Category: Medicine

Strengthening competition in health care markets

Michael Porter offers some suggestions for restructuring competition in the sector:

…competition in the health care system occurs at the wrong level, over the wrong things, in the wrong geographic markets, and at the wrong time. Competition has actually been all but eliminated just where and when it is most important.

We should have more competition for service and innovation and less competition for cost-shifting:

In a healthy system, competition at the level of diseases or treatments becomes the engine of progress and reform. Improvement feeds on itself. For that process to begin, however, the locus of competition has to shift from “Who pays?” to “Who provides the best value?”

This implies some specific proposals, including the following:

1. Greater specialization of providers and facilities.

2. Large deductibles combined with medical savings accounts. But most importantly, copayments should be the same both “within the network” and “outside of the network.”

3. Transparent prices independent of group affiliation.

4. Public availability of provider track records.

5. Better risk pooling for the self-employed. And do not allow premium boosts for the sick.

6. No malpractice suits in all but extreme cases.

7. A federal mandate for minimum standards of health insurance coverage.

In Porter’s view “Attempts to limit patients’ choices or to control physicians’ behavior would end.”

My main worries: Let’s say insurers can’t get rid of people. Won’t they simply decrease the quality of service to their most costly charges? If reputational forces won’t stop insurers from unloading the sick, how will those same forces stop them from treating the sick badly? Yes transparency will be greater, but is such bad behavior today any secret? Can the federal government really regulate every margin of service?

My second worry is how all these changes will be implemented and enforced in a radically decentralized system. We might end up with more centralized control than, say, the Democrats are contemplating. That is unlikely to favor beneficial market incentives. In essence the whole proposal could amount to nationalizing the insurance industry.

Here is one short account of the proposal, with a longer version available for $5.

Double Jeopardy Disaster

Getting a new drug or medical device approved by the FDA is a long and expensive process. The FDA is risk-averse and pays much more attention to the risks of approving a bad drug than to the risks of failing to approve a good drug. As a result, every economist who has ever written a serious analysis of the FDA has come to the conclusion that less regulation would mean more new drugs and more saved lives. (See FDAReview.org for more information. Gary Becker offers a recent statement.).

Approval, however, does not end a firm’s problems because even then it faces the risk of a debilitating lawsuit. Consider how bizarre this is: A team of statisticians, physicians and medical researchers pores over years of clinical data to pronounce a product safe (always noting that this means safe relative to the product’s expected benefits) and then a jury of 12 randomly selected Joes and Janes second guesses them, awards plaintiffs billions of dollars and drives the firm into bankruptcy. This has happened more than once.

FDA approval ought to be a “safe harbor.” Many states already have laws along these lines but they have been weakly enforced. The Bush administration’s efforts to limit lawsuits against firms that have passed FDA approval is a therefore a necessary and welcome piece of common sense. This doesn’t mean that you can’t sue a drug manufacturer. If the manufacturer lies to the FDA or to your physician or if they don’t produce the drug according to specification then by all means sue away. Every drug, however, has side-effects and every drug works differently in different people. That means that there has to be some sort of cost-benefit test to decide if a drug should be marketed. There is an argument for using tort law instead of the FDA to do this test – an argument that gets weaker the more out out-of-control the courts become – and there is an argument for using the FDA instead of tort law but there is no argument for adding tort law on top of FDA regulation, that is a double jeopardy disaster.

Slow medicine

Here’s another death of common sense story:

Would-be California medical students with learning disabilities filed a discrimination suit Monday saying their prospects of becoming doctors are being thwarted because they aren’t given enough time on the medical school entrance exam.

Do you remember the episode on ER where a patient was rushed into the hospital with severe head trauma and Doctor Green had to go to a quiet room to think about what to do? No, me neither.

(Not every doctor works in an ER but even general practioniers must think quickly if they expect to see enough patients to earn a good living.)

Even more shocking than the lawsuit is the response of the American Association of Medical Colleges. Instead of making the obviously correct argument that time is a legitimate testing hurdle for a physician they argue that the students involved are not disabled enough! If only they had failed more of their undergraduate classes then the AAMC would give them special accomodation. Really, I’m not making this up.

