Basic epidemiology, psychology, and overprescription

Levitin @ NYT:

Suppose you’ve just found out that you or a loved one has prostate cancer, ...Nearly every urologist would recommend radical surgery to remove the organ. Sounds reasonable, doesn’t it? 
But let’s look at the numbers... Prostate cancer is slow-moving; more people die with it than from it. According to one 2004 study, for every 48 prostate surgeries performed, only one patient benefits — the other 47 patients would have lived just as long without surgery... Moreover, the 47 who didn’t need the surgery are often left with an array of unpleasant and irreversible side effects, including incontinence, impotence and loss of sexual desire. The likelihood of one of these side effects is over 50 percent — 24 of our 47 will have at least one. This means a patient is 24 times more likely to experience the side effect than the cure.
...the “risk for disease,” ...is important to untangling disease statistics. Say a drug promises to reduce your risk of fatal illness X by 50 percent. Sounds great, doesn’t it? But suppose there was only a one-in-1,000 chance that you’d get the disease to begin with: reducing your risk by 50 percent means that you’ll now have a one-in-2,000 chance of getting it. Most medications have side effects, and the likelihood of these may far exceed that of being helped by the medication. For example, the “number needed to treat” for a particular cholesterol-­lowering drug is 300. (For every 300 people taking it, only one heart attack is prevented.) The drug has a 5 percent probability of side effects, including severe muscle and joint pain and gastrointestinal distress. Thus, for every person helped, 15 people (5 percent of 300) will experience side effects and not be cured. In other words, anyone taking the drug is 15 times more likely to experience the unwanted effects of the medication than the beneficial ones.
Of course, none of us want to think of ourselves as a statistic... studies by cognitive psychologists have shown that our brains are not configured to think statistically, whether the question is how to find the best price on paper towels or whether to have back surgery. In one famous study, Amos Tversky and Daniel Kahneman found that even doctors and statisticians made an astonishing number of inference errors in mock cases; if those cases had been real, many people would have died needlessly. The problem is that our brains overestimate the generalizability of anecdotes. Scientists call anecdotes the “n of 1,” pseudo-experiments with no controls and only one subject. The power of modern scientific method comes from random assignment of treatment conditions; some proportion of people will get better by doing nothing, and without a controlled experiment it is impossible to tell whether that homeopathic thistle tea that helped Aunt Marge is really doing anything.
...Returning to prostate surgery, consider that six weeks is the ...recovery period. Coincidentally, the operation will, on average, add six weeks to your life. (This averages across the 47 people who had no benefit from the operation and the one person who did.) To my way of thinking, the decision then becomes this: When do you want to “spend” those six weeks? When you’re relatively young and feeling well, or at the end of your life, when you’re old and only dimly aware of your surroundings? 

GROOPMAN and HARTZBAND @ WSJ:

Consider the case of Susan Powell..., a nurse's assistant now in her 50s. She had been healthy all her life, but when she turned 45, she decided to see a primary-care doctor. Susan ate healthy foods and was physically active, but she was a bit overweight, and her blood tests showed that she had high cholesterol. Her doctor prescribed a statin drug... Statins are among the most commonly prescribed medications in the world. In the U.S. alone, more than 25 million people take the drugs to lower their cholesterol, ...a key factor leading to heart attack and stroke.  Soon after seeing her doctor, Susan spoke with an acquaintance at church who had developed muscle pain after starting to take a statin. Susan also thought of her father, who had high cholesterol and never took ...medication... "People take too many pills," he often told his children. He lived a long, full and active life. 
Susan decided not to take the statin.
Many people decline treatment because they know someone who suffered from side effects... Stories deeply affect all of us, and they can make real the risks and benefits that might otherwise seem abstract—but they can also distort our vision by making the rare appear routine.
Statistics can help to put lessons drawn from stories into a larger context, letting us make a more considered choice...
At Susan's follow-up appointment..., her doctor told her that "by taking a statin pill, you'll reduce your risk of a heart attack over the next 10 years by as much as 30%." The risk of side effects, she continued, was very small, and the benefits far outweighed the risk. Susan promised to give it serious thought.
She continued to search for information, reading everything she could about cholesterol. What caught her eye was a ... "10-Year Heart Attack Risk Calculator."
She entered her age, total cholesterol number of 240, and "good" cholesterol (HDL) of 37. She was not a smoker, her blood pressure was fine, and she was on no medications. The result: "Risk Score: 1%: Means 1 of 100 people with this level of risk will have a heart attack in the next 10 years."
This means that 99 of 100 people like me won't have a heart attack in the next 10 years, Susan told herself. She started to feel much better. She had found a key number in health literacy: her risk for disease without treatment.
Without treatment, Susan's risk for a heart attack was 1 in 100. If 1 in 100 women has a heart attack, that means... 3 in 300. The statin treatment reduces risk by 30%, or about one-third.
Let's apply that benefit to a group of 300 women like Susan, where three would have a heart attack without taking statins. If we treat them all, we would prevent one heart attack—because we protect one-third of those three. The other two women would still have a heart attack despite taking the medicine. The remaining 297 would not have had a heart attack even without the medication, so they wouldn't benefit from taking it.
This statistic comes as a surprise to many people. When you hear that a statin lowers Susan's risk by 30%, it sounds as if she is at a 100% risk of suffering a heart attack if she doesn't take the medication.
Another component of health literacy is understanding the risks of a therapy. Statins cause muscle pain in 1% to 10% of people who take them. However, if we "flip" the frame, the number without any side effects is 90 to 99 out of 100, a much more reassuring statistic.
Advertisements for drugs ...are designed to communicate a compelling tale. ...In 2007, a team of researchers from the UCLA Medical Center and other medical centers studied prescription drug ads broadcast on national networks. They found that the average American TV viewer sees over 1,000 prescription drug ads in the space of a year. That's 16 hours all told—much more time than the average person spends with his or her primary-care physician.
The study concluded that the large majority of TV ads fail to fulfill an educational purpose. But they clearly work, ...: Every $1,000 spent on advertising translated into 24 new prescriptions...
Another illuminating study ...examined the impact of printed drug ads on patient preferences. One group was given actual ads. A second group received the same ads, except that the brief summary at the end of the text was replaced by a "drug-facts box." [like the nutritional facts box on packaged foods] The box presented information in a clear, accessible fashion, similar to the ...the benefits and risks of a statin for Susan [presented above].
The results of the Dartmouth research are impressive. Nearly two-thirds of the group that saw the original ads overestimated the benefits... They believed it was 10 times more effective than it actually was. But nearly three-quarters of the participants who saw the information in the drug-facts box correctly assessed the actual benefits...
Even more striking was another finding. When people were given readily understandable information about the statin's actual benefit in preventing future heart disease, nearly twice as many said they wouldn't take the drug in light of its side effects. When given clearer information, the patients weighed the risks and benefits differently ...and were less likely to take the medication.

