Health Care-Becker

The best way to evaluate America's expensive health care system would be to estimate the effects of different kinds of healthcare on the quality and quantity of health for individuals of various ages, incomes, races, and other categories. To my knowledge, no researchers have come close to doing this. Instead, the American system has sometimes been found wanting simply because life expectancies in the United States are at best no better than those in France, Sweden, Japan, Germany, and other countries that spend considerably less on health care, both absolutely and relative to their GDPs. Life expectancy is surely one supremely important measure of health since individuals in rich countries are willing to pay a lot even for small increases in their probabilities of surviving different ages (see the studies in the book "Measuring the Gains from Medical Research", ed. By Kevin M. Murphy and Robert Topel, 2003). Studies show that an additional year of life is worth over $120,000 to the typical American adult, apparently also including older adults, where "worth" is measured by willingness to pay for a one-year improvement in length of life. One can easily see without a lot of fancy calculations that the large sums Americans are willing to pay for improvements in health imply that they would pay a considerable fraction of their incomes in order to achieve significant improvements in their life expectancy, and also in their quality of life. Similar conclusions apply to other countries since the willingness to pay in different countries for an additional year of life varies approximately proportionately to their per capita incomes. Although such calculations show that improvements in life expectancy are worth a lot to most people, national differences in life expectancies are a highly imperfect indicator of the effectiveness of health delivery systems.for example, life styles are important contributors to health, and the US fares poorly on many life style indicators, such as incidence of overweight and obese men, women, and teenagers. To get around such problems, some analysts compare not life expectancies but survival rates from different diseases. The US health system tends to look pretty good on these comparisons. A study published in Lancet Oncology in 2007 calculates cancer survival rates for both men and women in the United States, the United Kingdom, and the European Union as a whole. The study claims that the most important determinants of cancer survival are early diagnosis, early treatment, and access to the best drugs, and that the United States does very well on all three criteria. Early diagnosis helps survival, but it may also distort the comparisons of five or even ten-year survival rates. In any case, the calculated five-year survival rates are much better in the US: they are about 65% for both men and women, while they are much lower in the other countries, especially for men. These apparent advantages in cancer survival rates are large enough to be worth a lot to persons having access to the American health system. Several measures of the quality of life also favor the US. For example, hip and knee replacements, and cataract surgery, are far more readily available in the US than in Europe. The cancer survival and quality of life advantages enjoyed by US residents indicates that Americans get something for the large amount they spend on health care, but they do not indicate that the bang for the health buck is greater in the US, or even that the US health delivery system is reasonably efficient. Indeed, the American health system has several characteristics that may considerably lower its efficiency. The American system ties medical insurance to employment by allowing company spending on medical premiums to be fully tax-deductible. Companies introduced health benefits during World War II in order to get around wage controls to be competitive in attracting employees. It was maintained as income tax rates increased during subsequent decades. This employer-based system is partly responsible for the high number of Americans who have no insurance coverage, since many small companies do not provide insurance to their employees. In addition, the system favors persons with high earnings since tax deductions for insurance premiums are worth more to them. A much better approach, so far opposed by President Obama, would provide a certain number of dollars each year to every person-perhaps $2500- as tax credits to be used only to buy health insurance and pay for medical care. Unused amounts in any year would be folded into health savings accounts (see my discussion of these accounts and other health care issues in posts for April 15, 2007 and January 13, 2008), and unused balances in any year would be carried over to spend in later years. This approach gives the same tax incentives to everyone, and it would encourage individuals to economize on their health care spending since unused balances would be available to spend in the future. It would also induce many persons without health insurance to get some since otherwise they lose access to this tax credit. Health insurance is expensive in the US partly because most states mandate coverage of various health expenditures that have little to do with insurable risks. For example, the majority of states require insurance companies to cover the medical costs of all birth deliveries, even though these deliveries are mainly planned, and the expenses are known beforehand. The proper insurance approach would cover only unusual birth expenses caused by complications in the delivery and post delivery stages. By getting rid of unnecessary mandates, health insurance would become much cheaper, especially in states with the more onerous mandates. The President wants to establish government-run health insurance companies to compete with private companies. This is a bad idea because experience from government-owned enterprises in other sectors conclusively shows that that they are run inefficiently, in good part because of political interference. Moreover, government enterprises do not compete fairly since they generally are subsidized, often generously and in hidden ways. Private health insurance companies in the US compete very strongly, although they are hampered by mandates and other regulations that frequently have nothing to do with effective and honest coverage of health needs.

Comments

[Anonymous]

Dr. Becker, Wouldn't a reform that ha been proposed by your colleague, John Cochrane, the creation of "health-status insurance" markets, remedy at least the coverage problem? A recent policy brief is found at the Cato Institute link below: http://www.cato.org/pub_display.php?pub_id=9986 A fuller treatment is in John H. Cochrane, "Time-Consistent Health Insurance," JPE 103 (June 1995) 445-73.