About the only saving grace in these stories is that the underlying assumption is usually wrong. Fact is, there just aren’t that many slow geniuses. Speed and quality of thought are correlated. (How else to explain my co-blogger? See here for more systematic evidence.) If there are other hurdles, these same students will soon be selected out. As a professor, I have seen this many times. Of course, that just means more lawsuits.

Thanks to Right Side of the Rainbow for the pointer.

Psychoanalysis and Consumer Society

Freudian introspection aimed to foster the individual’s capacity to live an authentically personal life, yet it wound up helping to consolidate consumer society…Psychoanalysis remained marginal to European psychiatry until after Wrofl War II, when Americans brought it back to Europe, but it became central to American culture almost immediately. The reason was the weakness of traditional authority in the United States and the widespread belief in the power of the individual mind to overcome “external” difficulties. In that context, American psychoanalysis became intensely popular. As a result, it was caught up in a process that emphasized personal empowerment, self-regulation, and individual charisma. As we shal see, the actual practice of analysis was less important than its cultural impact. Ultimately American analysis came to mean almost the opposite of the self-reflective exploration of internal limitations that characterized its European counterpart.

From the intermittently fascinating Secrets of the Soul: A Social and Cultural History of Psychoanalysis, by Eli Zaretsky.

Obesity now an illness

Medicare now considers obesity to be an illness. In other words, Jenny Craig could soon be receiving government funds to treat obese patients. Medicare and Medicaid are already busting the fiscal scales and with nearly 30 percent of Americans already obese and some 60 percent overweight this now adds another burden to the system.

More on the economics of obesity here and here. A short review of the economics of obesity written by myself can be found here.

Addendum: Thanks to Daniel Akst for adding more weight to my discussion.

Is Medicare progressive in its impact?

Maybe not.

If just one assumption about Medicare’s distributional effects would seem to be safe, it would be that the system results in substantial progressive redistribution, or transfers from people who on a lifetime basis are high-earners to those who are low-earners. After all, everyone gets the same insurance coverage upon retirement, but during your working years you pay a flat rate tax, with the result that high-earners pay more.

Think again. Here are some reasons why wealthier people use Medicare more:

1. Wealthier people demand more health care and greater treatment intensity.

2. Wealthier people tend to live longer.

3. Wealthier people don’t mind Medicare copayments as much.

4. Wealthier people are more likely to live in or near major cities, where access to care is greater.

A variety of studies offer mixed results, but in general do not support the view that Medicare is progressive in its effects. Note, however, that these studies do not consider the distributional impacts of the recent Bush drug prescription bill.

The above is taken from Daniel Shaviro’s Who Should Pay for Medicare?, an excellent public policy study. You’ll be hearing more about this book soon.

My observations: The correct notion of progressivity would account for the value of benefits received, not just dollars spent. Of course this is harder to measure. In the meantime, the result suggests that partial privatization of Medicare, as would allow the wealthy to opt out, would not create an (additional) fiscal crisis for the rest of the system. That being said, if the wealthy are gaining on net, don’t be surprised if privatization doesn’t get off the ground. Furthermore the medical benefits of privatization will be correspondingly limited. The main benefit of privatization would be to stop Congress from spending the money in the mythical “lockbox.”

Kidney swaps II

The Wall Street Journal reports (subs. required) that the kidney swap idea I wrote about earlier is beginning to be implemented. Here are they key points:

Last year, 43% of kidneys transplanted in the U.S. came from living donors, up from 28% a decade ago.

But a biological barrier often blocks a transplant from a relative. In about a third of all would-be pairs, blood types are incompatible. In others, the sick person has antibodies that can initiate a rejection of the donated organ. It’s heartbreaking “to have the treasure of the live donor and then have that not go forward because of a biological obstacle,” says Massachusetts General Hospital transplant surgeon Francis DelMonico.

Occasionally, transplant centers spot a way out: One New England father with blood type A couldn’t donate a kidney to his daughter with blood type B. So he gave a kidney to a teenager with blood type A, and the teenager’s sister gave a kidney for the man’s daughter.

Such swaps, however, typically occur only when happenstance alerts surgeons to the possibility. Economist Alvin Roth and co-authors have devised an algorithm, however, that computes all the possible swaps and which is incentive-compatible.