Should car dealers be forced to post the prices that they charge each customer for new cars?  Why should health care be any different?  Yglesias:

Josh Barro at National Review writes in favor of the idea that the law ought to require "hospitals and medical practices to disclose their full price lists—both the inflated list prices and the rates negotiated with each insurer that the practice accepts."

To my way of thinking, this is a moderately good idea. I remarked on twitter, however, that it didn't strike me as a particularly free markety idea. That's fine by me. Sometimes heavy-handed regulation is what you need. But others seemed to push back and say that anything aiming at providing more information about prices is per se a pro-market intervention. I don't think that's correct. Opaque pricing is a pretty common feature of the economy. Cable companies, for example, will often offer pretty steep discounts to customers who threaten to cancel service. The marginal cost of providing cable to an additional household is very low, so it's worth knuckling under to pressure. But obviously cable companies don't want to disclose how low they're willing to go, since if they did that would strengthen everyone's else's hand in bargaining. In general, full disclosure of how much you pay/charge your employees/clients/suppliers/customers would be pretty poor negotiating strategy in a wide variety of contexts so it doesn't exist in a market equilibrium. Rules banning price secrecy across the board would, whether you like them or not, be a very drastic regulatory intervention into the marketplace.

Waiting In America

Aaron Carroll:

Some days it’s hard to be a blogger. Yesterday, I told a story about how the local Minute Clinic filled a niche by providing timely care on off hours for a simple acute issue. Nevertheless, I got a lot of email accusing me of being a shill for Walmart and selling out the medical profession. Please.
Look, I clearly said at the end of my piece that I don’t think retail clinics are good for everything. I think longitudinal care through a medical home is proper for primary care. But there are limits. There are times when you need to see a health care professional early in the morning, or later at night. Have you tried to get an appointment lately when you’re sick? It’s hard! That’s not all. You often have to wait a while:

So almost 20% of people need to wait at least a week to see a doctor when they are sick. Try getting a same day appointment if you can. Or, even better, try getting an appointment before or after work. Or on a weekend:

Yeah, we beat Canada. But we lose to almost every other country. Almost two thirds of Americans have trouble getting care on nights, weekends, and holidays. You know what? A significant amount of the week is filled with nights, weekends, and holidays. Especially if you don’t want to miss work.
It’s fine to believe that people should try and see the doctor in the office. But if you want that to happen, then you need the office to be available. If retail clinics do a much better job in that respect, you can’t complain when people make use of them. In my example, my kids could be seen at 8AM, before school, without an appointment. That’s useful. If physician offices want that business, they should do the same.

Reagan Mandated Universal Health Care In 1986

President Reagan gave the US already a universal health care system that does not discriminate according to ability to pay.  But our universal health care system is so incomplete and strained that most people do not even realize that the US government already mandated universal health care.  
From Wikipedia [slightly edited]:

The Emergency Medical Treatment and Active Labor Act (EMTALA) requires hospitals to provide care to anyone needing emergency healthcare treatment regardless of citizenship, legal status or ability to pay. There are no reimbursement provisions. Participating hospitals may only transfer or discharge patients needing emergency treatment can be discharged only under their own informed consent, after stabilization, or when their condition requires transfer to a hospital better equipped to administer the treatment.  EMTALA applies to "participating hospitals." The statute defines "participating hospitals" as those that accept payment from the Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) under the Medicare program. However, in practical terms, EMTALA applies to virtually all hospitals in the U.S., with the exception of the Shriners Hospitals for Children, Indian Health Service hospitals, and Veterans Affairs hospitals. The combined payments of Medicare and Medicaid, $602 billion in 2004, or roughly 44% of all medical expenditures in the U.S., make not participating in EMTALA impractical for nearly all hospitals.

The most significant effect is that, regardless of insurance status, participating hospitals cannot deny urgent medical assistance. Currently EMTALA only requires that hospitals stabilize the emergency. According to some analyses of the U.S. health care safety net, EMTALA is an incomplete and strained program. Cost pressures on hospitals

According to the Centers for Medicare & Medicaid Services, 55% of U.S. emergency care now goes uncompensated. When medical bills go unpaid, health care providers must either shift the costs onto those who can pay or go uncompensated. In the first decade of EMTALA, such cost-shifting amounted to a hidden tax levied by providers. For example, it has been estimated that this cost shifting amounted to $455 per individual or $1,186 per family in California each year.

However, because of the recent influence of managed care and other cost control initiatives by insurance companies, hospitals are less able to shift costs, and end up writing off more in uncompensated care. The amount of uncompensated care delivered by nonfederal community hospitals grew from $6.1 billion in 1983 to $40.7 billion in 2004, according to a 2004 report from the Kaiser Commission on Medicaid and the Uninsured, but it is unclear what percentage of this was emergency care and therefore attributable to EMTALA.

