During the past months, a number of important articles have appeared in the healthcare literature on the subject of the recent slowing of health-spending growth in the U.S. In an article in January’s Health Affairs, economists at the Centers for Medicare and Medicaid Services suggest that the recession, even though officially ending in mid-2009, was the major factor in “extraordinarily slow” spending growth of 4.7 percent in 2008 and 3.9 percent in 2010, down from 7.5 percent in 2007 and double-digit growth in the 1980s and 1990s. Also citing recessionary causes, a report from the McKinsey Center for U.S. Health System Reform specifies declines in the rate of overall spending growth for eight consecutive years, from 9.2 percent in 2002 to 4.0 percent in 2009.
As I’ve already mentioned, “too soon to tell” is the correct response. Still, we should be raising our probability that the health care cost curve is (somewhat) being bent.
There is much more at the link. You can read Suderman and Lowrey here.
The view of someone (me) directly involved in health care is that the pace of innovation is slowing. Sure, there are new prosthetics, drug eluting stents, and medications, but it’s harder and harder overall to improve on the existing standard of care. At the same time, what we’ve been using has decreased in price. This does make me worry about the viability of the medical device and pharma industries. We need both to be healthy and profitable to continue innovating. If the price of R&D becomes too expensive, we may see these firms shift more towards marketing and “product differentiation” rather than making thing work better.
Yeah, the computer industry has been doing so horrible with falling prices, it’s a basketcase. Clearly in order for an industry to be profitable, costs have to rise exponentially forever, until 100% of GDP is devoted to buying that industry’s products.
Cliff – did you read what Richard said? He said that the price of R&D is rising to the point that it’s becoming prohibitively risky to develop new medical devices and drugs.
Does that sound much like the computer industry? Is the computer industry regulated like health care?
Regulatory arbitrage can be a good thing.
Why are R&D costs rising? Are labor costs getting more expensive? are the raw materials going up in price?
R&D costs are rising because all the low hanging fruit has been picked. Requirements for clinical trails are also much greater than they used to be.
The computer/tech market is totally unlike health care.
No one buys silicon and gallium tech components, which are tech equivalent to flat X-ray, CT, and MRI. Instead, you buy a complete package without you making a single choice about the component parts. If health care were the same, you would walk into the Apple Healthcare Store and pay $200 a month without a single question by Apple about you the customer, other than verifying you can pay $200 a month. If you buy an iPad and use if once a year, or use it in three shifts 24 by 7, the price is the same. So, health care should be priced the same way to be compared with computers.
And if health care were priced like computers and such, you would not know anything about how it works or make any decisions on the design choices. You would walk in and just use the health care to meet your needs. I can buy the iPad with broadband providing wifi for a fixed price and use it as much as I want, and have no clue how it all works and not make a single decision on the virtues of component choices. Every one of those decisions is made by Apple and the broadband provider. The iPad is single payer with everyone paying the same price – socialized single payer access to the worldwide web.
By the way, all the computer components are strictly regulated by the EU – the RoHs logo signifies it conforms to strict EU regulation that prohibit toxic metals. Other logos deal with a bunch of other government regulations.
Unfortunately, we are already there. In recent years, these industries have failed to innovate in ways that produce high value products. There are already huge subsidies provided to the pharmaceutical industry by this country and it has produced very few breakthrough therapies of late.
I actually think it is a good thing that spending on drugs in particular is slowing. However, your statement that we “need” the industry to be profitable to continue generating innovative products seems backwards to me. U.S. drug companies were some of the most profitable businesses throughout the last 15 years. Where is the innovation? It seems most of the revenue has gone to marketing and development of “me too” drugs, rather than breakthrough products.
Perhaps tax dollars would be better spent on investing in optimizing the use of the technologies and therapies available to us now–determining what therapy provides the most value for whom and under what circumstances.
