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Robert Waldmann on Health-Care Reform: Smart Cost Sharing

Robert Waldmann writes:

Robert's Stochastic thoughts: Ezra Klein writes about smart cost sharing... wants a committee to decide reimbursement rates. Oddly, I had another idea about smart cost sharing. Make the doctors pay for the care and pay the doctors based on outcomes... an idea I got from Mark Thoma:

...preventative care ... ought to be encouraged, and one way to help with this is ... to forge an unbreakable lifetime relationship between the insurance company and the consumer so that expected lifetime costs are important to the insurance carrier.

I strongly suspect (with no evidence) that Thoma's thoughts were influenced by an empirical result that very small financial incentives to doctors based on their patients' blood glucose caused big changes in those outcomes which will save huge amounts of money for medicare but small amounts of money for the HMO's that introduced the incentives.

One politically unfeasible approach to this would be to assign people randomly to HMOs and pay the HMOs based on their health but have the HMOs pay for their health care.... Now no way are Americans going to give up all choice (even in Italy I got to choose my GP), so So there would be a huge huge cherry picking problem. One could try to deal with it by charging the managed competitive insurance plans (that's not English it's Magazinerish) based on costs per patient minus predicted costs given region and patient characteristics and rewarding based on outcomes minus predicted outcomes. Obviously it would never work.

I think the best we can do is to charge medical costs not just to the current insurance plan but also, in part, to the one that covered the patients in the past (to give the an incentive to keep their clients healthy)... plus paying insurance plans based on documented improvement in, well, the 3 blood things say. If insurance companies saw obese people with horrible eating habits who watch TV all day as a profit opportunity, the USA would be a healthier place. Just think, sleazy insurance agent tells his boss (hey I just found someone with an LDL level of 300, we got to move fast before our competitors sign him).... [T]hey would be more willing to sign fat lazy smokers as there is lots of room for improvement compared to things as they are....

I know that there are non-compliant patients. My sister treats the homeless. My mother treats HIV positive people without insurance (by now most are intravenous drug addicts the nice polite gay men have learned to use condoms).... There is a huge literature on optimal incentive schemes when outcomes are not completely under the control of the agent. If agents (here doctors) are risk averse it is not optimal to pass all costs on to them.... That is why I proposed incentives at the level of the insurance company... they, as rational profit maximizing agents, will decide what incentives to pass on to the doctors. They can just take the hit for poor patient outcomes (note the fraction of non-compliant patients for a whole company has very low variance. It's like the point of insurance). Or they can pass them on to doctors and raise expected compensation so doctors accept their patients....

[P]art of the issue is that we have a strong sense that we must never punish the innocent... the market system... provides incentives which depend in part on individual choices and in part on luck... [but] somehow it's different if the government is involved. I once heard someone angrily opposing a gas tax (in the 70s) arguing that some people need to drive to get to work -- so it would punish people who weren't doing anything wrong. Look: I'm not talking about throwing people into jail. I'm talking about an MD getting $50 less in a year because he didn't manage to convince a non-compliant patient (note MDs can subcontract the nagging to nurses)...

I think that when Robert Waldmann says "the three blood thingees" he is refering to HDL, LDL, and TGC--high-density lipoproteins, low density lipoproteins, and triglycerides. But he might be refering to cholesterol, blood glucose, and blood pressure.

One prominent health care economist once said that the right way for an employer or a government to compensate health insurance companies is to require that everybody they cover compete in a mandatory decathlon every open enrollment period--sprint, long jump, shot put, high jump, hurdles, medium run (400m), throw the discuss, pole vault, throw the javelin, run the metric mile--and then pay the insurance company according to the change in performance between last year and this year, with a huge honking penalty for patients who die over the course of the year in order to eliminate the incentive to shoot the wounded. But even this doesn't get the incentives right. You want insurance companies to be paid for devising provider compensation schemes that help people get and stay healthy--without at the same time giving the insurance companies incentives to cherry-pick those likely to stay healthy and figure out some way not to cover or not to pay for the truly sick. That is incredibly hard to do.

There are four big problems in health care finance.

