Wednesday, March 23, 2005

Is Massive Health Care Waste a Myth?

There is an interesting contrarian piece on the costs of health care by Arnold Kling on Tech Central Station, which was also picked up by Tyler Cowen on Marginal Revolution.

Like some other comments by libertarian economists on health care, I found it intersting and provocative. I also found myself agreeing with some, and strongly disagreeing with other points he made.

To summarize, he contends that the US spends more than other countries on health care, but also provides significantly better health care. He thinks that the "usual subjects" rounded up in arguments to support the massive inefficiency of US health care are not guilty as charged. These suspects include spending on the last year of life, drug company profits and overhead, and administrative overhead. Finally, he thinks we spend too much on physician compensation and high-technology procedures.

My comments, point by point, are

  • Paying More to Get More - I think this idea is defensible, and I would like to see it discussed better and more often in the medical and health care literature. Surely, we can now cure illnesses that we couldn't cure before, and we can substantially improve the lots of patients with many other illnesses whom we couldn't effectively treat in the past.
  • Spending in the Final Year of Life - His arguments are reasonable, and again, I would like to see this issue discussed more clearly and rationally in the literature, with a bit more attention to the clinical context and the clinical epidemiological issues.
  • Drug Company Profits - This industry is often made into the bogey-man. In our criticisms of it, we should not ignore the fact that the industry provides us with many of the means to treat illness and alleviate suffering that we use to such good effect. On the other hand, their have been numerous abuses perpetrated by drug companies, some of which we have discussed on this blog. Furthermore, this is a bit of a straw man argument. I do think that if one considers the total profits and overhead not only of drug companies, but also of device manufacturers, information technology providers, managed care and health insurance companies, hospitals and hospital systems, and all the other miscellaneous players in our horribly complex US system, they would clearly in toto be excessive. Then, if you consider the various ways some of these organizations have acted in conflict with physicians' core values, the problem is even greater.
  • Administrative Overhead - Admittedly, the data about this issue is not very good. But I suspect the reason it is not very good is that researchers have been timid about addressing the issue, not because there is not a lot of administrative waste and inefficiency. My personal observation is that physicians, especially primary care physicians are drowning in paperwork and bureacracy, and so are hospitals. I did find one study of interest. MGMA compiled detailed data on the administrative and bureaucratic tasks that physician group practices must perform. They found that group practices were spending about $24,750 per physician on some specific "unnecessarily complex or redundant administrative tasks." I suspect that the more researchers look for administrative and bureaucratic tasks that physicians, other health professionals, and hospitals must undertake, the more they will find. Adminstrative and bureacratic methods to control costs may cost more than they are worth. Yet the administrative and bureaucratic load on physicians seems to continue to climb.
  • Physicians' Compensation - I am not sure where Kling got his numbers. My sense, and a brief web search suggests that the compensation primary care and "cognitive" physicians receive is comparable to that of physicians in other developed countries. For example, here is data on the compensation of UK physicians in 2002. Note that consultants, i.e., physicians who have finished their hospital training, get from 52,000 to 133,000 pounds sterling. On the other hand, here is data on average levels of physician compensation in the US in 2002 by specialty. Note that internists, family practitioners, and pediatricians average about $150,000 to $160,000. Correcting for the exchange rate in 2002, this would have been quite comparable to what UK physicians got. Of course, "procedural" specialists like anesthesiologists got much more. Kling suggested reducing physician compensation to levels comparable to those in other developed countries. My best guess is this would have little effect on "primary care" and "cognitive" as opposed to "procedural" physicians, perhaps even raising some of their pay. It would have major effects on "procedural" physicians. Its effect on total health care costs would be considerably less than Kling expects.
  • High-Technology - Here I suspect Kling is very much on target. The question is why such interventions are so expensive. It's interesting that the examples he used, CT scans, MRI scans, and open-heart surgery, were of technologies developed 30+ years ago. CT scans, for example, were developed in the 1960's by Sir Godfrey Hounsfield. So his examples are actually of mature, not "high-" technologies. Outside of medicine, the price of technologies drop as they age. Admittedly, there have been many incremental improvements in CT scans, but there have been no revolutionary changes. In particular, the "C" in "CT" stands for computer. CT scans use computers to process multiple x-ray images into the images of body slices which we are familiar. The original CT scanners used main-frame computers to do the image processing. Main-frames were very expensive in the 1960's. Yet now one can get a personal computer that is just as powerful for a many orders of magnitude lower price. Since a large part of the expense of CT scanning used to be computer hardware and software, why hasn't the price dropped like the prices of other computer hardware and software? The biggest failure of managed care and government efforts to control costs seems to be their failure to address the huge costs of "high-" or old technology. One possible explanation is that the people charged with controlling costs in managed care organizations and the government don't really understand the technologies for which they pay. Thus, they don't realize it when specific ones are drastically over-priced.
I hope we can engage folks like Kling in some creative thinking about ussues like this related to health care dysfunction.

1 comment:

Don said...

I've posted this comment at Econ Log and at my www.businessword.com blog, where I've blog rolled you.

I think you’ll find that in real dollars, the price of CT equipment and technology as well as the cost per procedure has dropped substantially since CTs were introduced in the early 1970s.


At least that’s what I’ve been saying for the last 20+ years. To me, the CT’s life cycle is the prime example of how the rich pay for new technology that, as it matures and wins a bigger market, eventually trickles down and becomes “affordable” for all.

The PC hardware is a small part of the technology. The software development, upgrading and maintenance is the real cost. And then add the cost of the spectacular hardware that the patient sees. Meanwhile, labor costs in hospitals are rising faster than in most other settings, I suspect, especially if there are shortages of imaging technicians. Not up to date on that, but should be.

And, finally, there are the huge regulatory and product liability costs that GE and others have to pay. GE Medical dominates the market and can charge pretty much what it wants, which it probably does, especially when it comes to service and support contracts. Once a hospital adopts a brand, it tends to stick with it, and GE is the market leader by far. It’s the Caterpillar and Apple of the industry.

So you have to look at the total cost of ownership, not just the price of a PC.

Donald E. L. Johnson