Arnold Kling  

Timothy Taylor on Health Care Spending in the U.S.

Arbitrary Intervention... The Good and the Bad...

He concludes,

The question of why the U.S. spends more than 50% more per person on health care than the next highest countries (Switzerland and Netherlands), and more than double per person what many other countries spend, may never have a simple answer. Still, the main ingredients of an answer are becoming more clear. The U.S. spends vastly more on hospitalization and acute care, with a substantial share of that going to high-tech procedures like surgery and imaging. The U.S. does a poor job of managing chronic conditions, which then lead to episodes of costly hospitalization. The U.S. also seems to spend vastly more on administration and paperwork, with much of that related to credentialing, documenting, and billing--which is again a particular important issue in hospitals. Any honest effort to come to grips with high and rising U.S. health care costs will have to tackle these factors head-on.

Read the whole thing. Note that he cites Larry Wilmore, another under-appreciated economics blogger.

In my book, Crisis of Abundance, I focused on the greater use of high-tech procedures and specialists.

I think that our ratio of specialists to primary care physicians is much higher than that in other countries, and I think that the reasons for this are the incentives embedded in third-party payment systems here. We pay for doing procedures that can be checked as boxes on an insurance company's form. Specialists have a high ratio of checkbox procedures to time spent with the patient, so they make the most money and often have the least distorted lifestyle.

I don't think that having a high ratio of specialists to primary care physicians is necessarily the right mix from a health care perspective--it may be the reverse. One of the benefits of getting away from third-party payment and instead having patients pay more of the cost out of pocket is that the resulting market forces might shift the balance back in favor of primary care.

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COMMENTS (14 to date)
Hasdrubal writes:

What about the high rate of administrative, especially billing, personnel. Is this a function of a third party payer system? Is this a function of having to deal with multiple institutional payers rather than individuals? I could see this as a reasonable argument for a single payer system: The government will be less efficient than any _single_ insurance company, but they're vastly better than the sum of _all_ insurance companies.

But why so much administrative overhead relative to services whose customers pay? Do other service providers have similar amounts of overhead, like lawyers or plumbers or homebuilders? What about service providers who deal with institutional customers like consulting firms or telephone companies? What's the difference between Verizon and Kaiser Permanente in re billing and collections?

Arnold Kling writes:

Socialists have long argued that competition is inefficient. One hundred years ago, they thought that "the government will be less efficient than any single steel company, but they are vastly better than the sum of all steel companies."

Didn't pan out that way.

When you have a government monopoly, you lose all the information that comes from a market price system. Government monopoly always looks efficient, until it's tried.

Floccina writes:
The U.S. spends vastly more on hospitalization and acute care, with a substantial share of that going to high-tech procedures like surgery and imaging.

If this is the case an important question is why do the insurance companies not refuse to pay for this care, that is if it is not effective. (It might be effective but the positive effective might be hidden in life expectancy stats by higher accident and homicide rates.)

Ironman writes:

I believe Tyler pointed to a potential contributing factor over at MR several months ago - Medicare reforms in the early 1980s created a bias strongly favoring treatments that involve very low marginal costs. That would tend to favor high-tech procedures where the fixed costs would be high, but would be capable of producing the low marginal costs favored for payment.

Add in the growing population for Medicare and the desire to spread the fixed costs (and overhead) across the entire population, and you might be able to explain much of the relative difference in U.S. health care costs with other nations that didn't implement such policies.

Mr. Econotarian writes:

US doctors and nurses of all kind are paid higher than the OECD average, even when weighted for GDP differences.

"why do the insurance companies not refuse to pay for this care, that is if it is not effective?"

Due to consumer demand and occasionally they are required by state laws to provide certain services.

KLO writes:

Why do insurers not press providers more to reduce cost or demonstrate efficacy of treatment? One would think that the major benefit of having private insurers is that they would work hard to keep costs down by using their bargaining power against providers and by refusing to pay for ineffective treatments. If I were an alien from a different plan that knew nothing of our system, I would predict that this is what would happen. Certainly, it does happen, but not to the extent that you would think it would. Insurers seem more than happy to pay for wasteful, useless treatments and try to pass the costs on to their customers. More and more, they cannot, but they don't seem that much bothered by this. I find it baffling how poorly private insurers are at containing supplier cost.

Seth writes:

"What about the high rate of administrative, especially billing, personnel. Is this a function of a third party payer system?"

I would guess that it is more a function of the volume of payments coming from government and the government requirements attached to those payments.

GD writes:

"I don't think that having a high ratio of specialists to primary care physicians is necessarily the right mix from a health care perspective"

As one of those dreaded and much maligned specialists, I can tell you that you're dead wrong. The further specialization and subspecialization of the practice of medicine taht has occured over the last few decades is not due to some secretive cabal of physicians who have crafted non-sensical procedures with the intent of bilking dollars from the government, but rather, has grown out of neccessity because dramatic scientific advancement continues to make the practice of medicine all the more intellectually and technically challenging. The doctor of some imagined bygone golden era of medicine could 'do it all' because the only treatments at his disposal were in his black bag. More complex treatment options require more focused training. And with that comes better results. Sure, non-medical folks love to bash US healthcare with coarse macro statistics showing how we spend more than country 'X' but our life expectancies are lower. Well, just because modern medicine can treat that early cancre in your 30's and give you the opportunity to live many more years of a healthy, productive life doens't mean everyone takes advantage of that opportunity (medicine can't fix decisions to smoke, do drugs, over-eat, and live a sedentary lifestyle). Poor personal decision making at a macro level overshadows the amazing successes that get lost in the mix.

