of life expectancy.

You can argue for how relevant this is, but you quickly start sounding like the defenders of DC’s public school system, which is also notable for spending a lot per person and not providing very good outcomes. (Though if we were really like the DC school system, we’d be spending this much money and have a life expectancy of 55 or something.)

b. We have a lot of medical research going on, much of it funded, effectively, by the prospects of making money in the US market, where we pay top dollar.

I think this is one of those places where we simply face a hard tradeoff. Either we keep paying top dollar for medical care in the US, get mediocre results, but continue funding a lot of drug development and maybe help push the boundaries of medicine forward over time, or we find a way not to pay top dollar, and effectively fund less drug development.

Now, I’d like to think there are better ways to fund drug development than gold-plating our entire medical care system, but honestly, I’m not sure. And Medicare inflation plus our demographics simply can’t play well with our existing government budget–if costs keep going up as they have, Medicare will eventually swallow up the whole damned budget, and long before then, we’ll wreck ourselves with our inability to cut spending.

Dan Weber April 4, 2011 at 10:53 am

Does it need to be either/or? We could have a public health system, where everyone gets a limited benefit, and a private system, where people pay top dollar for marginally less useful but still personally beneficial treatments.

Zach April 4, 2011 at 9:43 am

Under current law a given amount of resources are set aside for the lower and middle classes. Everything we’ve heard about Ryan’s plan is that it largely closes the budget gap by reducing these resources. There will apparently be some Simpson/Bowles-esque language on tax expenditures (which favor the wealthy), but it’ll be coupled with a reduction in income tax rates with little net effect on the fraction of income tax paid by the wealthy.

Conversely, lowering costs by attacking inefficiencies in the medical system shifts resources from the wealthy (doctors lose income, drug companies sell drugs for less, etc) to the less wealthy.

My general take is that free market reforms in health care would be a lot more reasonable in a world where everyone else played in a free market. In practice, it means that patients in the United States subsidize health care research for every other advanced nation when we ought to be able to leverage the fact that we fund three of the largest single payer health systems in the world to receive lower prices.

Andrew April 4, 2011 at 8:49 am

If limited resources = death panels, then yes, EVERYTHING is death panels.

foosion April 4, 2011 at 8:53 am

>>It is patently unfair to tax 18 year olds and hand it to retired upper middle class people>>

This is a highly tendentious phrasing. Try: is it unfair to tax 18 year olds today so that they will have a secure retirement?

There aren’t enough upper income people for means testing to be meaningful unless you define upper middle class as a large percentage of the population, e.g., income over $40,000/year.

Andrew April 4, 2011 at 9:08 am

“Try: is it unfair to tax 18 year olds today so that they will have a secure retirement?”

No, try the reality. It is unfiar to tax 18 year olds today so that SS and Medicare will not be recognizable when they are old. That is the reality of the pyramid scheme model.

Andrew April 4, 2011 at 9:09 am

And yes, even if it weren’t a pyramid scheme it would still be the wrong thing. Some people don’t want the ‘secure retirement’.

Zach April 4, 2011 at 9:56 am

I might be convinced to sign onto a pyramid scheme if the pyramid were constantly growing. Pyramid schemes fail because they promise instant returns that would only be sustained by an infinite rate of growth. There’s obviously a discrepancy between the growth of revenues and health expenditures under current law, but absent political pressure it wouldn’t be a very difficult problem to solve and the pyramid scheme would continue to work just fine.

Cliff April 4, 2011 at 10:26 am

Is there reason to believe the pyramid will constantly grow?

Cliff April 4, 2011 at 9:11 am

Obviously taxes on 18 year olds have absolutely nothing to do with what they get when they are old, so no.

John 4 April 4, 2011 at 8:55 am

“Methinks the emperor has no clothes.”

Do you really not understand what’s scary about “death panels” and rationing–other people making the choices about what treatment you get–as opposed to individuals having the choice? It’s individual choice vs non-individual choice–a distinction somehow everybody understands perfectly well when it comes to, say, abortion. Why does this become so hard to grasp when it is applied to others kinds of “medical” care. It makes me much more confident about my own position when people who really do know better, who are simply too smart not to know better (http://www.nytimes.com/2009/07/19/magazine/19healthcare-t.html), display ignorance of what the word ‘rationing’ means in plain English.

