Thought du Jour

Physician and journalist Atul Gawande (born 1965) spoke about US healthcare costs when he delivered the commencement address to this year’s graduates of Harvard Medical School.

Medical performance tends to follow a bell curve, with a wide gap between the best and the worst results for a given condition, depending on where people go for care. The costs follow a bell curve, as well, varying for similar patients by thirty to fifty per cent. But the interesting thing is: the curves do not match. The places that get the best results are not the most expensive places. Indeed, many are among the least expensive. This means there is hope—for if the best results required the highest costs, then rationing care would be the only choice. Instead, however, we can look to the top performers—the positive deviants—to understand how to provide what society most needs: better care at lower cost.

Atul Gawande, “Cowboys and Pit Crews“, News Desk blog, The New Yorker, 26 May 2011.

Dr Gawande is a frequent (though passive!) contributor to thought du jour.  He is referring to measurement of costs at a point in time, but at different locations. This is done by comparing costs of standard procedures, such as normal childbirth, hip replacement, coronary bypass surgery, et cetera. Measuring changes in costs over time – price inflation – is generally thought to be much more difficult. Via Mark Thoma, here is a quote from an interview of Rochester University economist Mark Bils (born 1958), who studies “the intricacies of price measurement”.

When you look at healthcare expenditures, you see that inflation is extremely rapid, much more rapid than other inflation rates. But we have no idea what the inflation rates for health expenditures really are. We don’t know! You can’t measure quality of healthcare very well.

If I compare healthcare costs today versus in the year 1800, well, I could go out and buy a bunch of leeches today for almost nothing. And I could have the healthcare I had in 1800. If you had a certain condition and you had $10,000 to get treated at today’s health prices, or $10,000 to get treated at 1960s prices with 1960s technology, I don’t think it’s so obvious that people would want to go back in time to get their important health conditions dealt with. In that sense, you say, I don’t know if there’s inflation. It’s pretty hard to say that there’s been a lot of inflation over the long haul in healthcare.

Brent Meyer, “Interview with Mark Bils“, Forefront (Federal Reserve Bank of Cleveland), Spring 2011.

My favourite paper on this subject is an essay that Brookings economist Jack Triplett wrote, with the provocative title “Human Repair and Car Repair”. Triplett believes that measuring the real output of health care is conceptually not so difficult. The main problem is that statistical agencies devote few resources to this task.

Why is measuring health care output so hard? The medical economics literature contains a long list of intimidating and discouraging difficulties. In this paper, I propose to cut through this mostly defeatist list by posing what at first might seem a narrowly-focussed question: Why is health care different from any other analogous service, such as car repair? ….

Jack E. Triplett, “What’S Different About Health? Human Repair and Car Repair In National Accounts and in National Health Accounts“, Brookings Institute, 25 June 1999.

This is a long paper, well written, difficult to summarize, and worth reading. It was published as the first chapter (pp. 15-94) of Medical Care Output and Productivity, edited by David Cutler and Ernst Berndt (University of Chicago Press for the NBER, 2001).

Triplett recently wrote another, shorter essay for The Oxford Handbook of Health Economics.

[P]roductivity in the medical care sector has behaved very differently from other industries, even other services industries: Measured productivity growth in medical care has typically been negative. ….

Few industries have experienced more innovation, so medical care’s negative productivity growth is highly suspect. …. Data on inputs and outputs—indeed, economic data generally—for the health care sector are much less well developed than for many other sectors of the economy, which is bizarre considering the size of health care in most industrialized countries and the importance of the sector. ….

The National Health Accounts produced in many countries have become nearly irrelevant to the current policy debates on medical care costs because they show only who provides the money for health care (consumers, governments, insurance companies) and who gets it (hospitals, doctors, pharmaceutical companies). They do not show what is bought for health care expenditures—treatments for disease. ….

If expenditure growth is contained, is the effect to reduce medical care inflation? Or is it, instead, to reduce the growth of medical care services? We don’t really know. Only after determining this can we move to the next stage and ask whether the growth in the number of medical care services is worth it, a question that has too often been “answered” with a minimal amount of relevant data.