Financial pressures on hospitals in the 20 years since EMTALA's passage have caused them to consolidate and close facilities, contributing to emergency room overcrowding. According to the Institute of Medicine, between 1993 and 2003, emergency room visits in the U.S. grew by 26 percent, while in the same period, the number of emergency departments declined by 425. If the emergency room is overloaded, patients must be treated in an order based on their determined medical needs, not their ability to pay. But ambulances are frequently diverted from overcrowded emergency departments to other hospitals that may be farther away. In 2003, ambulances were diverted over a half a million times.  

Arbitrary Pricing

Price discrimination usually causes businesses to charge poorer people less because they are more likely to walk away if the price is high, but in health, the insurance companies pay less because they have more bargaining clout (and information) and it is hard or impossible to just walk away when you are sick.  Washington Post:

In a report this past spring, the state found that some Massachusetts doctors charge six or seven times as much as their colleagues for the exact same procedures. Across the board, a three-fold variation in prices was pretty standard.
There’s a pretty simple explanation for all the price variation: hospitals negotiate specific rates for specific insurance companies. They gauge the size of the insurance company and how many patients it would be expected to bring in, and then set a price. Insurers and hospitals alike closely guard those pricing agreements as proprietary information, with neither party wanting to see their pricing agreement undercut by a competitor.
Massachusetts wants to do away with all of that. In a proposal released Wednesday, the Massachusetts Special Commission on Provider Price Reform recommends allowing a panel of state regulators to reject rates charged by hospitals and providers if they’re too high. The report, which you can read here, also proposes the creation of a claims database, which would allow the public to see how much their health care actually costs.
That would be a really big shift from where we are now, where price negotiations are usually a private matter between insurers and providers, and it’s nearly impossible to figure out how much a given procedure costs. A recent Government Accountability Organization report really hit home on this. The agency called up 17 hospitals at random to ask how much a knee replacement would cost. Not a single one of them could name a price for one of the country’s most common surgeries.

Doctors Respond To Incentives

Austin Frakt is a physician who writes about health economics with some health economists and other researchers.  He has summarized several studies that show how doctors change their behavior when they are paid for services versus paid via capitation. 

Fee for service payment of physicians is often blamed as a contributor to high and rapidly growing health care costs. In an analysis of primary care physicians, Helmchen and Lo Sasso provide a sense of how physicians respond to different compensation schedules:

Using a four-year [2003-2006] sample of 59 physicians and 1.1 million encounters, we study how physicians at a network of primary care clinics responded when their salaried compensation plan was replaced with a lower salary plus substantial piece rates for encounters and select procedures. Although patient characteristics remained unchanged, physicians increased encounters by 11 to 61%, both by increasing encounters per day and days worked at the network, and increased procedures to the maximum reimbursable level.

The extra payment that so dramatically increased encounters was $5 for each reported performance of an eligible procedure. The number of procedures per encounter in each month that qualify for the $5 bonus is illustrated in the following figure by practice area:

The policy implication is obvious, right? Paying fee for service is asking for higher costs. So, we could cut costs by reducing or eliminating piece rate based (fee for service) payment. Case closed.
Not so fast! Let’s talk about what those $5 bonus payment eligible procedures were.

[T]he network began paying physicians $5 for each reported instance of most immunizations for children and adults as well as counseling and screening services aimed at detecting or preventing risk behaviors such as substance abuse, contraction of infectious disease, suicide, obesity, and the patient’s exposure to violence. Importantly, physicians were only remunerated for an average of one $5 procedure per encounter.

It is not at all obvious that the extra money spent encouraging these particular procedures was not worth the personal and population health value they conferred. Put it this way, would you argue that the individuals who received those services should not have, that those services were part of the problem of overuse of unnecessary care? That is a hard argument to make. Yet the data show that without the extra $5 the studied physicians provided fewer of those very services.
As the authors point out, to make that precise, one would need to quantify the health gains and adjust for whether the provision of extra services by these physicians didn’t just offset a reduction of services by others for the same patients (crowd out). By doing so, it is possible to make a good argument that more health spending is worth the cost (see my post on Cutler’s book that makes this very argument, but with numbers.) This is important to keep in mind. Fee for service isn’t all bad. It just needs to be applied in a more nuanced way. Not all physician compensation should be fee for service. But some should be.

 And another study found sick patients do poorly under a capitation scheme whereas healthy people do poorly under a fee-for-service payment scheme. 

In case there is any doubt, a new study using experimental methods shows that how physicians get paid and by how much does affect patient care, but it is not the only factor. The health of patients matter too.... The paper, by Heike Hennig-Schmidt, Reinhard Selten, and Daniel Wiesen, appeared in the Journal of Health Economics and is titled How payment systems affect physicians’ provision behaviour—An experimental investigation. As the title states, this was an experiment, not an observational study.... the findings:

1. Payment systems matter. More services are provided under FFS than CAP. On average, patients receive more services than are optimal under the former and fewer than optimal under the latter.
2. Patient health matters. That is, physicians do respond to how much treatment benefits patients. Still, under FFS, patients in good and intermediate health are overserved. Under CAP, patients in poor and intermediate health are underserved.
3. Payment systems affect health (or patient benefit). Patients in good and intermediate health suffer losses under FFS due to overprovision. Patients in intermediate and poor health suffer losses under CAP due to underprovision.

It should be perfectly clear from these results why patients in the real world might self-sort according to health, even aspects of health that are unobservable to the researcher. A patient in poor health attempting to optimize his benefit would do better under FFS. A patient in good health gets better results under CAP.
Even though I already stated the results, the following chart conveys them so beautifully you really must take a look.... 