…when Dr. Saidman gave the economists details on 45 pairs in which the would-be donor was unable to give a kidney to the intended recipient. Even though each of the 45 had a donor willing to spare a kidney, all were stuck waiting for the right person to die. With swaps involving two kidneys, the economists found, eight transplants were possible. If swaps involving three kidneys were possible, then 11 transplants were possible.

Addendum: Alert readers will note that kidney swaps are quite similar to organ clubs an idea for saving lives that has been implemented by Lifesharers.

Shorter patent lives mean shorter lives

People talk about the high price of pharmaceuticals as if high prices lasted forever. In fact, within a year of the expiration of a pharmaceutical’s patents, prices will typically fall by more than 50 percent as generic producers enter the market. Patents nominally last for 20 years but the effective patent life is much lower because patents are typically granted years before a product has cleared FDA review. The effective patent life of the average new pharmaceutical in the 1990s averaged just 12 years (see here for some references). Competition from competing but non-infringing pharmaceuticals makes the de facto patent life even shorter.

Thus, my response to the seniors and others clamoring for lower pharmaceutical prices is to be more patient. Does this sound harsh? Consider this, the people who are demanding price controls are not simply asking for lower drug prices they are asking for lower prices on the newest drugs. Lower prices for drugs introduced 15 years ago are already here. Remember, those drugs were recently considered the very best modern medicine has to offer, so it’s not like I am expecting those who can’t afford the newer medicines to go back to using leeches.

Price controls or other such plans such as reimportation may bring cheaper pharmaceuticals for a short period but we will then have a much smaller supply of new drugs forever. Only the shortsighted would buy that prescription.

A serious health care proposal

Brad DeLong argues that the government should pick up all health care costs above $50,000. Among other things, this would diminish the incentive for HMOs to neglect sick patients or try to push them off the books. It also would provide comprehensive catastrophic insurance. By lowering the cost of private insurance, it will lead more people to be insured, which will lower governmental costs elsewhere in the system. Being on the run in Poland, I don’t have the ability to offer a full analysis. But it’s one of the best economics posts I’ve read in the blogosphere in a long time.

One question I have is how many of these expenditures are worth subsidizing at all. A big chunk of our health care bill is spent in the last year or two of life, without always bringing much of a payoff. A second question is what would happen to cost control at these higher levels of expenditure. In particular what would happen to cost care as we approached the $50,000 threshold?

The proposal can be viewed in one of two lights. From one perspective, it will bring catastrophic care to many who are otherwise uninsured. From another perspective, we already have too much catastrophic care, at the expense of prevention and healthy lifestyle habits. Government catastrophic insurance will lead to price controls, either explicit or implicit, and rationing. Catastrophic care will decline, but in a way that might be beneficial. This latter alternative is not politically appealing, but we cannot rule it out as the relevant scenario.

But read Brad’s post and make up your own mind. Health care reform is an area where no one (i.e., you, the reader, and me, the writer) should feel they already have a pat or satisfactory answer.

Tailor made pharmaceuticals

Better genetic information is beginning to reveal why some drugs work for some people but not for others. (Here’s a CBS Marketwatch story, requires free subscription). In addition to the heath benefits, there are some political-economic benefits to better understanding of how drugs interact with personal chemistry.

Drugs that benefit a minority of the population are sometimes not approved by the FDA because their side-effects for the majority are deemed to outweigh the expected benefits. But if we can identify more clearly who the drugs will benefit and who they will harm, more drugs will be deemed safe and will get through the FDA process. As a further result, the costs of drug development will be reduced.

Genetic information can also help to avoid the opposite error. It often happens that in a clinical trial a drug doesn’t look beneficial overall but does appear to work in some subpopulation (e.g. African-Americans with disease of type X that has progressed to stage y). The danger is that some results like this are bound to occur by chance alone and thus do not necessarily imply true efficacy. If we can show that the subpopulations do (or do not) have systematic genetic differences from the majority population, however, we can rule out (or rule in) chance as an explanation and better separate the wheat from the chaff.

Thanks to Jim Coomes (a long-time reader from Pattaya, Thailand!) for the link.

Smart people live longer

Earlier I discussed the evidence from Oscar winners that higher status leads to better health. Steve Sailer alerts me to a good article from Forbes challenging the status explanation in favor of an effect of IQ on health.