Improving the database for the analysis of medical care productivity deserves high priority. It deserves high priority, not so much because productivity analysis is necessarily that important, but because vital questions of health care policy demand exactly the same data.

Jack E. Triplett, “Health System Productivity“, ch 31 of The Oxford Handbook of Health Economics, edited by Sherry Glied and Peter C. Smith (Oxford University Press, 2011).

This is an excellent paper, but very concise. The link is to a November 2009 draft. I recommend reading it as an update to Tripett’s earlier paper.

This story is not new, but was recently back in the news, and has been discussed in a number of blogs, including The Economist. Mitt Romney’s past continues to haunt him.

BELMONT, MA—Though Mitt Romney is considered to be a frontrunner for the 2012 Republican presidential nomination, the national spotlight has forced him to repeatedly confront a major skeleton in his political closet: that as governor of Massachusetts he once tried to help poor, uninsured sick people. ….

“I don’t know what got into me back then,” Romney said. “Wanting to make sure people were able to have health insurance if they left their job. Providing a federally funded website so individuals could compare the costs of insurance providers. Making certain that somebody who earns less than 150 percent of the poverty level can receive the same health care coverage as me or any government official. All I can say is that I was young and immature, and I am not that person anymore.”

“The only solace I can take is in the hope that some of the folks I helped were terminally ill patients who eventually withered away and died,” Romney added.

“Mitt Romney Haunted By Past Of Trying To Help Uninsured Sick People“, The Onion, 21 April 2011.

The Onion is a satirical newspaper, unlike The Economist, but it is often difficult to distinguish between the two. (This is intended as praise for The Onion, not criticism of The Economist!)

The current issue of Journal of Economic Perspectives (Spring 2011) contains a symposium on “Constraining Healthcare Costs”, with five papers. All articles in the JEP can be freely downloaded. Here are the five symposium papers:

The (Paper)Work of Medicine: Understanding International Medical Costs
David M. Cutler and Dan P. Ly

The Pragmatist’s Guide to Comparative Effectiveness Research
Amitabh Chandra, Anupam B. Jena and Jonathan S. Skinner

Patient Cost-Sharing and Healthcare Spending Growth
Katherine Baicker and Dana Goldman

Reforming Payments to Healthcare Providers: The Key to Slowing Healthcare Cost Growth While Improving Quality?
Mark McClellan

Evaluating the Medical Malpractice System and Options for Reform
Daniel P. Kessler

JEP Managing Editor Timothy Taylor, in his “Recommendations for Further Reading” column, notes that “the symposium … has a primarily American focus”, so suggests two complementary readings, one from the IMF

[S]ince 1970, public health care spending has risen from 3 to 7 percent of GDP in the advanced economies, by far the most important driver of total public spending increases. ….

In the advanced economies, public health care spending is projected to rise by an additional 3 percentage points of GDP over the next 20 years and by 6½ percentage points over the next 40 years. In net present value terms, these spending increases would be close to 100 percent of GDP. In emerging economies, where fiscal pressures are less severe, public health outlays are projected to rise by 1 percentage point of GDP, but are more sizable in certain regions ….

Past experience points to the importance of four major policy options to contain spending in advanced countries in an efficient and equitable manner. First, budget caps and central oversight of budget allocations: among the countries with the lowest public spending increases, Italy, Japan, and Sweden have a greater reliance on budget caps. Second, reforms that strengthen the role of market mechanisms by introducing competition and choice: Germany and Japan score relatively high in this regard and are among the countries with the lowest spending growth in the past. Third, strong incentives for the provision of cost-effective health care: this includes the introduction of case-based payment systems which have been used with relative success in Germany and Italy. Fourth, greater reliance on private financing: Australia, Canada, and France rely significantly on private insurance for services not covered by the public package.

IMF Fiscal Affairs Department, “Macro-Fiscal Implications of Health Care Reform in Advanced and Emerging Economies“, 28 December 2010. From the Executive Summary.

and another from the World Health Organization, focusing on coverage rather than cost.