Of course anyone familiar with the English language and the basic principles of reasoning understands this:

http://www.willwilkinson.net/flybottle/2009/07/17/peter-singer-on-health-care-rationing/

So the most charitable interpretation I can come up with is that people who make this argument are deliberately obscuring an important distinction and hence not arguing in good faith. What raises a rather troubling question: why am I arguing with them?

Andrew April 4, 2011 at 9:10 am

Well said.

Aaron April 4, 2011 at 9:49 am

It always amazes me that people can work themselves into such a froth about choice and freedom and individualism and so on, simply to make the argument that a privatized bureaucracy should be in charge of funding their health care rather than a public bureaucracy. It’s like you’ve never actually tried to consume health care on planet Earth.

Meanwhile, the portion of the population which actually has publicly-funded health care will stop at almost nothing to keep it. I’m sure you’re much smarter and more knowledgeable than they are.

Lou April 4, 2011 at 10:19 am

So, you’re saying you dislike private enterprise because it’s more like the government than the government is.

Aaron April 4, 2011 at 12:20 pm

lol

Dan Weber April 4, 2011 at 10:42 am

I trust insurance companies as far as I can throw them. But if other people wish to trust them, I think they should be perfectly allowed to. Freedom is about allowing other people to make decisions for themselves I think unwise.

Meanwhile, the portion of the population which actually has publicly-funded health care will stop at almost nothing to keep it.

This is pretty much a tautology. If someone else is paying for me to get something for free, of course I’m going to want them to keep paying for it.

Aaron April 4, 2011 at 12:28 pm

And what if people decide they don’t like private insurance companies and elect representatives to design a single-payer health care system so that they end up paying less money for their health care?

No, most elderly people are in Medicare because they like it better than private alternatives. You should check out some articles about Medicare Advantage to see the wonders that private alternatives to regular Medicare provide to the elderly. The current governor of Florida owes a large part of his fortune to the efficiencies and liberties provided by the magic of the market.

Ryan Vann April 4, 2011 at 1:19 pm

Are you kidding me with this? They use it because they where obliged to pay for it the last 50-60 years.

Dan Weber April 4, 2011 at 1:33 pm

Medicare and Medicaid are “single-payer” and they underperform most of the industrialized world. The US Government spends more, per capita, on health care than most other first-world countries do.

Overhead is a component of health-care costs, but even if they went to zero the US would still be vastly out-of-line with other countries. The biggest component of costs is health care procedures. We get a lot of useless stuff done in this country, because no one wants to hear that they’re not getting an MRI.

albatross April 4, 2011 at 10:38 am

Is anyone proposing that treatments judged economically not worth it (in terms of dollars per year of life saved) should be banned? Or simply that Medicare or Medicaid ought not to cover them?

I certainly agree that I don’t want anyone banning the use of your own money to pay for treatments that are judged economically not worth it. (Were it up to me, you could spend your own money to pay for stuff the FDA didn’t approve, too, but that’s a different argument.) But if we’re talking about what Medicare will pay for, then we’re outside the realm of personal choice–we’re now talking about what someone else (the taxpayers) is going to pay for. And they may well decide not to pay for things that don’t seem all that worthwhile, like a treatment that costs a lot of money and extends life by only a few months on average.

Dan Weber April 4, 2011 at 10:40 am

Wilkinson seems to be making a lot of assumptions about what other people are assuming. Simply reading Singer’s piece shows that he thinks there should be limits “on which treatments should be paid for from the public purse.”

But it’s extremely rare that I’ve had a useful discussion about “what a word really means,” yet politicians seem to like doing it a lot. C.f. “pro-life” “pro-choice” and all that.

Dasp April 4, 2011 at 2:38 pm

This argument could only work if all medical care not covered by Medicare (or whatever government insurance agency) were banned. No one that I am aware of is advocating for this. You can purchase as much health care as you want out of your own pocket, but there can and will be reasonable debates about exactly what should be covered by the taxpayers (and no, this does not a “death panel” make).

So no, people who disagree with you are not arguing in bad faith; you are simply misrepresenting them.

John 4 April 4, 2011 at 4:43 pm

“This argument could only work if all medical care not covered by Medicare (or whatever government insurance agency) were banned.”