Yes, perhaps we are already there, though I do not fully blame pharma for failing to come up with new breakthroughs, just as I don’t blame FDA regulation for everything. It’s a simple matter of profitability that’s led these companies to make quite logical decisions.
I can give you an example. One of my pet peeves is that lack of new antibiotics developed in oh, the last decade or two (see: http://www.theatlantic.com/business/archive/2011/06/how-superbugs-will-affect-our-health-care-costs/240454/). At least part of the reason is that innovation is genuinely hard in this area; most of the antibiotics we have now are derivatives of chemicals structures found in nature. Attempts at making novel synthetic molecules rather than derivatives have been miserable failures. Another reason is the “global need” for these drugs. The moment something comes along to treat MDR-TB, MRSA, or panresistant gonorrhea, the UN will put it on the essential medications list and “negotiate” lower prices for developing countries (Paul Farmer and Jim Kim actually played a key role in this). Sure, they managed to secure one round of low-priced drugs for developing countries, but at the cost of shifting pharma development even further away from antibiotics. This is why I say the industry needs to have profitable outcomes in these arenas to continue innovating in a way that’s aligned with public health goals.
Look at where the focus of pharma development is today – targeting rich country problems like cardiovascular disease, diabetes, and cancer or producing “designer” drugs that target therapy based on individual genetics. These are things that aren’t yet on the radar of “most” developing countries (given low life expectancy), making the lower prices a moot point. This is where the profit is and where the bulk of research is focusing on. And this is not even taking into account yet the lack of “low-hanging fruit” that’s making innovation harder.
I am also not aware of huge subsidies to pharma (Medicare part D doesn’t count). There are some small amounts of incentives to target research into orphan drugs and rare diseases, but that’s about it.
Yes, I think one does have to count Part D as a subsidy to pharma. Not simply because public funds are used to purchase the drugs, but because the government is explicitly prohibited from negotiating prices for Part D drugs. Such a prohibition does not exist in pretty much any other federal program–it would be called out as pure waste in almost any other context. This is why the VA pays about 40% less for drugs than Medicare. It represents a subsidy of tens of billions of dollars per year.
Other subsidies to pharma include extensive tax write offs (every single R&D dollar can be deducted) that result in one of the lowest effective tax rates among all industries and the new NCATS initiative at NIH that is explicitly designed to license promising compounds to pharma and biotech companies for free. Then of course the smaller subsidies you cite. Most of these exist for defensible reasons and I don’t necessarily oppose them, but let’s not say pharma isn’t getting subsidies. They are extensive.
And to be clear, I don’t disagree with you that drug companies are going to invest in what is profitable and focus where they know they have a buyer. I don’t think the issue is lack of incentives–I believe they are there and sufficient. I believe a number of factors, including ineffective R&D and the fact that most of the low-hanging fruit has already been picked, mean that the drug companies aren’t likely to produce many breakthroughs in the near future. I don’t think we can solve this problem by throwing even more money at the companies.
Slowing of healthcare is more evidence of the Great Stagnation. This is because the USA is a “frontier” industry in medicine, meaning they subsidize the rest of the world in new advances and hence the high costs (and of course defensive medicine is to blame). Fewer advances means the USA is resting on their laurels. BTW, did you know the NIH (US gov’t R&D institute) initially denied funds to both Damadian re MRI and to the founders of Genentech on recombinant DNA? Your government money at work. Fortunately private VC funds filled the gap.
A great stagnation in medicine is a disaster. Consolidating costs for the known medical solutions is fine. We don’t want the same cost structure of R&D used for mundane care, and that seems to be what we have during this period of technology integration. We haven’t figured out how to separate spending for experimental procedures and how to properly compensate the people we are experimenting on. I think giving them risky procedures is as good as any plan. But outside of that, we should be working very hard to figure out ways to spend more money on health. Most of these will be complete wastes of money. That is how research works. The US largely bears the trial-and-error cost and what turns out to work is copied by others. I’m also okay with that. We can take it.