[Anonymous]

When I lived in the US as an MBA student, I personally experienced the high medical costs.

One thing I remembers is that it was hard to understand why such high price and what the statements in the bill meant. As someone not used to the system, I just had to trust I was not overcharged.

I suspected that there are complex regulations behind and many activities in the healthcare system are carried to meet those regulations.

Another thing I noticed was that some Korean Americans (and Korean students) went to some doctors, who were known as much cheaper. I have no hard evidence, but they may be bypassing the insurance/regulation system entirely or partly thereby lowering marginal costs. I guess the patients know (or remotely feel, at least) that they are bypassing the system and they are not entitled for regulatory protections they would be otherwise.

But they go to those doctors anyways, because they get what they what they want (diagnosis and treatment) at lower prices. The point is that the system may be overloaded with regulations that are not essential in consumers' eyes. To put it differently, left free, the price may have a large room for price reduction.

These are just gut feelings I had, but I am curious if my hypothesis has some validity.

[Anonymous]

To sum it up : "Kill the poor and the sick!"

[Anonymous]

I read Posner's comments, and while I largely agree with him, Becker's piece sums up exactly my concern: lifestyle may be the biggest factor of life-expectancy. People put too much emphasis on life-expectancy studies.

Solid analysis.

I do wonder about one thing neither of you addressed: how much is cost here driven by physician supply? The supply of physicians, as I understand it, has remained relatively constant up until very recently. Yet population has swelled. And physician supply certainly hasn't kept up with population growth. If the cost of doctors themselves have grown rapidly, they might account for a lot of the recent cost increases. Or, even if not, a significant increase in the supply of doctors might still lower health care costs. I know some states are taking steps in that direction to alleviate physician shortages - states are passing laws that require all med schools in the state to increase their class sizes. As you are both aware, the med schools (like other prestigious graduate schools) have resisted because keeping the class size small can keep the school more competitive and may have other advantages as well. And the AMA is probably not fond of drastically increasing physician supply. But if one wanted to cut costs, that's one place I would look first - it would be virtually costless to implement changes to physician supply.

[Anonymous]

It can't be emphasized enough that once we get a national health system we will be stuck with it forever. It will immediately generate interest groups which will block any meaningful change or, especially, elimination. So, no matter how bad the system is we will have it for the rest of our lives, and those that follow, too.

[Anonymous]

To put it differently, left free, the price may have a large room for price reduction.

[Anonymous]

One wonders how effective, cheap and coordinated medical care would be if firms like WalMart were free to construct and staff medical schools, train their own doctors and nurses, construct hospitals, bulk-purchase needed medicines, and offer insurance policies to the public. I'll bet they and other entrepreneurs would like to. What's stopping them? Answer that question, and you'll know why health care is so expensive in the US.

[Anonymous]

no mention of lawsuits? no mention of liability insurance?

How much do those two add to America's cost?

[Anonymous]

Public funds comprise about half of all healthcare expenditures and most of that is without rationing of any kind. Surprise, surprise that usage and costs are high. That was predicted by opponents of Medicare in the 60s and ignored.

Longevity is related more to public health and life style issues as well as to economic status than to national policy or healthcare spending. To make assertions otherwise would require studies removing heterogeneity from consideration.

Healthcare is not the same as medical care. If one considers the outcomes of treatable diseases like breast cancer, prostate cancer, etc the United States is far better than other nations in the results.

Medicare spends 80 billion per year in the last year of life. That issue alone is fit for a separate discussion but consideration of a mandatory advance directive at the time of Medicare (Social Security) sign nup should be considered. Estimates of defensive medicine costs vary from 10% to 30% of the total costs of healthcare which may be as much as 700 billion. If providers are not protected from the perils of the tort bar, those costs will persist regardless of rationing regardless of other standards of care.

I have looked at emergency room patiens who present with one or more of 17 neurological symptoms but no signs relative to CT scans of the head, their cash costs and sensitivity. Allowing that the amount actually paid to the institution is $400 and to the radiologist for interpretation $100, the actual cost to find ONE positive study is about $12,000 or a sensitivity of 5%. Since the sinsitivity is fairly low, then, could one justify not doing the scan if the patient presents with one of those symptoms and no physical signs. The answer is "sure" as long as you can convince a jury that what you did was reasonable. Get my drift?

Of the 45 million uninsured, 12 million are illegals and 10 million are eligible for some coverage but choose not to avail themselves of it. Emergency room services are free to the uninsurd and many with Part A (hospital coverage) choose not to buy Part B (physician coverage) for reasons mostly economic but who knows.