Why is it that, all around the world, those with more income, education and high-status jobs score higher on various measures of health? ….The traditional answer to these questions has been that greater wealth and social status mean greater access to medical care. But even ten years ago, when this magazine last delved into the topic (FORBES, Jan. 31, 1994), the available answers seemed inadequate. If access was the key, then one would have expected the health gap between upper and lower classes to shrink or disappear with the advent of programs like Britain’s National Health Service and America’s Medicare and Medicaid, not to mention employer-sponsored health insurance. In fact, the gap widened in both Britain and America as these programs took effect. The 1994 article cited a study of British civil servants–all with equal access to medical care and other social services, and all working in similar physical environments–showing that even within this homogeneous group the higher-status employees were healthier: “Each civil service rank outlived the one immediately below.” How could this be?

Today the standard answer–or, at least, the answer you are guaranteed to get from the WHO and other large health bureaucracies–is that inequality itself is the killer. …

[But a new theory has been put forward by] Linda Gottfredson, a sociologist based at the University of Delaware, and psychologist Ian Deary of the University of Edinburgh. Their solution to the age-old mystery of health and status is at once utterly original and supremely obvious. The rich live longer, they write, mainly because the rich are smarter. The argument rests on several different propositions, all well documented. The crucial points are that (a) social status correlates strongly and positively with IQ and other measures of intelligence;(b) intelligence correlates strongly with “health literacy,” the ability to understand and follow a prescription for disease prevention and treatment; and (c) intelligence is also correlated with forward planning–which means avoidance of health risks (including smoking) as they are identified.

The first leg of that argument has been established for many decades. In modern developed countries IQ correlates about 0.5 with measures of income and social status–a figure telling us that IQ is not everything but also making plain that it powerfully influences where people end up in life. The mean IQ of Americans in the Census Bureau’s “professional and technical” category is 111. The mean for unskilled laborers is 89. An American whose IQ is in the range between 76 and 90 (i.e., well below average) is eight times as likely to be living in poverty as someone whose IQ is over 125.

Second leg: Intelligent people tend to be the most knowledgeable about health-related issues. Health literacy matters more than it used to. In the past big gains in health and longevity were associated with improvements in public sanitation, immunization and other initiatives not requiring decisions by ordinary citizens. But today the major threats to health are chronic diseases–which, inescapably, require patients to participate in the treatment, which means in turn that they need to understand what’s going on….

Deary was coauthor of a 2003 study in which childhood IQs in Scotland were related to adult health outcomes. A central finding: Mortality rates were 17% higher for each 15-point falloff in IQ. One reason for the failure of broad-based access to reduce the health gap is that low-IQ patients use their access inefficiently. A Gottfredson paper in the January 2004 issue of the Journal of Personality & Social Psychology cites a 1993 study indicating that more than half of the 1.8 billion prescriptions issued annually in the U.S. are taken incorrectly. The same study reported that 10% of all hospitalizations resulted from patients’ inability to manage their drug therapy. A 1998 study reported that almost 30% of patients were taking medications in ways that seriously threatened their health. Noncompliance with doctors’ orders is demonstrably rampant in low-income clinics, reaching 60% in one cited s tudy. Noncompliance is often taken to signify a lack of patient motivation, but it often clearly reflects a simple failure to understand directions.

Although I doubt that IQ explains the longevity of Oscar winners relative to nominees I think it does explain a great deal – indeed, it would be astonishing if IQ didn’t impact health. By the way, I recommend Deary’s Intelligence: A Very Short Introduction and here is an even shorter introduction.

The organ trade

The NYTimes tracks a kidney from Brazil to Brooklyn, via a transplant center in South Africa, brokered by agents in Israel. Ain’t globalization grand?

The kidney was sold for $6000 by a poor Brazilian to be transplanted into what is, by world standards, a rich American. I understand, of course, that this trade is upsetting to many people. The trade is illegal and the Brazilian and South African government have made arrests – sadly, including some of the organ donors. I am upset too, but less by the trade than by the grinding poverty that make the ability to sell an organ an opportunity.

Think of it this way: It is a tragedy that the poor of many third-world countries must scavenge in garbage dumps for survival but it is no solution to fence in the garbage dumps.