Now, the government resents this hit to their budget. But to the extent that healthcare spending is a grand experiment in healthcare technology and even wasted to a great degree, that is an actual public good.
Because the NIH should be expected to know which technologies will shake out to be groundbreaking in every case. Give me a break.
You realize that NIH funds are limited by Congressional appropriations, right? It will be a great day when DOD budgets get slashed so NIH can fund more basic research. Until then, you will have to look to your VC friends to fill the gaps.
Want to bet it makes up for lost time if/when the recession ever ends?
Recently attended a faculty seminar on measuring physician productivity using CMS data, etc. Very poor existing measures of physician productivity. Some of the measures capture as physician productivity the substitution of other alternative providers for physician services. In other cases, as in hospital scheduling and efforts to minimize length of stay, the gains in productivity or better resource use show up in surgeon earnings or health plan returns.
Very few people examine productivity in a vertical coordination context from what I have seen unless you are a fully integrated provider like Kaiser.
The problem is that health care, like most services, is hard to improve upon in terms of productivity. Let’s face it, there’s a floor to how productive hairdressers can be, and we’ve probably already reached that, with a little wiggle room for new innovation in technology.
Granted, there is lots of room to improve physician productivity. Currently we spend significant time (I’d reckon 2-3 hours each day) on documentation, in part due to Medicare requirements and liability concerns. If we shift this work to other personnel, there will be more room to increase the patient load of each physician. Hospitals can also do other things to minimize downtime such as flex-scheduling and having people be “callable” depending on hospital volume at any given time, such as is done for nursing.
“declines in the rate of overall spending growth for eight consecutive years, from 9.2 percent in 2002 to 4.0 percent in 2009″
Hm, in average this is still 6.6 percent, or in total, ~67 percent. How high was the increase of the main street people’ incomes during this period?
Hmm. Just a thought.
The vast majority of health care costs are labour. Recession introduces a slower rise (possibly even a fall) in wages. Recession could therefore slow the rise in cost of services which are primarily composed of labour.
True, and the correct diagnosis of the cost ailment plaguing healthcare may be Baumol’s diseases. In a recent healthcare health scare I was rolled down the hall in a wheelchair by an orderly for an ultrasound (the results were negative thank God!) and as I passed each room I got to say “MRI, that sucked.” “CT, that sucked.” “Spinal tap room, that REALLY sucked.” Etc. I had had every test in every room we passed. Defensive medicine, or whatever the cause, we haven’t created many labor saving devices and most of the technologies, for good or ill, have created the need for more labor.
On the other hand (am I doing it right?), the measurement problem is that small decreases seen as rounding error every year will move the needle during a recession.
Apparently too little innovation in how to lower costs of existing procedures (and to develop new antibiotics) and maybe too much in new procedures that achieve marginally better outcomes. Atul Gawande hopes that “big med” will have the incentive to do so. Comments on his thesis would be interesting to see.
Generally speaking, in medicine you have a new technology or treatment that is very expensive. Overtime the technology spreads, and absent regulations that stand in the way, costs come down. More people are trained, the marginal costs of medical equipment drops quickly, etc.
However in the end we all die from something. At some point the quality of the time gained is not worth the costs. Perhaps this is some of the decline.
Perhaps we have picked off most of the low hanging fruit, at least for now, and new innovations have slowed. Chronic conditions are a concern. But the cost of AIDS has declined, angio replacing bypass, etc.
The market works. Prices are signals. Obamacare will be pushing on a balloon with slow responses and regulatory nonsense.
Why just “recent”? Healthcare spending has been declining since 1980; more important, it’s been “bending” up and down with GDP. And the future? “Follow the money”
http://nextthingsfirst.wordpress.com/2008/10/04/wake-up-call-for-health-care-venture-investors/
http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/tables.pdf
We need more doctors — more med schools and more graduates. The gov’t should subsidize the building of and staffing of more med schools before other health care subsidies.
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