Is that so? If rich people could pay exorbitant prices to receive extra gasoline etc. during wartime rationing (as we call it), does that mean there was no rationing (truly speaking)? Or even that they themselves weren’t being subject to rationing?

I don’t think “extra” procedures need to be banned for one’s “choice” to count as limited. Here’s an analogy. There is a perfectly legitimate sense in which one’s choices are limited by the curriculums set by your local public school system. If our public schools stopped teaching evolution and taught creation “science” instead, and we didn’t have a voucher program, one could rightly complain about one’s children being forced to learn that nonsense. Of course they wouldn’t be being forced in the strongest sense of the term–everyone would theoretically have the ability to pay for a pro-scientific private education out of their own pocket. But we would be being forced to pay for a school system that doesn’t give us an acceptable array of choices.

Closer to home, consider how your choices about foreign language instruction are limited by the offerings of the school system. Aren’t your choices limited, in a very intuitive sense, by the offerings of your local school?

Dasp April 4, 2011 at 6:41 pm

I’m beginning to get your argument, but I’m now unclear on why this perspective, as I understand it from the example about the inferior school district, is leading you to land on vouchers rather than go all the way and favor cash payments or just reduced tax rates.

1. Medicare in an era with more cost controls: The government taxes me, and eventually pays me back in healthcare, but they make decisions on what it will pay for. This is bad because it’s a non-individual choice rather than an individual choice [using your terminology from above].
2. Voucherized Medicare: The government taxes me and gives me a voucher but will only allow me to spend it on healthcare. This is bad because it’s a non-individual choice rather than an individual choice (less bad than the above, based strictly on this criterion, though there are of course practical concerns).
3. None of the above: The government taxes me and gives me back money to spend on whatever, or just doesn’t tax me in the first place.

To say that healthcare in particular is a right that must be provided lands you on the wrong side of the individual/non-individual choice distinction. I guess you could come up with an argument that it’s more efficient in some way to have people buy healthcare with vouchers rather than out of pocket.

chris April 5, 2011 at 9:11 am

I think you’re not taking into account the variable need for healthcare treatment.

Suppose one person in your neighborhood needs a very expensive operation to save their life.
1. The government taxes everyone in the neighborhood and pays for the operation. The patient lives.
2. The government says everyone should be responsible for their own health care. The patient can’t afford the operation and dies.

Now do you see the case for government action? Ordinary (i.e. for-profit) insurance is useless if the patient’s condition has already become known, since it will refuse to insure them for any premium they can afford; only social insurance can make a policy decision to ignore the higher risk and include the patient in the pool anyway.

There is a real sense in which everyone else in the neighborhood is worse off because their taxes went to pay for someone else’s operation… but that’s basically the policy argument, is it legitimate to tax people to save other people’s lives or not?

Kitten April 4, 2011 at 9:19 am

How is David Hume related to this? I didn’t get it… :))

fischbone April 4, 2011 at 9:30 pm

just a badass quote about not wasting one’s time on sophistry. perhaps a bit ironic on here

Andrew April 4, 2011 at 9:39 am

7. My problem with this is that I see few legit functions of the ‘death panels’ that can’t be served by the existing medical literature. I see the Death Panels as mostly an attempt to monopolize the information and seize the rents from the doctors, and no, that’s not an improvement. Doctors already do resource allocation. When the MRI is busy, we wait. They already bought the MRI, not paying them to use it because the ROI is lower than we thought it would be is a bit glib.

Dan Weber April 4, 2011 at 10:45 am

If someone else pays the doctor $2000 every time he does an MRI, the doctor isn’t going to do very efficient resource allocation.

Well, it will be efficient in terms of maximizing the doctor’s income.

Richard A. April 4, 2011 at 10:22 am

“2. One reform option has government experts rule which treatments are eligible for coverage, with varying degrees of Congressional input.”

This sounds like Comparative Effectiveness Research (CER) with teeth, something like the British National Institute for Health and Clinical Excellence (NICE, http://www.nice.org.uk ). There are powerful economic interests opposed to this–big pharma for one. What is pharma afraid of? Guess which party carries water for big pharma.

Cliff April 4, 2011 at 10:28 am

I’m guessing both. Did I win?