Health and Status

A number of studies have shown a startling connection between higher social status and better health, even after controlling for income, education and other factors. Some economists are skeptical, Angus Deaton, for example, suggests reverse causality may be a factor:

The major reason that people retire from the work force is that they’re sick. If you get sick in America, it does terrible things to your social status.

Two remarkable papers by Donald Redelmeier and Sheldon Singh cast some doubt on this explanation. In Survival in Academy Award-Winning Actors and Actresses Redelmeier and Singh compare the longevity of Oscar winners with nominees who did not win. The statistical hypothesis is that all that separates winners and nominees is the random fact of winning (random with respect to other factors influencing health). If winners and nominees are alike but for random factors then any differences in longevity can be causally ascribed to winning the Oscar. R and S find that winners live about 4 years longer than non-winners, a huge difference. The effect does not go away with additional controls.

Skeptics will posit other mechanisms but R and S have a lesser known but equally important paper on screenwriters who win the Academy Award. Surprisingly, they find that winning screenwriters die about 3 years earlier than non-winning nominees. At first, these two results appear to be quite contradictory suggesting some problem in the studies. But on second look there is a compelling logic to the findings. The difference between actors who win the Oscar and screenwriters is that even winning screenwriters get no respect. Who remembers a screenwriter’s name? I think it’s in the movie Bowfinger that Steve Martin says of the lovely ingenue something to the effect, “She’s so dumb she’s sleeping with the screenwriter to get to the top.” Winning screenwriters have longer and more successful careers (4 star movies) than non-winning writers so income and other material factors would suggest greater longevity but even a winning screenwriter is almost surely destined to have his lines mangled by a lousy but famous actor and perhaps this stress drives them to an early grave.

Economic arguments I have never understood

Have you ever heard the claim that U.S. medical care is in trouble because we subsidize third-party insurance through the tax system? Glenn Hubbard presented this view in the Wall Street Journal this Tuesday. Hubbard writes:

Reform the tax treatment of health-care expenses. The most far-reaching and misguided government policy, established more than 60 years ago, allowed employer-provided health care to be exempt from taxation. Under this policy, medical care purchased through an employer’s insurance plan is tax-free, while direct medical-care purchases by patients must be made with after-tax income. The tax preference for employer health insurance has been instrumental in creating today’s third-party payment system. In this perverse world, true insurance, in the form of coverage for catastrophic health events, is the exception; prepaid health care, in the form of coverage with low deductibles and copayments, is the rule. The tax preference for insurance is the primary reason five out of every six dollars of health-care spending are paid by third parties…

Low copayments and deductibles fuel excessive cost growth and breed wasteful medical practice…consumers have little incentive to limit their use of unnecessary medical-care services, little incentive to shop for the health plan that best suits their needs in a cost effective way, and little incentive to evaluate their care on the basis of value.

But I’m stumped. If the argument is that tax deductibility leads to too much health care, I can see the logic. But then the problem is in the pretzels and beer markets; health care should be doing fine, albeit in bloated form.

Alternatively, it might be argued that buying health insurance involves a negative externality on others. Maybe insurance companies are intrinsically bad monitors, and more insurance corrupts the system as a whole. Grant this premise, but where do we end up?

1. We would have a good argument for taxing insurance purchases. Yet the insurance point is rarely raised with this conclusion in mind. We might have (yikes!) an argument for greater government involvement in health care.

2. If insurance companies are such poor cost monitors, why doesn’t this raise premia accordingly? The poor monitoring of the company would be reflected in policy price and thus would be internalized by the people or institutions who buy the policies. The externality should vanish or at least significantly diminish.

3. Why should insurance subsidies lead to “low copayments and deductibles”? Insurance with high copayments and deductibles is favored by the tax system as well. That being the case, why do we blame the tax system for how insurance is (perhaps) poorly structured?

All these points collapse into a more simple query: how can a simple relative price, whether a distortion or not, corrupt the cost control practices of an entire industry?

And if government provision of health care is ineffective and costly, isn’t there a positive externality from the purchase of private health insurance?

Many of the people who cite this argument about health insurance are smarter and more accomplished than I am. I will grant their greater wisdom and authority. But at the end of the day, I still don’t get it.