 

A-E are the (abstract) illness types and 1-3 index how much medical care would be optimal. The solid, black dots show the optimal level of care. Patients of type 1 (1A, 1B, etc.) would do best with 5 units of care, etc. Notice that under both payment systems, actual quantity provided is correlated with what would be optimal, highest for type 3 patients, lowest for type 2. So, patient needs matter. Still, patients needs don’t tell the whole story. Provision of care under both payment types differs from optimality, most strongly for types 1 and 2 under FFS and type 3 under CAP. Finally, CAP levels of care are systematically lower than under FFS. Conclusion: money matters, though so do patients. Lesson: your doctors, or medical providers generally, are not just taking care of you. They’re taking care of business (themselves) too.

The Social Responsibility of Business is to Increase its Profits

Libertarians like Milton Friedman often believe that profit-maximizing markets are the morally best outcome.  Many libertarian organizations promote this idea and there even some heterodox journals, such as Markets and Morality, that are part of this effort.  Friedman also had opposite ideas that balanced out what he says here.  Some "hard core libertarians" accuse Friedman of being somewhat of a bleeding-heart liberal because Friedman also promoted things like government welfare for the poor in various forms like a negative income tax (which was implemented by Nixon in a weak form as the EITC, partly based on Friedman's ideas).  Milton Friedman wrote the following essay in 1970 and repeatedly promoted these ideas. For example, he reasserted them in 1995 in another libertarian publication.  

The Social Responsibility of Business is to Increase its Profits

...The businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are--or would be if they or anyone else took them seriously--preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.
...The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. There are not values, no "social" responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form. 
The political principle that underlies the political mechanism is conformity. The individual must serve a more general social interest--whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.  Unfortunately, unanimity is not always feasible. There are some respects in which conformity
appears unavoidable, so I do not see how one can avoid the use of the political mechanism
altogether. 
But the doctrine of "social responsibility" taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collective doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." 

No Increase in Doctors

Many factors should be increasing the number of doctors in the US.  Rising medical spending, an aging population, a rise in the number of applicants to medical schools, population growth, etc.  But it isn't happening.  

As you can see, the total number of M.D’s awarded by American medical schools has changed hardly at all since 1980 (which is pretty amazing given that the nation’s population grew by roughly 80 million people during that time). Back then, medical schools were graduating roughly 11,500 men and 3,500 women per year. Subsequently, society became more just and civilized and women were given great opportunity. Because both the number of medical schools and the number of annual M.D.’s are tightly limited via cost barriers to entry, regulation, and professional practice, this created approximately a one-for-one substitution effect so that by 2009 the numbers were almost equal: 8,000 men to 7,800 women.

I am glad that there is enough gender-equality that half of new doctors are now female, but female doctors put in less time on the job than male doctors (on average) because they are in a family-friendly occupation which allows them to take more time off for children and they take more time off than men do.  This trend further reduces the amount of doctoring that happens and increases the need for more doctors.  Doctors earn a lot of money and more people would love to go to medical school if the doctors who control medical education would let more people get educated.  In contrast, law schools have increased the number of slots to accommodate more women and they can still fit in men like Saul Goodman (as the link shows, the guy is almost too ridiculous to be true).   

...It’s easier and cheaper to open a new law school than a new medical school, pass the bar, etc.  So what we see here is the number of men getting law degrees per year holding constant (albeit declining in per-capita terms) at around 23,000, give or take, while the number of women nearly doubled, from 11,000 to 20,000.

Overtreated Poll

Reuters:

In a new poll of primary care physicians, nearly half of them said their patients received too much medical care and more than a quarter said they were practicing more aggressively than they'd like to.
That could mean ordering more tests, prescribing more drugs or diagnosing people with diseases, although they would never have experienced any symptoms.
On the other hand, just six percent of doctors believed their patients were getting too little care.
"Physicians at the frontline of medical care are telling us that their patients are getting too much care," said Dr. Brenda Sirovich.

...Excessive tests may also lead to diagnosing conditions that would never have caused any problem in the first place, such as a slowly developing prostate cancer or a slightly elevated blood pressure.Yet after such a diagnosis, it's difficult for doctors not to proceed to treatment, which may cause side effects.
"When you do anything to somebody, whether it is an intervention or a test, you are putting them in to the healthcare system in a way that exposes them to risk," said Sirovich. "Unnecessary care is potentially harmful."
REIMBURSEMENT MODEL TO BLAME?
So why would doctors order tests that they themselves believe are excessive?
Three reasons stood out in the survey, which is based on a random sample of U.S. doctors: fear of malpractice lawsuits, performance measures and too little time to just listen to patients.
Four in 10 also believed that other primary care physicians would order fewer tests if those tests didn't provide extra income. (Of course, just three percent thought that financial considerations influenced their own practice style.)
"I'm not saying that physicians do tests in order to make money -- there is a potential to be a real cynic here -- but I think that the reimbursement model for most healthcare encourages utilization in a variety of ways," Sirovich said.

The 100-Year Anniversary of Medical Education Reform

What kind of schools do you think of as being "private ventures, money making in spirit and object. Income was simply divided among the lecturers. No applicant for instruction who could pay his fees or sign his note was turned down." This sounds like some sort of shady for-profit educational scam like Trump University, but that was how a lot of medical education was characterized in the United States in 1910 when the Carnegie Foundation published the Flexner report. This report helped spur medical education reform and licensing.
Continued on medianism.org

Adverse Selection Example

Byran Caplan: 

If an economist wants to ward off the spirit of laissez-faire insurance policy, all he has to do is repeatedly chant "moral hazard and adverse selection."  The funny thing about this two-part mantra, though, is that the "moral hazard" part doesn't do any of the work.  Almost no one even pretends that governments do anything to mitigate it.

When we get to the "adverse selection" part, the plot thickens.  There is, in theory, a regulation capable of solving the problem: mandatory insurance.  To see how mandates can help, consider a simple example.  Suppose there are two equally common types of people who buy insurance:

High-Risk Consumers: They have a 20% chance of losing $2000.  Since they're risk-averse, they value full insurance at $1000 ($600 more than the actuarially fair premium of $400).

