Arnold Kling  

It is Health Care Consumption

The Trickle-Down Stimulus... Atlas Shrugged--And I Didn't...

The Washington Post editorializes,

There is no silver bullet to controlling health-care costs

Until somebody listens, I will keep shouting that it is not health care "costs" that are out of control. It is the utilization of medical services. To put it in terms that will provoke some, it is the consumption of medical care.

There are many procedures for which the benefits are small or speculative. Often, the patient gets a ray of hope, or comfort that doctors are making an effort. Less often, the procedures improve the outcome.

The Post talks about health care exchanges (where insurance companies compete on price offering government-approved health plans) as if they were part of the solution to limiting utilization. They do nothing to control utilization, as the Massachusetts experience demonstrates. Why treat insurance exchanges as a silver bullet when you've started your editorial by pointing out that there is no such thing?

The issue boils down to whether health care rationing is going to be undertaken by government officials or instead by individuals making their own decisions with their own money. The default option is neither, with the Democrats blocking anything that resembles a voucher and the Republicans blocking anything that resembles a government panel.

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COMMENTS (12 to date)
Bob writes:

Thanks, Arnold. I totally agree that the major issue here is between government rationing health care, or individuals rationing their own health care.

Ted writes:

I largely agree, but there is something to cost control as well. Let me explain. People think the costs of MRIs are rising (or really any medical technology), but this is false. On a quality-adjusted basis, the price of an MRI has fallen fairly substantially. The thing is though, while the quality-adjusted price of an MRI from 10 years ago has fallen - the MRI's improvement from 10 years ago isn't that substantial. I find it interesting that there are very few places that will offer you MRI's using outdated technology that is still pretty good, for a much lower price. Especially since a lot of the problems attempting to be diagnosed for most people don't require the latest and greatest MRI. The same is true for a lot of the very expensive diagnostic equipment.

Why we don't see older, cheaper equipment offered to people is an interesting question and it's one I'm not sure I have the answer too. I speculate that it's a manifestation of consumer ignorance, medical rent-seeking, and government insurance regulations all acting together to make sure perfectly usable, cheaper technology isn't utilized.

John writes:

Only doctors can ration health care. Government, insurance companies and individuals have virtually no say in the matter. Why would doctors want to limit the utilization of their services? Lets get real.

Shangwen writes:

I think this is a fundamental problem in health policy in all OECD countries--that costs are being tackled (or at least conspicuously decried), and that "health promotion" campaigns are funded without any evidence that they influence behavior, while the dynamics of excess consumption go relatively ignored.

On that note, I would point out that excess consumption goes hand-in-glove with excess provision by providers and health care systems. I discuss this problem here, and know that there are similar problems in the UK, France, and of course the US where the problem is probably at its worst.

Although I am philosophically opposed to it, I often see few politically realistic alternatives to draconian rationing.

And Ted, you are dead on about MRIs, thought your statement would apply to any number of technologies and drugs.

Octahedron writes:


How is it only doctors? The way insurance is set up is part of the issue as well since it allows people to more access to healthcare for things they should be paying completely out of pocket for. If they only have to pay a small deductible to get a check up then of course you're going to have over consumption.

Azra writes:

Simplifying the issue of healthcare in America down to one or two points is unreasonable. Yes, the use of excessive/unnecessary services is an important factor driving up costs. Then there is the lack of emphasis on cost-effective, preventive healthcare, the (corrupt and profiteering) healthcare insurance and the pharma industries.

In 2000, the WHO ranked the US healthcare system 37th. France took #1 and had a per capita cost of about $3,000. The US per capita cost? $5,700 (

All other top ranked systems had extensive government involvement in the healthcare system. Costs were kept reasonably low and the quality high. Eventually, the US will have to have a higher level of government involvement, which will naturally involve some level of rationing (right now, the rationing is effectively done by the capitalistic system; we all pay for it with higher prices and social costs of reduced access to healthcare for the less fortunate in our society).

Of course, there are other differences between the US and other OECD countries like lifestyle differences (we love to drive everywhere), and nutrition (think high-fructose corn syrup and fast food). I guess the Washington Post is right - there is no silver bullet to controlling healthcare costs.

R Richard Schweitzer writes:


Back to an attack on cost-spreading, which is the factor that facilitates non-optimum utilization of anything (mortgages, sick leave,specific infrastructures, healthcare, "higher" education, etc., etc.).

The current cost-spreading mechanism is the mis-application of the risk-transfer function of insurance, particularly "group" insurance (which does provide some efficiencies).

If nothing else, a beginning can be made by "splitting" policies or coverages into two (or more?) parts: The HealthCare provisions and the Risk provisions. The costs of the first should be phased out of employment benefits and shifted to the consumer (right terminology!); whereas the risk portion could be left as is.