A few examples:
- Successful treatments. Take cystic fibrosis. As recently as the 80's, the life expectancy for a newborn with CF was 14 years. Today the average life expectancy is around 35, with patients routinely living into their 40's and 50's. Their treatment likely costs more than their workplace productivity over their lives. From an economic perspecitve, the country, at a macro level, would be fiscally better off to let them succumb to their illness. Until society is comfortable making decisions like that (spend lots of money to extend the life of someone who will almost certainly never generate enough surplus to 'pay for' the care they receive vs. sorry, the actuaries show us that your ROI will be negative, so no treatment for you), the issue of how to finance healthcare (i.e. Obamacare, etc.) will continue to rage.
- The value of specialists. So, a 30-something year old female arrived out our hospital the other day. The right half of her body was paralyzed, which the primary care doctors in the ER immediately recognized as a stroke. They ordered the appropriate imaging tests and initiatied appropriate care. They consulted a neurologist, not because they were friends and they'd get paid a couple hundred bucks to take care of the patient, but because when a patient is facing the possibility of being paralyzed forevermore or not, you want the best, most highly skilled person addresssing that situation. They initiated TPA, an expensive clot busting drug. Unfortunately, it wasn't working, and time was running out, let the damage become permenant. So, that specialist was now out of options and consulted the subspecialist neurointerventional radiologist. Again, this wasn't because they're buddies, but because the only guy who could do anything about the problem at this point was not the triage nurse, not the ER doctor, not the neurologist, but the subspecialist. 30 minutes later, after a microcather had been skillfully advanced from the artery in her groin through her aorta, to the small vessels in her brain, and a stent had been temporarily deployed, she was again able to use the entirety of the right side of her body.

From paralyzed to waving her arms through the skill of the only person at the hospital that day (and one of less than a handful in the city of several million people) who could successfully do what had just been done. If she had gone any of 3 other hospitals in a 5 mile radius, she would have ended up with half her body paralyzed, because they wouldn't have had the available resources (physician skill being the main one lacking) to successfully treat her. Each provider along the way did exactly what they were supposed to do, from the ER doc immediately recognizing the gravity of the situation (having sorted it out from the more common non-emergent cases that come through her department), to the neurologist trying the 1st line therapy and coordinating plan B as soon as it was evident that the 1st line therapy wasn't going to work in this patient, to all the support staff that expedited the successful perforance of each of these tasks. Primary care physicians are very important. But, if there is no highly trained specialist available to perform the critical procedure...all the initial work-up in the world is meaningless. Oh, and this isn't some one-off story. Similar highly-skilled specialist care saves patients from death and disability daily across the country. If you want to question the value of such costly care...go talk to someone like that woman and ask her what it's worth to her to not be paralyzed for the next 40 or so years.

One last thing, a little academia analogy for you. I don't think that having a high ratio of specialized facutly to general education facutly is necessarily the right mix from an education perspective. College professors make more money than primary and secondary school teachers, but what are we getting for these specialist educators? All I read about is how so many college graduates (who learned from these specialists) are unemployed and suffering under a mountain of debt...whereas so many western Europeans got a cheap college education and have minimal, if any debt.

mick writes:

If America euthanized the expensively sick like most other countries do then health care costs would rapidly decrease. It could also raise its infant mortality rate by pretending premature babies were never born. Medical statistics can be like economic statistics, poor performance is easily masked by shifting definitions.

Ash writes:


What evidence do you have for the assertion that "most other countries" routinely "[euthanize] the expensively sick"?

GD writes:

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Mike Rulle writes:

As a first step, I would be happy simply with posted prices for any and all medical procedures and hospital stays. This would include where there are pricing differentials between patients.

For example, what is the total charge for a medicare patient for procedure X? What is the total charge for procedure X for a patient who choses to self insure? What is the total charge for procedure X for a person insured by company ABC? What are the charges that medical practitioner asks from each of these entities for procedure X and what percent do they get? Is each person charged the same or is there price differentiation?

The first requirement for a market surely is price transparency.

Michael Villo writes:

In the April issue of Health Affairs this article appeared. If you haven't read it yet, I think it reinforces what you've previously talked about.

In A Survey, Marked Inconsistency In How Oncologists Judged Value Of High-Cost Cancer Drugs In Relation To Gains In Survival

Rufus writes:

1. @GD As someone whose wife died of a stroke, and as someone who now works at a hospital, I can appreciate the specialization and dedication of the individuals who can perform the procedures you described.

2. There was a very good episode on Econtalk with Matt Ridley that talked about the division of labor and the amazing advances that are part of the free market economy. Staying with the medical theme, I recently read an article that said in the 1970s the typical patient was seen by about 3 specialties during the average hospital stay. Today, they are seen by as many as 14 specialties. Clearly, that is a cost driver, but is also a massive advance in the quality of care. It is very hard to place an economic value on the outcome of a medical procedure, but clearly having access to MD, RN, PT, OT, .... and all the other specialists is not simply an exercise in billing for extra fees.

3. We should not discount the issue of the governmental influence in the health care market. Medicare / Medicaid are a significant part of the market. Those programs have price increases built in (financed by printing money), so we should expect nothing other than inflation in the health care sector given the "asset bubble" that is being financed through debt. Of course, both of those programs are actually bankrupt, so soon enough we are likely to discover what it is like to live with a system that costs less, simply because we cannot afford it.

here's a short video that covers the financial status of Soc Sec and Medicare, although the numbers are from 2009. All of the bankruptcy dates have been moved forward as of the latest Trustees report.

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