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Why Health Care Costs are Hard to Reduce

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Megan McArdle writes,

I think the central difference between me, and the people who think that IPAB's reimbursement-rate powers will be a big help in controlling health care costs, is that the latter group tends to think that a lot of expensive health care problems are like back surgery--something that doesn't do any good, but gets done anyway, because of desperate patients and arrogant/ignorant/greedy surgeons. I tend to think that more of the questions are like this one. Is spending $50,000 to give a pancreatic cancer patient an extra 5-9 months of life a wasted expenditure, or a medical advance?

I think that the tougher questions are ones where probability is involved. A screening protocol has a probability of x of providing a benefit, but it has a probability of y of showingn nothing and a probability of z of being a costly false positive. Overall, the average cost per life saved may be in the hundreds of thousands of dollars. But try arguing that to the person whose cancer was caught early and treated because of the protocol.

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COMMENTS (8 to date)
polypolitical writes:

I think the probability argument is a valid one, but just my anecdotal experiences from spending a lot of time around hospitals is that insane amounts of money get spent on keeping terminally ill people or people with zero chance of recovering any serious quality of life alive for brief periods, often in awful suffering.

I think that better education about end-of-life dignity and palliative care, along with encouragement to make final wishes known and aid in enforcing documented end-of-life wishes would go a tremendous way towards lowering some of the cost. Many a patient have I seen suffering for weeks or months, full of tubes and in terrible pain, despite documented wishes otherwise, as their families, for fear of losing a loved one, fight protracted battles to keep them in agony.

Gary Rogers writes:

I still think the biggest issue rovolves around somebody else making decisions about how to spend someone elses money. No matter how complex or how much probability is involved, I can make a decision and live with the consequences when I decide how to spend my own money. Living with the consequences becomes more complex when someone else makes the decision and the money comes from some ambiguous source. The IPAB could probably reduce the cost of healthcare by denying procedures, but neither the board nor the population would go along. As long as there are rich people around that could contribute more to the pot there will be pressure to spend more. It will be defined as "contributing their fair share". Not until all the rich people have been cleaned out can the board really start reducing healthcare.

Tim Ozenne writes:

Another complication is that the cost-effectiveness of screening varies hugely based on the skill or competence of the service providers, but presumably the guidelines or reimbursement rates will be based on broad averages.

Seth writes:

Like in education, subsidies result in a lot of superfluousness.

kebko writes:

Most people who let insurance spend hundreds of thousands for a few more months of life wouldn't for a second think of spending their children's inheritence for the same outcome. But who wants to make that decision?

c141nav writes:

I beleive that Arnold's insurance vs. insulation analysis would solve all these problems.

fundamentalist writes:

McArdle should ask why it costs $50,000 to give a pancreatic cancer patient an extra 5-9 months of life. She assumes the cost is legit, but the use of the procedure might not be. The cost of healthcare is insane for several reasons. Government and quasi-government agencies (AMA) restrict the supply while the state and company-paid insurance create almost unlimited demand.

The government should tax health care premiums as regular income so that people will see the actual cost of insurance. With the current system most people think insurance costs them $300/mo, when in reality family coverage is closer to $1,500/mo. Medicare patients pay about $100/mo and consume about 60% of all medical care.

Take away the unlimited demand and the healthcare industry will begin to reduce costs. Take away the massive subsidy of healthcare spending and people will get pissed and might be open to freer markets in healthcare supply.

Jeff writes:

Why is it that whenever health care costs are under discussion, all anyone wants to talk about are price controls and/or somehow limiting demand? How about increasing the supply?

Right now you can fly to India or Thailand, have major surgery there, take a two week vacation there while recuperating, and fly back, all for less than the cost of having the surgery here. There are studies showing that doctors here make much more than doctors with equivalent training and skills in other countries. This is not just due to differences in average income across countries -- doctors here earn a higher multiple of average wages than they do overseas.

Milton Friedman explained long ago how the AMA restricts the number of approved medical schools and hospitals (where you have to do a residency before you can practice medicine) to limit the supply of physicians. The fact that no one ever talks about this is amazing.

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