The level of understanding of anatomy, physiology, pathology and phamacology among the US population is appallingly poor and contributes to enormous unnecessary healthcare and medical interactions. That could easilly be corrected with education at the primary and secondary school level (taught by medical professionals).

Medical care is an ART. Very difficult to set standards. The whys and wherefores of that statement is also fit for an entire discussion. Suffice it to sat that academic medicine is structured in such a way as not to be entirely reliable for setting standards for everyday medical practice.

The Rand Corporation study of 2005 which finds a annual saving os 80 billion per year should all medical records reside in an electronic form is pure nonsense, again a subject for lengthy discussion. The cost of implementation and maintenence would be enormous. Failure on the first attempt would triple the costs. Ask Tony Blair. He tried it and failed and now the UK can't afford to try it again.

I predict that we will design and enact a national system with one tier and no up-front recognition of the necessity to ration to avoid a political food fight. That will lead to runaway cost escation, more political mistakes, rationing and continuing unhappiness with an ineffective expensive system.

Remember that the National systems in other nations are more two tier, have rising costs, long waits for routine procedures and/or hopitalizations (unless you have private insurance) and acceptance of rationing(if you have end stage renal disease and are over 55 in The UK, you just go home for your remaining few days).

If we are going to have a national system, at least approach it honestly and learn from others. That, I am afraid, is too much to expect from what is a politically driven situation.

JIM

[Anonymous]

WalMart leaves their employees with a $500 to $1000 deductible for having a baby. I can never collect that amount from a WalMart employee. McDonalds does the same thing. I feel like when I delivery their babies, I am subsidizing WalMart.

[Anonymous]

Great point about insurance mandates. I believe, however, that insurance itself is the problem. Instead we should be encouraging a switch to a fee for service model. Where we find this, such as elective and cosmetic surgery, there is little cost inflation. We need to encourage people to shop around to help drive down costs. Competition is the antidote to surging prices.

That said, insurance does have a place as a guard against catastrophic events such as cancer.

I would propose the following:

* Eliminate the tax deduction for employer provided health insurance. This is an artifact of WWII that creates an unnatural link between health care and employment, leading to labor market distortions.

* Allow insurance to be sold across state lines to get around the state mandates.

* Review licensing requirements to expand the supply of doctors and nurses. Doctors are not needed to perform a lot of simple inpatient procedures that nurses can cover. There are substantial barriers to entry here in the labor market.

* Review medical malpractice laws. I don't think that this is the silver bullet many think it to be, and it isn't a problem in all states, but probably plays some marginal role.

[Anonymous]

All your arguements are worthless and we will never lower health care costs until we teach the young people to stop smoking and eat right. I'm 80 with no health problems. I haven't eaten a cooked meal in 40 years. I never smoked and never get sick. BEING HEALTHY IS HARD WORK. Lowering
health care costs is going to be harder if no one
cares about how much sugar and chemicals the big guys put in the food were are able (or taught)to buy. van Vollmer

[Anonymous]

As already mentioned by some commenters : by allowing people's juries to award insane damage payments to the victims of medical malpractice, the US have made their healthcare system needlessly expensive.

Having a doctor provide a less-than-optimal medical service, should not be equal to winning the lottery. Erring medical professionals should be investigated and maybe barred temporarily or permanently, when the failure can be shown to be due to irresponsible negligence. But by no means should they be forced to pay astronomical retributions.

In whichever field humans are active, mistakes will occur. Mistakes which may cause bodily harm or even death. Everybody silently consents to this risk, when they get in their car and start to drive.

When the law does not stop juries in courtrooms from awarding silly damage amount over ill-advised indignation at just another human error, the result is that either patients or taxpayers will end up paying for this folly.

Doctors need to subscribe to insurances with huge premiums, just to be able to continue their profession. They'll inevitably have to charge these costs onto the patients or their medical plan provider. In the meantime, the execs of bloated insurance firms gamble all that extra money away on Wall Street.

Isn't it obvious how to make American healthcare an order of magnitude cheaper ?

[Anonymous]

Health insurance companies quite rationally try to avoid taking on customers who might actually need health care, and shedding customers once their needs become known. These firms aren't evil, they are simply making a living in their market.

Social insurance where everyone pays into a pot and everyone is covered would eliminate these incentives. Rationing would have to occur, but it would be far better than making middle class people lose their houses if they are unlucky enough to get sick outside of the employer-provided system.

[Anonymous]

Where did everyone's guts go? I mean the guts to use the dreaded "R" word - RATIONING. It's already good enough, effectively, for America's men & women in uniform and our veterans. Might as well describe the deterioration of Medicare. If you're not there yet you will be. The other forces that are hurtling us toward hyperdeflation of asset values and depression of wage incomes but hyperinflation of our medium of "full faith & credit" will drive the country just as surely to accept public policy that rations healthcare - triage at the pass, as it were. The wealthy and powerful will always have alternatives, such as foreign travel for treatment. The insurance industry doesn't care whether it wears a private label or a government seal, as long as the fee revenue for administration holds up. Seriously, do you think anybody still pulling down a fat pay check at AIG really wants the enterprise to be sold off in pieces?