Low-Risk Consumers: They have a 1% chance of losing $2000.  Since they're risk-averse, they value full insurance at $50 ($30 more than the actuarially fair premium of $20).

If insurance companies can't distinguish High- from Low-Risk consumers, an actuarially fair premium for an average consumer would cost .5*$400+.5*$20=$210. 

If consumers purchase insurance voluntarily, though, the Low-Risk will drop out of the market - they won't pay $210 to get a policy worth $50 to them.  With only High-Risk consumers in the market, the competitive price of a policy is $400.  The market fails to realize $30 worth of consumer surplus per Low-Risk consumer.

In a mandatory insurance regime, however, the Low-Risk have to buy the policy.  The result: The regulation is efficiency-enhancing, because it takes $160 from every Low-Risk person in order to give $190 to every High-Risk person.

All insurance produces moral hazard and the more generous the insurance, the more moral hazard it produces.  There is nothing government nor private insurance can do about that except by reducing the generosity of insurance coverage.  I agree with Caplan that moral hazard isn't that much of a problem in health care.  The adverse selection problem comes down to ethics.  For example, insurers want to charge women more than men because women are prone to expensive pregnancies.  Most people think that that is unfair and so governments regulate insurance to subsidize pregnancies by making men pay more than the free market would require.  Adverse selection also causes a race to the bottom on quality of care because insurers want to get rid of sick people and that is another equity problem.  If insurers could only insure healthy people, they would be more profitable, but the whole point of insurance is to help sick people and adverse selection means that healthy people try to get out of helping the sick.  Most people do not object if bad drivers must pay high insurance fees for their recklessness (although we do want them to get insurance because of the externalities), but most people do object when sick people die because insurance companies do not want to cover them. 

Insurance Companies Routinely Reject Claims

 LA Times:

California health insurers reject [over] 1 in 5 medical claims. Six of the state's largest insurers rejected 45.7 million claims for medical care, or 22% of all claims, from 2002 to June 30, 2009, according to the California Nurses Assn.'s analysis of data submitted to regulators by the companies. ...said Nicole Kasabian Evans, spokeswoman for the California Assn. of Health Plans. "It appears that a good deal of the so-called denials are merely paperwork issues," she said. Brown's office said that his deputies would soon review records and complaints. "These high denial rates suggest a system that is dysfunctional, and the public is entitled to know whether wrongful business practices are involved," Brown said. Doctors complain that too often insurers delay, shortchange or deny legitimate claims. "Getting health insurers to pay their fair share of medical claims can be as much of a headache for physicians as it is for patients," said Rebecca Patchin, an anesthesiologist at Loma Linda University and board chairwoman of the American Medical Assn. She said each insurer has a different set of "obscure, bureaucratic rules for processing and paying medical claims" that result in as much as $210 billion of "unnecessary cost" annually, studies have shown.

Higher US Health Prices Explain High Spending

NYT Uwe Reinhardt:

...the health care sector of any country always has the dual goals of enhancing the quality of life of patients as well as enhancing the quality of life of the providers of health care, and, charity care aside, patients are at once objects of compassion and biological structures yielding cash.

...The chart below illustrates the fraction of G.D.P. ceded to the providers of health care in a number of different countries over the last three decades.

¶Although not all countries can be featured in such a chart, the fact is that no other country cedes quite the slice of its G.D.P. to the providers of health care as does the United States. Current projections are that health care will claim every fifth dollar (19.8 percent to be precise) of G.D.P. in the United States by 2020.

 ... a study by Miriam Laugesen and Sherry Glied, published last week in the health-policy journal Health Affairs warrants careful review. The authors assert:.

¶Higher health care prices in the United States are a crucial reason that the nation’s health spending is so much higher than that of other countries. Our study compared physicians’ fees paid by public and private payers for primary care office visits and hip replacements in Australia, Canada, France, Germany, the United Kingdom and the United States. We also compared physicians’ incomes net of practice expenses, differences in financing the cost of medical education and the relative contribution of payments per physician and of physician supply in the countries’ national spending on physician services.

¶Public and private payers paid somewhat higher fees to United States primary care physicians for office visits (27 percent more for public, 70 percent more for private) and much higher fees to orthopedic physicians for hip replacements (70 percent more for public, 120 percent more for private) than public and private payers paid these physicians’ counterparts in other countries. U.S. primary care and orthopedic physicians also earned higher incomes ($186,582 and $442,450, respectively) than their foreign counterparts. We conclude that the higher fees, rather than factors such as higher practice costs, volume of services or tuition expenses, were the main drivers of higher U.S. spending, particularly in orthopedics.

¶Other studies point in the same direction. An early one, “U.S. Health Care Costs: The Untold Story,” by the health economist Mark Pauly, was also published in Health Affairs. Professor Pauly showed that a good many nations in Europe actually transferred more real human health-care resources to patients than did Americans – suggesting that the real-resource cost of European health care is higher than it is in the United States (or was, at the time of the study). But these other nations paid physicians and other health personnel less than do Americans.

¶Higher physician income, of course, cannot explain all or most of the total higher health spending in the United States, as payments for “physician- and clinical services” constitute only about 20 percent to total current health spending ($538 billion out of a total of $2.7 trillion in 2011) and close to half of those payments tend to go for practice expenses, including support staff, malpractice insurance and claims processing.

¶But prices of other, non-physician health-care services and products in the United States also seem to be higher than elsewhere, as is suggested by the annual surveys of health care prices conducted by the International Federation of Health Plans in their comparative price reports.

Deaths Due to Medical Errors

The Institute of Medicine's Quality Chasm series examines the mortality from avoidable medical errors and came up with between 40,000 and 98,000 annually in the US. HealthGrades estimates that it is double: 195,000 deaths. Forbes:

In any given year, between 40,000 and 98,000 people die from preventable medical errors [and a newer study estimates up to 200,000 Americans]. These mistakes account for as much as $38 billion in direct health care costs due to repeat tests, disability and death. And that's not even considering further costs arising from lawsuits and malpractice insurance. Incorrectly administered medicine is one of the most common errors. According to a recent study by researchers at Auburn University in Alabama, patients in the hospital may get the wrong drug 20% of the time.