Dan Weber April 4, 2011 at 10:47 am

Lots of people are scared of Effectiveness Research. It’s so bad that I can’t even voluntarily enter an insurance program that only pays for things that pass a cost-benefit analysis (because lawsuits ruled on by an emotional jury are sure to follow).

Andrew April 4, 2011 at 11:05 am

I’m not scared of effectiveness research, I’m scared of some of the people parading it about.

Noumenon April 4, 2011 at 10:31 am

Off topic, can I ask if anyone remembers the post where Tyler linked to a retired journal editor posting the secrets of getting off the slush pile, or something like that? I think it was a PDF.

Erik April 4, 2011 at 10:43 am

The biggest problem that I see is that none of this addresses the fundamental underlying issue of incentives.

I have worked in the field of healthcare and Medicare and related reform, so I know a bit about what I am talking about.

The big issue is that there are thousands upon thousands of available medical procedures and tests (mostly tests) where there were fewer before. That number is growing every day and will continue to do so as technology advances (and this is a good thing).

The problem with that is that, contrary to many people’s conception, medicine is not a perfect science. It’s part art. A patient comes in with symptoms and the decision tree about what can and should be done is very complicated. Complex decisions can be difficult, even for trained doctors. There are recommended paths for various symptoms, and once a medical issue is diagnosed there are decision trees that are calculated based upon probable outcomes by panels of expert doctors. These recommended treatment paths assist doctors in their recommendations. Unfortunately, they are quickly outdated by new technology, which makes the decisions more difficult.

In our system, doctors are their own small businesses, whether they are in a group or on their own. They get paid per procedure and per test. Combine that with liability and malpractice concerns, and they are incentivized to throw the kitchen sink at medical issues, particularly when it comes to testing. Studies have recently shown that US doctors have lost their in-person, physical diagnosis skills vs. doctors in the developing world because of a reliance on X-rays, MRIs, and CAT scans. Many problems that can be diagnosed by physically probing and listening are not because the doctors rely on technology for this. It doesn’t help that they get paid more for sending a patient for a test (and the patient prefers the piece-of-mind of the thorough test vs. an in-office exam).

What needs to be done is that we need to shift to some system that rewards doctors for positive outcomes and long-term patient management rather than on a procedure-by-procedure basis. I can’t prescribe what that would look like. On the one hand, all doctors could be salaried and become direct employees of insurers. Or, some sort of more complex outcome tracking and compensation system could be deployed. Either way, doctors probably wouldn’t be in support since most like being treated as small businesses. However, as they are squeezed more and more through low Medicare reimbursements, maybe that will change.

Hand-in-hand with this is the need for Primary Care Physicians and Electronic Personal Health Records. Being a Primary Care doc is not as financially rewarding both because of the premium paid to specialists and the fact that you rely more on simple office visits and less on tests and procedures. You send the patient to a specialist for that. But many people lack a primary care doctor, which leaves the responsibility for coordinating care in the patient’s hands. Complete, portable, electronic health records could help assist with this, but the end result is redundancy. I once had three specialists order similar tests. I had the knowledge and wherewithall to suggest that the latter two simply use the results from the first one, which I had to go pick up on CD and deliver personally, but how many people do that? Having a single doctor monitor the work of all the specialists is key to getting to results-oriented care and seeing the bigger health picture, rather than our current procedure-by-procedure model that encourages healthcare inflation.

There will be the need for expert panels to determine recommendations for doctors to use, as well as to determine certain treatment paths that should NOT be pursued because they are wasteful (although there should be a very high threshold set for such decisions; but if a treatment costs $100K and has a 2% chance of extended life 6 months at the max, then maybe it should be taken off the table). We should also let individuals indicate their broad choices and charge them accordingly. That’s one thing that Medicare and any public plan needs to think about: different levels of service (and coverage / reimbursement) for different levels of premiums. That’s one thing that the private sector gets correct.

However, until the basic incentive problems are addresses, we’re just treading water.

Yancey Ward April 4, 2011 at 10:52 am

Eventually, we will learn that the way to control costs is to not actually spend more money than can be afforded. Simple, and yet we pretend it is so difficult.

mulp April 4, 2011 at 3:45 pm

Why not learn that equal or better health care is possible for lower cost by adopting the principles common to the three dozen nations who do better for 80-50% of what the US spends per capita?