On the service coverage side, the proportion of births attended by a skilled health worker can be as low as 10% in some countries, for example, while it is close to 100% for countries with the lowest rates of maternal mortality. Within countries, similar variations exist. Rich women generally obtain similar levels of coverage, wherever they live, but the poor miss out. Women in the richest 20% of the population are up to 20 times more likely to have a birth attended by a skilled health worker than a poor woman. Closing this coverage gap between rich and poor in 49 low-income countries would save the lives of more than 700 000 women between now and 2015. In the same vein, rich children live longer than poor ones; closing the coverage gap for a range of services for children under the age of five, particularly routine immunization, would save more than 16 million lives. ….

The path to universal coverage, then, is relatively simple–at least on paper. Countries must raise sufficient funds, reduce the reliance on direct payments to finance services, and improve efficiency and equity. ….

Many low- and middle-income countries have shown over the past decade that moving closer to universal coverage is not the prerogative of high-income countries. For example, Brazil, Chile, China, Mexico, Rwanda and Thailand have recently made great strides in addressing all three problems described above. Gabon has introduced innovative ways to raise funds for health, including a levy on mobile phone use; Cambodia has introduced a health equity fund that covers the health costs of the poor and Lebanon has improved the efficiency and quality of its primary care network.

World Health Organization, The world health report – Health systems financing: the path to universal coverage (WHO Press, Geneva, Switzerland, November 2010).

It may, however, surprise some of Hayek’s new followers to learn that “The Constitution of Liberty” argues that the government may need to provide health insurance and even make it compulsory.

Francis Fukuyama, “Friedrich A. Hayek, Big-Government Skeptic“, New York Times Sunday Book Review, 8 May 2011.

Fukuyama mentions only conservative talk-show host Glenn Beck, Tea Partiers and “other conservatives” as “Hayek’s new followers”, but many libertarians are followers of Hayek, so may be just as surprised. Libertarians should note also that Hayek, in an appendix to his book, titled “Why I am not a conservative”, had unkind words for conservatives and libertarians. Hayek identified himself as a classical liberal, lamenting that the term “liberal”, in the United States at least, had come to mean something very different.

Political scientist Francis Fukuyama (b. 1952) is reviewing a new edition of Hayek’s The Constitution of Liberty, a book first published in 1960.

HT Bill Easterly.

Britain’s system of socialized medicine, known as the National Health Service (NHS for short), is widely perceived by US voters as synonymous with poor healthcare, hence an unacceptable model for healthcare reform. That is the reason that Obama’s reform is so timid – the fear of being perceived as a move toward the British system. ‘Obamacare’ (aka ‘Romneycare’) does not offer even a public insurance option, much less move to a single payer system or socialize the delivery of medical care. But in the UK, voters are surprisingly satisfied with their healthcare system. Opinion polls reveal that satisfaction with the NHS in the UK climbed to 64% in 2009, nearly double the 34% approval rating recorded when the Conservatives, led by Margaret Thatcher John Major, left office in 1997.

The Conservatives, under David Cameron, returned to power in May of last year, in coalition with the Liberal Democrats, following elections in which no party was able to win a majority of seats in Parliament. The new government has promised more choice to NHS patients, but an austerity budget limits increases in NHS funding to increases in the consumer price index, equivalent to zero growth in real terms. If service deteriorates, satisfaction with the NHS will no doubt fall as well.

Satisfaction with the NHS is at its highest level ever. When Labour entered office in 1997, only a third of people (34%) were satisfied with the NHS, the lowest levels since our survey series began in 1983. By 2009, satisfaction stood at 64%, the highest level since the survey began. ….

While satisfaction with the NHS among Conservative supporters fell initially when Labour came to power, it rose 12 percentage points between 1996 and 2009, reaching a high of 61% in 2009. [Click on chart for a clearer view.]

John Appleby and Ruth Robertson, “A healthy improvement? Satisfaction with the NHS under Labour“, chapter 4 of  British Social Attitudes 27th Report (National Centre for Social Research, London, December 2010) – summary of the chapter.