The first problem--let me explain it in terms I have borrowed from Uwe Reinhardt. Suppose a business offers employer-sponsored lunch as a benefit. Then when the business hires an extra worker, it has to take into account not just the salary it will pay him or her but also the cost of hiring the extra cooks and servers to serve them lunch. So it is with health care. In America today, for every hundred workers that a firm providing employer-sponsored health insurance hires, it must also come up with the money to pay for 18 more workers in health care--2 doctors, 6 nurses, 2 orderlies, 2 pharmacists, 1 physical therapist, and 5 health-care administrators. Those 5 health-care administrators' jobs are (a) to keep the system running and everybody showing up at the right time at the right place with the right materials, (b) to keep people from going to the doctor by making it expensive in time by hassling them, (c) to keep people from going to the doctor or getting reimbursed for money they have advanced by making them do more paperwork, and (d) to figure out which are the hot-potato expensive patients and persuade them to go take their business to some other facility or provider or insurance company--or take their business to nobody at all. If we could get rid of jobs (b), (c), and (d), we would need not five but two health-care administrators for every hundred workers with employer-sponsored coverage. That's a savings of $100 billion a year: $100 billion a year that could be used to hire people to do socially useful rather than useless and socially-destructive pass-the-hot-potato and ration-by-hassle jobs.

The second problem is, I think, best explained by David Cutler: leaving the excess administrators aside, a lot of what our doctors and nurses and pharmacists are doing isn't helping people:

David Cutler: Use a Scalpel, Not a Meat Cleaver: Medicare spending varies by a factor of two across parts of the country, without comparable health benefits.... [I]f the high spending areas were brought to the level of the lower spending areas... we could save 25 to 30 percent of Medicare spending.  No one doubts that the same is true about non-Medicare spending as well....

The problem in medical care is how to separate the good from the bad.  What can we do to maintain the services that are very effective but get rid of the waste?... Broadly speaking, there are two approaches to eliminating waste in medical care.  The first is the demand-side approach: give patients more information... raise the price that they pay for using care, and rely on informed choices to produce efficient outcomes.  The alternative is the supply-side approach: invest in information technology, monitor what physicians do, and pay providers more for better care than for less good care.... [L]et me state my sense of the literature: ...we have no evidence that consumers facing higher cost sharing will make the right medical care decisions.  Indeed, the evidence suggests the opposite.... [M]edical care consumers respond to prices of medical services... [but] cut back indiscriminately.... When firms raise the price of one medication in a class, some consumers switch to cheaper drugs in that class, but others stop taking the medication entirely... the people who stop taking the medication... [are not] those who benefit from it the least.... [T]he demand-side approach is wrong for many, perhaps most, of the population.... I see no alternative to thinking clearly, systematically, and expansively... targeted evaluations of what is done and how to pay for it better are the fundamental way that we can eliminate the waste in medical care but still retain the valuable core...

The third problem--well, it isn't a problem so much as an opportunity. We will want to spend even more on medical care in the future than we do now--even though a lot of what we spend now is wasted. Medical care in 2010 will be 17 percent of GDP. Medical care in 1975 was less than 8 percent of GDP. Medical care as a share of GDP has more than doubled in a generation primarily because we have developed new and better ways of treating patients. Let's listen to David Cutler again:

In 1950, a person with a heart attack received bed rest and morphine (to dull the pain). That was how Dwight Eisenhower was treated when he had a heart attack in 1955.  This therapy is not very expensive, but it is also not very effective.  Today, such a person receives clot-busting drugs and other medications, and intensive interventions such as bypass surgery or angioplasty. These technologies are certainly costly.  Spending in the few months after a heart attack is about $25,000 per patient.  And yet the care provides enormous benefits.  Mortality in the aftermath of a heart attack has fallen by three-quarters since the 1950s. The average person aged 45 will live 3 years longer than he used to solely because medical care for cardiovascular disease has improved...

There is every reason to think that as time passes and as we grow richer we are going to want to devote a larger and larger share of our economy to health care. I mean, how many large-screen LCD screens does one person need? Biomedical technologies will give us an enormous opportunity, which we might fail to grasp if we cannot fix our system so that it uses our health care dollars effectively and which we might fail to grasp if we stupidly and niggardly put global caps on health-care spending.

The fourth problem is a problem. (1) We as a country seem to believe in a relatively small government. (2) We also seem to believe that health care should be provided on the basis of how dire your need is rather than how thick your wallet is. (3) And we have good reason to suspect that our health care capabilities will become larger and better as time passes. (2) and (3) are inconsistent with (1). (1) and (3) are inconsistent with (2). (1) and (2) can go together only if (3) is false. I think that (3) is true. That leaves us with a societal choice to make: do we abandon (1) or abandon (2)? I favor throwing (1) over the side, but this is an important issue we can talk about.

But one thing is clear. We could be spending half as much on health care as America is today and we still be as healthy. Take 10% savings from eliminating maladministration, 20% from removing unnecessary, inappropriate, and counterproductive care, add on lifetime disease management so that we are not in our current emergency room-driven dealing with problems only when they reach crisis--and you can easily get American health care spending down to the level of, say, France.

Or we could be healthier: to the exercycle!