We hear about the few Canadians who must wait to get what Medicare patients get quickly, but never talk about the waiting and absolute denial of care for the tens of millions of working poor in the US who have no health coverage at all unless they can no longer work and then qualify for inferior coverage. If Medicaid is so lavish and superior to Canada’s health care, why not replace employer and Medicare et al health care with Medicaid for all? Surely pointing to Canada to argue it is inferior to Medicaid proves Medicaid for all would be cheaper and better for everyone in the US.

Yancey Ward April 4, 2011 at 7:37 pm

Well, mulp, if you can demonstrate how to transplant those systems in their entirety to the US, then I am all ears. Failing that, I think we just set caps on what can be spent each year by the government as a first step, and set caps on that growth year to year, then let people decide how they spend their portion. With the proper incentives, people will find a way to maximize the value received to themselves. There are some decent ideas in the comments for doing this that you don’t find anywhere else in the world actually practiced. If you actually look at a most of the OECD countries, they have the same problem, but only start at a lower level of spending, so even if you managed that complete transplant I mentioned, you would still have to solve the problem of escalating costs a decade down the road. I would settle for solving the cost inflation problem even if it meant keeping today’s level of spending- as should any rational human being.

chris April 5, 2011 at 9:14 am

With the proper incentives, people will find a way to maximize the value received to themselves.

Only if they also have the necessary information, expertise, and bargaining power. But patients have none of those things w.r.t. doctors or insurers. That’s why expecting the patient to be the gatekeeper of health care is doomed to fail. People aren’t that rational and sick people even less so.

Bill April 4, 2011 at 11:05 am

I think there is a simpler solution that involves incenting the kids to be involved in the healthcare decisions of the parent when there are extraordinary costs at end of life.

As Mike P pointed out, medicare insurance is inheritance insurance paid for by those without assets to protect the inheritable assets of those with assets.

Here is a partial deregulatory solution: medicare covers all but the last six months of your healthcare. If you have assets in your estate, the estate pays for the last six months (with an exclusion if there is a surviving spouse. The kids will be interested in seeing that there are no costly and unnecessary expenses, as they did before medicare, when the kids were asked/required to pay for the parents healthcare when the parents ran out of money.

If you want to protect the assets for your children so they can inherit more, you buy a special health insurance policy covering the last six months of your life.

Andrew April 4, 2011 at 11:34 am

“medicare covers all but the last six months of your healthcare.”

A little like determining if people are witches by which ones can stay underwater longest isn’t it?

Kidding.

Dan Weber April 4, 2011 at 11:45 am

But our culture still views people who want to pull the plug as monsters.

Now, my mom worked several decades in the ER and ICU, and she has absolutely no illusions about what that end of life is life. She has made it clear to everyone she doesn’t want to linger at all. If she ever gets to that state, I don’t suspect it will take long for her kids to pull the plug, and we won’t feel bad about it.

I think we’re kind of the exception, though. A lot of people want to signal that they care and want Mom or Dad alive as long as possible, even if it’s something that Mom or Dad would consider horrible.

Bill April 4, 2011 at 2:09 pm

Depends whose pulling the plug. Family members or someone else you can bitch at as a heartless bureacrat.

They may want to signal keeping mom and dad alive when they have nothing to lose. They may begin to think otherwise when they see that keeping mom or dad alive for an extra week in a coma will impact the size of their inheritance.

Humans are morally fluid in that respect.

fischbone April 4, 2011 at 9:43 pm

This might also be done by linking life insurance policies to care in the last 6 months of life. Policy beneficiaries could pay for end-of-life care from their policy. Then the money would already be saved up and set aside. And, if there were any legitimate costs that could be avoided, the children could make that decision and be rewarded for it through a larger policy payment

Bill April 4, 2011 at 11:41 am

Every act that has randomness to it is waiting to see who can stay under the longest.

There is a probability distribution that I will fall dead in one minute without any costs over the preceding six months, and a distribution that I will linger for 6 months. There is also a distribution that the costs will escalate while the benefits of increasing care decline. This will get families involved. This is a screening mechanism.

Andrew April 4, 2011 at 12:01 pm

“Every act that has randomness to it is waiting to see who can stay under the longest.”