Due to confusing names, similar packaging and complicated procedures, a handful of drugs are responsible for a surprisingly large share of the errors.... According to [MedMarx], five drugs were responsible for a quarter of all harmful [drug] errors...

Generic Name Possible Complications Indication Percent Of Reported Errors Insulin Coma, death Diabetes 9.2% Morphine Unconsciousness, death Pain 6 Heparin Bleeding, rashes, death Blood thinner 5.5 Warfarin (Coumadin) Bleeding, stroke, death Blood thinner 3.8 Potassium Chloride Stopped heart, death Heart disease 2.2

Sources: U.S. Pharmacopeia MedMarx, Forbes

The solution? Moving medicine into the digital age might be the best hope for reducing drug errors.  

This article was from 2003, but surprisingly little has changed and we still have worse electronic medical records than most developed countries. 
Interns are routinely kept awake for 24hr shifts which also leads to deaths. There is no medical or educational rationale for making the least experienced doctors work while fatigued and sleep deprived.  Doctors rarely even wash their hands in between touching different infectious patients and avoidable infections kill another 100,000 Americans.  You would think that malpractice cases would be enough to get doctors to make common-sense changes, but it is not. 

Inflated Hospital Costs

The average profit margin at the nation's hospitals is low.  They were 4.4% in 2003 according to the hospital association.  Professor Melnick is probably not including fixed costs and administrative costs in saying that hospital charges are more than double the actual costs and a large component of hospital fixed costs is paying for uncompensated care for under-insured patients.  That is one reason the hospitals charge a fictional list price that very few patients actually pay. It is a kind of price discrimination to try to recoup those fixed costs.  Uwe Reinhardt says that in 2004, "U.S. hospitals were actually paid only about 38 percent of their "charges" by patients or their insurers."  That means that the hospitals billed charges that are over two-and-a-half times greater than what they actually got paid.  More at Medianism.org

The Dartmouth Atlas of Health Care

The Dartmouth Atlas of Health Care: "variations in spending across regions and hospitals provide evidence of important opportunities to reduce the costs of U.S. health care. ...Patients in high-cost regions have access to the same technology as those in low-cost regions, and those in low-cost regions are not deprived of needed care. On the contrary, the researchers note that care is often better in low-cost areas. The authors argue that the differences in growth are largely due to discretionary decisions by physicians that are influenced by the local availability of hospital beds, imaging centers and other resources-and a payment system that rewards growth and higher utilization. "

Libertarian Alternative to Obamacare

Marginal Revolution: What should we do instead of the Obama health reform bill?: "1. Construct a path for federalizing Medicaid and put it on a sounder financial footing; call that the 'second stimulus' while you're at it. It's better and more incentive-compatible than bailing out state governments directly and the program never should have been done at the state level in the first place.

2. Take some of the money spent on subsidizing the mandate and put it in Medicaid, to produce a greater net increase in Medicaid than the current bill will do, while still saving money on net. Do you people like the idea of a public plan? We already have one!

2b. Make any 'Medicare to Medicaid' $$ trade-offs you can, while recognizing this may end up being zero for political reasons.

3. Boost subsidies to medical R&D by more than the Obama plan will do. Establish lucrative prizes for major breakthroughs and if need be consider patent auctions to liberate beneficial ideas from P > MC.

4. Make an all-out attempt to limit deaths by hospital infection and the simple failure of doctors to wash their hands and perform other medically obvious procedures.

5. Make an all-out attempt, working with state and local governments (recall, since the Feds are picking up the Medicaid tab they have temporary leverage here), to ease the spread of low-cost, walk-in health care clinics, run on a WalMart sort of basis. Stepping into the realm of the less feasible, weaken medical licensing and greatly expand the roles of nurses, paramedics, and pharmacists.

6. Make an all-out attempt, comparable to the moon landing effort if need be, to introduce price transparency for medical services. This can be done.

7. Preserve current HSAs. The Obama plan will tank them, yet HSAs, while sometimes overrated, do boost spending discipline. They also keep open some path of getting to the Singapore system in the future.

8. Invest more in pandemic preparation. By now it should be obvious how critical this is. It's fine to say 'Obama is already working on this issue' but the fiscal constraint apparently binds and at the margin this should get more attention than jerry rigging all the subsidies and mandates and the like.

9. Establish the principle that future extensions of coverage, as done through government, will be for catastrophic care only.

10. Enforce current laws against fraudulent rescission. If these cases are so clear cut and so obviously in the wrong, let's act on it. We can strengthen the legal penalties if need be.

11. Realize that you cannot tack 'universal coverage' (which by the way it isn't) onto the current sprawling mess of a system, so look for all other means of saving lives in other, more cost-effective ways. If you wish, as a kind of default position, opt for universal coverage if the elderly agree to give up Medicare, moving us to a version of the Swiss system and a truly unified method of coverage. But don't bet on that ever happening.

Separate issues:

12. If you can tax health insurance benefits and cut a Pareto-improving deal overall, fine, but I am considering this to be too politically utopian and it's not clear what the rest of that deal looks like. The original tax break makes no economic sense but you don't want to end up with a big tax increase and a lot more people on the public books with little in return.

13. If the current bill were voted down, you can imagine some version of the above happening, although not necessarily all at once in one big bill.

14. Commission a study of how much the Obama plan is spending per QALY saved. I agree that more health insurance saves lives, but a) the study should adjust appropriately for the superior demographics of those who hold or buy insurance, and b) the study should adjust for the income that would be lost through mandates and the safety that income would purchase. I worry greatly that we have never, ever seen this number presented and that if we did it would not be pretty. In any case, do the study, scream the number from the rooftops, and reread points 1-11. Enact.