UK residents tend to be more satisfied than US residents with their respective systems of healthcare. In a 2009 online survey carried out in 14 countries, 79% of UK respondents rated the quality of healthcare in their country as good, compared to 55% of US respondents. [Click on chart for a clearer view.]

Bobby Duffy, Anna Quigley & Kate Duxbury, National Health? Citizens’ views of health services around the world (Ipsos Social Research Institute, December 2010)

The NHS is a huge bureaucracy, which makes even more remarkable the high levels of satisfaction expressed by its patients. How large is the NHS? That information and more is available from the NHS web page:

The NHS was born out of a long-held ideal that good healthcare should be available to all, regardless of wealth. That principle remains at its core. With the exception of charges for some prescriptions and optical and dental services, the NHS remains free at the point of use for anyone who is resident in the UK. That is currently more than 60m people. It covers everything from antenatal screening and routine treatments for coughs and colds to open heart surgery, accident and emergency treatment and end-of-life care.  ….

The NHS employs more than 1.7m people. Of those, just under half are clinically qualified, including 120,000 hospital doctors, 40,000 general practitioners (GPs), 400,000 nurses and 25,000 ambulance staff.

Only the Chinese People’s Liberation Army, the Wal-Mart supermarket chain and the Indian Railways directly employ more people.

The NHS in England is the biggest part of the system by far, catering to a population of 51m and employing more than 1.3m people. The NHS in Scotland, Wales and Northern Ireland employ 165,000, 90,000 and 67,000 people respectively.

The number of patients using the NHS is equally huge. On average, it deals with 1m patients every 36 hours. That’s 463 people a minute or almost eight a second. Each week, 700,000 people will visit an NHS dentist, while a further 3,000 will have a heart operation. Each GP in the nation’s 10,000-plus practices sees an average of 140 patients a week.

All economists know, or should know, that competitive markets do not exist for medical care. There are no profit-maximizing producers ready to supply medical care to informed consumers, at market-clearing prices that do not vary by ability to pay. When you hear calls for government to leave medical care to the magic of the market, keep in mind that this is one sector where markets everywhere fail.

Stanford economist Kenneth Arrow long ago explained why this happens. Here is a brief excerpt from his paper. Click on the link to access the full publication.

Uncertainty as to the quality of the product is perhaps more intense here than in any other important commodity. Recovery from disease is as unpredictable as is its incidence. ….

Since the patient does not, at least in his belief, know as much as the physician, he cannot completely enforce standards of care. In part, he replaces direct observation by generalized belief in the ability of the physician. ….

One consequence of such trust relations is that the physician cannot act, or at least appear to act, as if he is maximizing his income at every moment of time. As a signal to the buyer of his intentions to act as thoroughly in the buyer’s behalf as possible, the physician avoids the obvious stigmata of profit-maximizing. Purely arms-length bargaining behavior would be incompatible, not logically, but surely psychologically, with the trust relations. …. The very word, “profit,” is a signal that denies the trust relations.

Price discrimination [charging by ability to pay] and its extreme, free treatment for the indigent, also follow. If the obligation of the physician is understood to be first of all to the welfare of the patient, then in particular it takes precedence over financial difficulties.

As a second consequence of informational inequality between physician and patient and the lack of insurance of a suitable type, the patient must delegate to the physician much of his freedom of choice. …. The safest course [for the physician] to take … is to give the socially prescribed “best” treatment of the day. Compromise in quality, even for the purpose of saving the patient money, is to risk an imputation of failure to live up to the social bond.

The special trust relation of physicians (and allied occupations, such as priests) extends to third parties so that the certifications of physicians as to illness and injury are accepted as especially reliable.

Kenneth J. Arrow, “Uncertainty and the Welfare Economics of Medical Care“, American Economic Review, December 1963, pp. 941-973.

Kenneth Arrow (born 1921) won the 1972 Nobel Prize in Economics jointly with British economist John Hicks. President George W. Bush presented Arrpw with the 2004 National Medal of Science for his contributions to research on risk and decision-making. He is an uncle of economist Larry Summers.