ZC writes:

Great post Arnold!

I have to take issue with Ted though. "The MRI's improvement from 10 years ago isn't that substantial".

Obviously you're not that well acquainted with MRI's from 10 years ago, and the capabilities of MRI today. Any radiologist, like myself, would laugh at such an assertion. The capabilities of MRI have grown at an exponential pace in the last decade. Sure, you could diagnose a herniated disk or a big brain tumor 10 years ago, but given the high fixed cost of running an MR system, the marginal cost of more expensive equipment is relatively low, and well worth the marginal benefit. Today's exams can be done in a fraction of the time they took 10 years ago, and all sorts of things from cardiac MRI, to perfusion MRI, etc are now widely available whereas 10 years ago they were the purview of a few academic centers.

Of course, you'll retort that 'but you're just looking out for your self interest, you get paid for doing MRI's', so I'll go ahead and reply to that preemptively:

1. I'm in a much better position to asses the capabilities of MRI in the clinical setting than pretty much everyone else (certainly more so than someone with a marginal understanding of the technologies utility like yourself). That's a big problem in the venue to discussing healthcare -- everyone's an expert...even when they're not.

2. Reimbursements for MRI on a per-case basis have fallen dramatically in the last decade. Even if the new technology weren't better, exams cost less now than they did a decade ago. Given that they are better, more for less certainly sounds like progress to me.

3. Do you want to be the patient on whom the doctor says, "let's give it a shot on the older system, it'll probably be good enough to figure out what's going on." Only to find out two years later, "Well, in retrospect the cancer was probably there two years ago when it could have been treatable, but we didn't pick it up on the limited scan we did. Sorry."

It is, however, a travesty that Medicare and other payors pay the same rates for a top of the line scan performed with the latest tech as they do for an old machine that is a marginal performer. Plenty of unsavory characters bilk the system performing substandard work with substandard equipment. Most patients have no idea. Now that, Ted, is a scam.

Arthur_500 writes:

Arnold you know nothing of politics. If you ask the wrong question then you can always get the answer you want. If you can't dazzle them with brilliance then baffle them with ridiculous irrelevant statements and change the discussion so it comes to only one logical conclusion.
Of course, since the premise is incorrect so too will be the logical conclusion.

ConnGator writes:


I like your list of reasons why older technology is not used, but I would add one more: the thread of litigation.

If your doc says an older MRI would be fine and then misdiagnoses you, I think lawyers would be on him like white on rice.

Defensive medicine is a big reason for over-utilization.

Jeff Hallman writes:

The very existence of the medical tourism industry contradicts the point of this post. It is possible to lower costs while increasing consumption. The magic elixir that makes it possible is the same one that works in every other industry -- competition.

In the US, non-primary care physicians are overpaid. You can't practice in these fields without first completing a residency, but the numbers of slots in these programs are limited by the cartel behavior of the 26 Residency Review Committees, all of which are overseen by the Accreditation Council for Graduate Medical Education. See Nicholson (2003) for some details.

While the ridiculous state of medical malpractice law (and civil law in general) undoubtedly enriches a lot of lawyers, I would guess that the incidence of their predation falls mainly upon the doctors, not their patients, as the doctors have monopoly power and thus are already charging as much as the market will bear.

Bob Hertz writes:

According to the website Political Calculations, the fifty most common procedures in Medicare cost the government a total of $40.9 billion in 2009.

Yet Medicare as a whole had total spending over $450 billion.

In other words, the consumption of eye exams, blood tests, tissue exams, echos, and dialysis sessions is probably not the driver of health costs. (At least in Medicare -- our largest insurance plan that I will assume for the moment is a proxy for all health plans.) All health care analysts that I have read stand by the assumption that 10% of patients bring in 70% of the costs.

My belief is that big-ticket items like bypass surgery and ICU care are the drivers. Even in categories where 'consumption' has been flat, the total cost to insurers for these items has often increased.

The reason is upcoding. Medicare and other plans have been far too tolerant in paying more for 'outliers' and 'complexity' and 'intensivity."

What is most intense is the desire of providers for more money.

Other nations who do just as much intensive care as we do have managed to spend less. It is not rocket science. They have flat and low fee schedules. Hospitals do not have the power to bargain with them, at least not very much.

Their fee schedules start with an overall national budget. Their fee schedules have no particular respect for the costs of the hospital. (Medicare has insane rules where a high-cost hospital in Miami or New York gets higher fees than a low cost hospital in North Dakota. The Germans, French, or Canadians -or Walmart, for that matter -- would say in effect, screw the New York hospital. Let them get their costs down.)

When we get tough, we will lower costs. Medical tourism can do the same thing, and not so contentiously.

Bob Hertz
Director, The Health Care Crusade

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