[Anonymous]

This article is just a repetition of all of the marketing and advertising misinformation by the medical and weight-loss industries. It has nothing to do with real scientific findings regarding effective medicine.

Too bad so many people buy the "lifestyle" excuse. Obesity is not a disease and it does not cause the diseases of aging. In fact, "overweight" people fair slightly better later in life than "healthy weight" people do. Dieting often causes you to lose life expectancy, not gain it.

Age, genetics, and low socio-economic status are the leading causes of poor health. For instance, the main risk factor for developing cancer is being over the age of 75, not what you ate for dinner every night! Don't let the medical industry shift the blame to you when they can't deliver as promised. Instead, alter your expectations of what medical intervention can do. Mortality is still guaranteed. No one escapes.

The issue at hand is universal access to basic care, not cutting edge, $100,000-a-day treatments that may extend life a few months. Our current rationing system gives lots of care to some while giving none to others. Most of us believe that basic services should be available to all, regardless of income. At this point, poor health is one of the biggest threats to anyone's income and wealth. We need to change this trend.

[Anonymous]

Those with pre-existing conditions may be denied coverage for these conditions AND pay higher premiums (a friend of mine who once had double pneumonia can no longer have any respiratory problems covered and STILL pays a hell of a lot more than $2.5k). And that's for the companies that will even cover her in spite of having no medical issues since that one time.

Dr. Becker, your plan works for the healthy only and leaves the balance of power in the hands of those for whom it pays not to provide coverage.

Dr. Becker's proposed plan doesn't help anyone except the health insurance companies.

[Anonymous]

This article, like jugdge Posner's, does not address the key question, "Why are US doctors paid so much more money than other doctors in the rest of the world?" Ignoring the question simply marginalizes a debate on health care costs in America.

[Anonymous]

Why are lawyers paid $500 per hour. Why are General motors unionized fork lift drivers paid $85,000 per year. Why are semi-literate athletes paid millions per year. Why are investment bankers paid millions per year. Why are defrocked politicians paid millions for a book full of self serving lies. Most primary care physicians net about 85K per year. Specialist are paid more but not out of proportion to the time, money and effort invested in their education and training. I don't know about you but I would prefer a physician who knows what is going on to a poorly paid one who doesn't care. Maybe you think that physicians should work for nothing. Maybe you should work for nothing. Why do you think rationing occurs in countries where physicians make less. Why should they bust their behinds for no reward. In addition, physician costs in the US are 10%-15% of total costs, no more.

[Anonymous]

If government-run insurance simply competes in the market rather than regulating existing companies out of existence, government does not reduce new barriers to entry (unrealistic assumptions, I know), and people chose the government program over private competitors, wouldn't that mean government-run health insurance is more efficient? And - if so - wouldn't that be a good thing?

Daniel

[Anonymous]

Anon 12:03 You may have answered most of your own question and highlighted much of the problem at the same time.

If the Doc is only in for 15% surely we'd look at the other 85% for cost containment opportunities.

Examples abound, but surely as costly prescription drugs become a much larger percentage of health care and are sold for 1/3rd or half as much in other advanced nations we might find some savings there. IF we looked?

Surely you've heard others such as the tremendous overhead of insurance companies and the related paperwork/haggling which employs 11 clerks in the US to accomplish what ONE does in Canada.

As for "investment??" "bankers?" Ha! both laughable terms just now! carving off what they have been, let's HOPE that this is a partly curable anomaly and NOT a biz plan to be emulated widely!

Athletes? Another anomaly that dates to the beginning of the television era and the fact that tv stations pay nothing for the use of the broadcast airwaves, and! of course, because they've been so good at getting taxpayers to cover much of their stadium costs. But, hey! the cost per viewer is not very high so let it be?

Jack

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[Anonymous]

Anon at 9:27 p.m. Doctors in the U.S. make so much money because the person who uses the service does not pay for the service. So the doctor can bill as much as he can without losing the patient.

If someone else is going to buy me a car, I'll take a Ferrarri. If I'm paying for it, I may settle for less.

[Anonymous]

"The Rand Corporation study of 2005 which finds a annual saving os 80 billion per year should all medical records reside in an electronic form is pure nonsense..."

I agree with you. But at the very least, all providers should implement a plan to convert their current paper charts to electronic format..such as TIFF or PDF images. This would protect the charts from unauthorized access and disaster. In addition, the info. can be exchanged easily and read by any provider