That's my recipe. It's better than what we are doing now. You don't have to adhere to any extreme form of economistic or free market ideology to buy it. It might even be politically easier than the current path, as it 'sounds less socialistic.'"

Raising Medicare Age Will Raise Total Health Expenditures

The government could save money by raising the Medicare age, but it would cost the country even more money than the government would save and increase total national health spending.  That increase in spending is why the health lobby has been supporting the change behind the scenes.  Washington Post:

The Health Leadership Council, a consortium of 47 health industry leaders including Aetna, Pfizer and the Cleveland Clinic, endorsed today to raise Medicare’s eligibility age from 65 to 67, phasing in the change by two months annually. Raising Medicare's eligibility age is one proposal in a four-part package of Medicare reforms up for vote, including creating a new exchange-like marketplace and increasing the cost-sharing for seniors who earn more than $150,000. You can read the full proposal here....
There’s a pretty simple explanation for why hospitals and some insurers would favor raising the eligibility age: Hospitals receive higher payments from private insurance than they do from Medicare. The payments that hospitals receive from private insurers are 28 percent above the break-even point for providing treatment, according to a recent report from the Blue Cross Blue Shield Association. Medicare pays only 91 percent of what it costs a hospital to provide care.
...Heath insurers, too, could stand to benefit if 5 million seniors in that age bracket move into the private market. A number of health reform provisions -- in particular the mandated purchase of insurance ...would presumably push those seniors to buy health insurance rather than go uninsured.

....the American Hospital Association is lobbying the supercommittee to raise the Medicare eligibility age from 65 to 67. As Politico reported last week, “The association is urging its nearly 5,000 members to lobby Congress to raise the Medicare eligibility age from 65 to 67.”

...“This policy does nothing to control costs,” Sen. Bernie Sanders, an independent from Vermont, wrote in a memo obtained by the New York Times. “It simply shifts substantial costs from Medicare to other parts of government and to private and public employers.”
The Budget and Policy center estimates that if the Medicare eligibility age were raised, seniors under age 67 would have to spend $3.7 billion more in out-of-pocket cost. For many in the political system, that’s enough to reject the idea out of hand. But for some in the health-care system, that’s a profit waiting to be made.

The only age demographic where a majority opposed Obamacare was people older than 65 because they feared that it would take away from their universal socialized health insurance.  I didn't think that would happen, but it turns out they may have been right.  Now that Obamacare provides a viable alternative mechanism for insuring seniors (mandate, regulate, and subsidize private insurance), politicians are already talking about rolling back Medicare.  

Moral Hazard & Adverse Selection

Adverse selection and moral hazard are both caused by asymmetrical information and are sometimes difficult to distinguish from one another.

• Adverse selection is the selection bias that happens before a contract happens and moral hazard is the change in behavior that happens after a contract is in place.  
• Adverse selection is the difference in behavior between low-risk and high-cost individuals which causes high-cost people to self-select a way to offload their expenses on someone else like insurance.  Moral hazard is when someone does too much of something because they know they can offload their expenses on someone else. 

For more, see medianism.org

Best Hospitals: For-Profit or Non-Profit?

US News and World Report (or, for detractors, 'Useless News and World Distort') ranks the nations hospitals and all of the best hospitals are either nonprofit or government-run.  Healthgrades also ranks hospitals and finds that nonprofits do a bit better than for-profits at making it onto their top 50 list, but Healthgrades is a for-profit company with nontransparent incentives and methodology and they do not even publish their rankings, so their report is not very useful for judging the relative merits of different kinds of organizational structures.  Others have done more in-depth analysis comparing the quality of for-profit and non-profit care. For example, Woolhandler and Himmelstein say, "For decades, studies have shown that for-profit hospitals are 3 to 11 percent more expensive than not-for-profit hospitals; no peer-reviewed study has found that for-profit hospitals are less expensive." (Here is the Ebsco link available through the Bluffton library access).
For-profit institutions do better when they specialize in well-defined treatments that are more easily standardized and measured which helps them use incentive pay and helps the market discipline the institution.  For example, Lasik eye surgery is easy to define, advertise, and most importantly, its quality is more clearly visible to patients than the quality of heart bypass operations. For-profit institutions are a rapidly growing and profitable sector of the health industry and the business press is quite enthusiastic about this trend.  Here is a good example of a for-profit specialty hospital in India that has achieved impressive results:

Dr. Shetty, ...entered the limelight in the early 1990s as Mother Teresa's cardiac surgeon, offers cutting-edge medical care in India at a fraction of what it costs elsewhere in the world. His flagship heart hospital charges $2,000, on average, for open-heart surgery, compared with hospitals in the U.S. that are paid between $20,000 and $100,000, depending on the complexity of the surgery.

The approach has transformed health care in India through a simple premise that works in other industries: economies of scale. By driving huge volumes, even of procedures as sophisticated, delicate and dangerous as heart surgery, Dr. Shetty has managed to drive down the cost.  ...'Japanese companies reinvented the process of making cars. That's what we're doing in health care,' Dr. Shetty says. 'What health care needs is process innovation, not product innovation.'