Perhaps, but who we force to bear the risk matters. In practice your proposal is very similar to my proposal of a lifetime benefit that can be transferred and bequeathed. Getting warmer (and I don’t mean that condescendingly).

You are right about the incentives on the family side. The risk of having to pay it all in cash would be enormous, and probably would be artificial (we aren’t really cost constrained- yet) and would result in a lot less treatment due to reverse moral hazard. Even a 10% risk of death with the result being family bankruptcy might be a bit too strong an incentive for what would be a no-brainer risk/benefit. Avoiding this is why we have insurance.

Bill April 4, 2011 at 2:06 pm

No, you’re getting closer to my proposal.

A lifetime benefit cap proposal just means that someone blinks at the end of the game if the person who had the benefit comes up short.

Most likely the kids will once again have to pay for medical expenses, or we will hear cries for charity or it will be picked up in your property taxes to recreate and begin refinancing the old charity hospital or old age home.

My only way to get around this problem is to enlist the elderly in the military. Then they would receive a lifetime medical benefit for there short time in service.. Grandma to the front line!

Maybe we could then have Octogenarians on the front line in Libya, following the lead of Sen McCain. This may be a problem for octos because he is slightly younger.

But, Where there’s a will there’s a way.

mulp April 4, 2011 at 3:34 pm

“Even a 10% risk of death with the result being family bankruptcy might be a bit too strong an incentive for what would be a no-brainer risk/benefit. Avoiding this is why we have insurance.”

If you are already bankrupt and can’t afford insurance, what then?

Do you repeal EMTALA and legalize giving patients who arrive at the hospital bankrupt and in need of critical care, pure nitrogen instead of oxygen as the most cost effective compassionate care? (And as too much CO2 isn’t harmful so no global warming, too much nitrogen isn’t harmful either.)

Perry The Cynic April 4, 2011 at 11:49 am

Any particular reason why you don’t even mention:
3B: Another option is to let individuals choose at the time of need which treatments they will pay for, and which not?

It strikes me that too many discussions take insurance-or-bust for granted. This happens to be how the U.S. health care system is currently organized, more or less, for a number of historical and practical reasons. But I don’t think it should be taken as an axiom of all possibly solutions.

U.S. health insurance conflates risk pooling (the core insurance function) with social transfer payments, tax shelters, and consumer negotiation pools. It’s altogether not clear to me that combining all of that into an “insurance” system is a great idea; in fact I’d argue that delayering this monster could save quite a bit of money, as well as encourage innovation.

But seriously: I’d like to know why you formulated your #3 in terms of necessary insurance, rather than in terms of consumer choice to arrange spending as he wishes.

Cheers
— perry

dirk April 4, 2011 at 2:24 pm

How about when an individual is sick and they have choice between treatment X or treatment Y they get paid cash 1/2 the difference if they choose the less expensive treatment? Then there’d be the incentive to innovate cost effective treatments.

Dan Weber April 4, 2011 at 3:29 pm

Okay. Instead of drinking liquid gold to cure my cold, I’ll just have some chicken soup.

Where’s my check?

dirk April 4, 2011 at 4:48 pm

I’m not suggesting you get to cut the pie and choose your slice, but if someone else is cutting the pie you should be choosing your slice.

Bill April 4, 2011 at 3:30 pm

Depends on the outcome.

Let’s say you take the cheaper course of treatment, get paid, and what happens next is that the condition gets worse, requiring more treatment. At that time, you will not be denied treatment, but just go through another round of risk payment/risk sharing.

But, your proposal does have applications to devices and medicines. Government will pay no more than the price of the generic drug; will not pay for a device that is substantially better than another device, requiring you to pay the extra if you want it.

dirk April 4, 2011 at 5:02 pm

My understanding is that the way it stands now is that when a pharma/medical device company comes up with something new which costs twice as much as the old yet .01% more effective the tendency now is to go with something fractionally more effective yet twice the cost — because that’s how the incentives align. In most every other industry in the world innovators are trying to innovate across 2 different axes: better/cheaper. But with drugs/medical devices there is only one axis: better. Right now the main incentive for medical innovators should be: cheaper. How do we create that incentive? How do we make Medtronic more like Intel?