NursingSchools.net summarized a bunch of research on the pros and cons of for-profit hosptials:

1. Over 17 percent of hospitals are for-profit. In 2002, that number was only around 10%, demonstrating a marked growth in the for-profit health care industry over the past decade, growth that's expected to continue over the next five years. [also see this]
2. For-profit hospitals often focus on high-end, high-revenue treatments. Visit a for-profit hospital and you're likely to see a gleaming cardiac wing, top-notch brain surgeons and fancy CT scanners. What you are less likely to see are family planning services, emergency rooms and psychiatric care. These services have a low rate of return on investment and may actually cost rather than bring in money, so many private institutions opt out of providing them. Of course, there are some for-profit hospitals that provide the bulk of these services (and others) to their local communities.
3. More for-profit hospitals engage in morally questionable practices like patient dumping. A study found that for-profits were twice as likely to dump emergency room patients onto other facilities as not-for-profits. Patients who do not have insurance or whose plans will not cover emergency care were more likely to be transferred, often in a manner that violates the Emergency Medical Treatment and Labor Act. Not-for-profits certainly aren't in the clear here, but the difference between the two is striking...
4. It'll cost you more to go to a for-profit hospital. Not necessarily because they just want to charge you more, though profit margins certainly are an issue. For-profit hospitals don't get the tax breaks that not-for-profits do, meaning they have to charge more to make up for it. How much? Expect to pay around 19% more for a visit to a for-profit than a not-for-profit.
5. For-profit hospitals have a higher death rate, on average. While the results of the study have been hotly contested, a group of Canadian researchers found that for-profit hospitals have a slightly higher death rate — around 2% higher. While the study found a difference, researchers were unable to pinpoint just what was causing the disparity, but some think it might have to do with for-profits cutting corners in order to generate more revenue. Of course, that number doesn't mean every for-profit has a higher death rate — it is an average– some may have a much lower chance, while others are much higher....
6. Dementia patients are more likely to be over treated at a for-profit. The practice of tube-feeding patients with advanced dementia has been widely criticized by the top medical journals and isn't medically necessary in most cases, yet doctors are still using it as a treatment for dementia patients. While it occurs in for-profits and not-for-profits alike, patients at the former are 33% more likely to be given a feeding tube. It is even more common at large hospitals in either category, with a whopping 50% greater chance of feeding tube insertion in hospitals with over 300 beds.
7. Patients rate higher loyalty and satisfaction in for-profit ERs. While some for-profits might shy away from these low-return facilities, those who do have them tend to have higher rates of patient satisfaction than their not-for-profit counterparts. Some suggest that the reason for this may be due to for-profits having access to greater capital, meaning they can more easily invest in updated equipment and services. Additionally, not-for-profits are often chronically overburdened with patient volume and suffer from short staffing, factors that could reduce overall satisfaction
8. For-profit hospitals rate consistently lower when delivering care for these common conditions: congestive heart failure, heart attack and pneumonia. If you've got any of these conditions, or suspect you might, you may be better off heading to a not-for-profit if you have a choice. A 2006 study by the Harvard Medical School determined that patients with these conditions were more likely to get high-quality care diagnosis and treatment for these conditions as not-for-profits– a fact they suggest is due to increased staffing and more technology...
9. The impact of for-profit hospital conversion on the community is varied. Some may see for-profit hospitals taking over not-for-profits as a blessing, others as a curse, but the facts don't have much to lend either side. Studies conducted by the Boston University School of Public Health found that some for-profits dramatically increased care to the poor while others decreased it, sometimes as much as 40%. The study found that, on average, there were no long-lasting changes in care between the two types of hospitals, meaning a lot of worries communities have about for-profit health care could be unfounded.

Healthcare In Japan

The Economist magazine says that the Japanese health system is in crisis.  Japan has a Bismarck system with non-profit insurance companies, but mainly for-profit clinics that advertise aggressively.  Japanese prices are aggressively controlled by the government which makes Japanese drugs, surgeries, and MRIs very cheap.  The prices of surgeries are so cheap that doctors discourage them, but other kinds of medical care are consumed more intensively in Japan than anywhere on earth.  To make a profit, the Japanese system encourages extremely high consumption of several kinds of health care compared with the US:

•  14.5 annual doctor office visits per person on average (3X more than in the US) and they routinely do home visits.  Doctor visits are extremely short. 
• 2X more prescription drugs (doctors get a profit by prescribing them because they also sell them directly).
• 3X more MRI scans.
• Many more days in hospital care (5X??).

The government publishes their price controls in a book the size of the Tokyo phone directory.  Remarkably, despite extremely strict government price controls, few doctors, and high volumes of consumption, waiting times are very short. 

Discussion Questions:

1.     What is the crisis that the title in the article refers to, and how does their crisis compare to the US health system?

2.     How do the strengths and weaknesses of the Japanese system compare with the US system?

Life Expectancy, Income, and Senior Citizen Benefits

The Incidental Economist made this graph:

Most people in the top half of the income distribution (politicians, pundits, and media) want to reduce Medicare and Social Security expenditures by raising the eligibility age due to the rational that everyone's life expectancy is rising.  But this is a way of cutting expenditures that hurts the poorer half of Americans much more than the rich because it is the increasing longevity of the wealthier half that is increasing expenditures.  And the poor are more likely to work in physically demanding jobs that cannot be continued at age 65 whereas the more wealthy are more likely to work in cushier jobs that require more education and are easier to continue despite reduced physical strength in old age.  Most people think of Medicare as being a progressive program, but it is not.  It redistributes from the poor to the rich for two reasons.  First, the rich live longer and "by cheating death, the rich collect benefits longer. Secondly, the wealthy demand more intensive use of more expensive medical care. Among individuals over 85, the wealthiest 10% of the population claim nearly 40% more in Medicare expenditures than the poorest 10%."
Former Democratic Senator Joe Lieberman and Republican Senator Rand Paul have proposed raising the Medicare age which would make Medicare even more regressive.  It would save the government money, but it would raise overall healthcare expenditures because Medicare is more efficient than the private insurance system and despite increased total expenditures, it would increase the number of uninsured Americans.  In other words, it would keep taxes low, but it would reduce disposable income more than just keeping Medicare as it is raising taxes to pay for it. Liberal economists like Paul Krugman typically propose the opposite: to increase universal health coverage by expanding Medicare rather than shrinking it.  There are many other possibilities too. We could pay for increasing longevity by making medicare less generous for everyone. For example, we could cut the drug benefit that President Bush added or reduce payouts to providers down to the levels that Medicaid pays. None of these ideas are particularly popular.