Bill April 4, 2011 at 7:10 pm

Actually, I’ve taught pricing in the graduate school, attended by device and drug manufacturer students. I don’t believe the claim of .01%. You won’t get practictioners of health plans to move for that for the Feds to approve. I believe that part of the recent healthcare legislation is going into this.

Where pricing comes in is claims that x will reduce costs because it avoids hospitalization, etc. What you basically do is take a distribution of probabilities and play them off cost tables.

Now, doctor procedures can be something to watch as well: procedure x does just as well as procedure y, but, guess what, one is an older procedure and the other is newer and gets a better rate. Guess which one becomes the “gold” standard, particularly when the gold goes into the urologists pocket, cardiac specialists pocket etc.

Bill April 4, 2011 at 7:14 pm

And one thing that does happen with drugs that is disconcerting and almost, but not quite, counterintuitive:

When a drug comes off patent, the patented drug sometimes RAISES its price and the generic, which is priced off the brand drug, enters at a pretty high price, until other generics enter. Duopoly between branded and generic is an interesting game.

Orange14 April 4, 2011 at 8:31 pm

The first generic has six months exclusivity because of the Hatch/Waxman law which is why they can price things the way they do. The second and more unseemly part of this is that the brand company can buy the “authorized” generic company off for a fixed amount of money and get that additional time for their patented product (again legal). Once multiple generics enter the marketplace the price levels out. I think the pricing of cancer drugs does not fit in with what you say above. Products with marginal efficacy are commanding extremely high prices. Provenge for metastatic prostate cancer is $95 K per course of treatment and I think now approved for Medicare coverage. Average extension of life in the small number of patients treated is 4 months when cancer survivability is normally measured at five years. These are the things that are leading to the Medicare problems; not the routine medical stuff.

Bill April 5, 2011 at 10:41 am

Hatch Waxman reduces entry costs by the generic because the generic entrant can rely on the efficicacy data and not have create its own. Hatch Waxman also encourages patent challenges by contesting the existing patent and showing that it should not have been granted. If the patent expires, the generic can enter.

The item you talk about–paying a generic potential entrant to delay–is an FTC violation. Hatch Waxman has as much relevance to violations of the law as would authorizing guns and someone claiming that guns lead to bank robberies.

Bill April 5, 2011 at 10:45 am

I do agree with you, though, about multiple generic entry. It is just that once a generic enters, there is less incentive for other generics to enter. Duopolies are more stable than threeopolies or quintopolies.

I also agree on your point about extennding life at a premium and costs for that. The point I was responding to was the .01% increase in efficacy above.

mulp April 4, 2011 at 3:25 pm

“3. Another option is to let individuals choose in advance which treatments they will be covered for, and which not.”

Ah, yes, government run death panels.

The attack on that option forced even Obama to take it off the table, so only individuals who are willing to pay out of pocket to figure out how to save the tax payers money can plan in advance.

Unless the idea is that insurers would have a policy that is subtitled “great care until three days in intensive care, then the pure oxygen is switched to money saving pure nitrogen.”

Andrew April 4, 2011 at 5:23 pm

I favor a combination of #3 with transferable benefits if I don’t use them.

I’d like to cover end-of-life counseling for a couple people in particular.

Bill April 4, 2011 at 7:12 pm

Hope not me.

Nearer my God to thee.

Roy April 4, 2011 at 7:40 pm

1.). I object to premise #1e, the fed. govt pays for a lot of less important things than medicare (arts, ag subsidies, transit subsidies, national parks, expensive buildings, etc…) it pays for a couple of things more important (Social Security, Food stamps, WIC, Courts, law enforcement, IRS, defense, etc…). Until all those less important things are cut and the more important things are threatened, Medicare should not be limited, except to prevent fraud.

Until then it is like a comedy routine where people are stuck in an elevator and after five minutes resort to canibalism, it is asinine.

I currently refuse to accept the premise.

SteveX (formerly Steve) April 4, 2011 at 10:26 pm

Is a nation better off economically in the long term, if all it’s children, and working age and elderly citizens are healthy most of the time? If so, how much is that worth to long-term GDP? If there’s a net increase to the GDP, does it make sense to use n% of the additional tax revenues from it to fund the cost of keeping them alive and healthy, and whatever’s left on reducing the deficit?

Comments on this entry are closed.

Previous post:

Next post: