Slowing health cost growth requires information AND incentives
21 April
When I was growing up, I was taught that you change the oil in your car every 3,000 miles.
Suppose I take my three-year old car to Jiffy Lube for an oil change.
Jiffy Lube has all the latest information technology, as well as good data on both manufacturers’ recommendations and best practices.
After entering my license plate into their database and checking my odometer, the technician says, “Mr. Hennessey, it’s been only 3,000 miles since your last oil change. Your manufacturer recommends an oil change once every 12,000 miles. We have even better data based on comparing wear and tear on vehicles from all over the country, and we recommend once every 10,000 miles. Still, you have at least 7,000 miles to go before you need to change your oil.”
I argue, “But I thought you were supposed to change your oil every 3,000 miles?”
He replies, “Those were the old practices. We have better diagnostic technologies, better engines, and better oil. It’s now every 10,000 – 12,000 miles.”
I respond, “Thanks. How much does an oil change cost?”
Imagine if the technician were to say, “$50, but your insurance covers it. You only have to pay a $5 deductible.”
What would you do?
The President is absolutely right when he says, “We can’t allow the costs of health care to continue strangling our economy.”
The President’s budget director, Peter Orszag, is the lead Administration advocate for this policy. Director Orszag is right when he writes on his blog,
Now, many of you have heard me go on about how important it is to reform health care in order to bend the curve on long-term costs and get our nation on firmer fiscal footing – and this data shows how critical that effort is. When we say that health care is consuming too much of our GDP, we are not just citing an abstract statistic. These costs have real implications in sectors across our economy, limit our economic growth, reduce opportunities, and harden inequalities.
He then, however, argues,
This is why the Administration is making historic investments through the Recovery Act in efforts that will be crucial in bending the curve on the growth of health care costs while improving the health outcomes we can expect from our medical system. We are investing over $19 billion in health information technology to help computerize Americans’ health records, which will reduce medical errors and enhance the array of data that physicians and researchers have at their disposal. We are investing $1.1 billion in comparative effectiveness research, which will yield better understandings of which medical treatments work and which do not.
Additional information is good, but the example above shows why information by itself will not significantly slow the growth of medical care spending. Information must be combined with the incentive to purchase high-value medical care – a decision that involves both the medical benefit of the treatment and the financial cost. The government could use this information to reduce costs in health programs that it runs, like Medicare and Medicaid (I am certainly not endorsing that). But those of us with private health insurance are largely protected from the costs of the medical care we use because of the general prevalence of low deductibles and copayments. Even if we have better information, we may not care if the benefit of a particular medical treatment is small, as long as it seems really inexpensive. The Administration’s proposals on health information technology, electronic medical records, and medical outcomes research may improve health, but they will have little effect on slowing the growth of health care spending for those with low-deductible, low-copayment private health insurance.
I favor helping individuals get information so they can decide what is high-value for them. I imagine that those who favor a single-payor system would say those tradeoffs should be made for everyone by the government.
The Administration is giving an incomplete answer. They need to explain not just how much they will spend on health information technology, electronic medical records, and medical outcomes research, but how that information will be used to reduce cost growth, and by whom.
To be able to credibly claim that they will slow the growth of health spending, the Administration needs to answer the following questions:
- Who will be empowered to make decisions based on this improved information?
- Upon what basis will that decision-maker compare the costs and benefits of a particular medical treatment, good, or service?
- How will you change policy to create incentives for that decision-maker to choose high value medical care?
Until they provide answers, they cannot legitimately claim to be slowing the growth of health spending in the private sector. They are just increasing government spending on technology.
Jim Capretta has discussed this in greater detail on his excellent blog, Diagnosis.
Related Posts
(best matches are listed first)- CBO: Health IT and preventive care won’t save a lot of money
- Third party payment in health care (part 3): Technology drives cost growth
- How to measure health care cost control
- Parsing the President’s health care reform letter
- Economic highlights of the State of the Union address
- America’s long run fiscal problem is spending growth, not taxes
- USA Today op-ed: Keep taxes low
- Health spending fallacy
Orszag claims that “the Administration is making historic investments through the Recovery Act in efforts that will be crucial in bending the curve on the growth of health care costs while improving the health outcomes”.
Translation: Win-win. No sacrifice. All gain, no pain.
Yes, we should invest where appropriate in better use of information (for both outcomes and cost containment), and yes, as Keith points out, incentives are an important element, too, but what is missing in the hyperpartisan talking points of those who imply that we just need win-win healthcare “reform” and the huge problem of the long-term fiscal impact of projected Medicare and Medicaid will mostly go away is that even with whatever net savings are produced via better use of information, more preventive care, universal coverage (perhaps single payer), etc., we will still (I strongly suspect) need to reduce entitlement eligibility and/or benefits to get our fiscal house in order. That means options like fairly broad means testing for Medicare and Social Security, higher retirement age, and reduced benefit levels vs. current law.
We need to reduce the influence of hyperpartisans who mislead the public or…
Get the hyperpartisans on the left to admit the necessity of actual sacrifice on entitlements or (if they can) produce credible analyses showing how we can adequately reduce our long-term fiscal imbalance without such measures.
Get the hyperpartisans on the right to either admit that we will need to raise tax revenues in terms of rates (and/or new categories of taxation) and as a percent of GDP or at least lay out with appropriate specificity how much less they would spend to adequately reduce our fiscal imbalance without any increase in taxation.
Seems to me that the most effective tool is to insist that all members of congress and government must participate in exactly the same system that they apply to the American people. After all, if congress is going to make the rules and legislate about what can and cannot be done, then they should understand the system from within in order to make effective rules. Otherwise they would just be bureaucrats legislating on things of which they have no personal knowledge — a major reason for the colossal failure of so many government programs.
If you read current CBO director Doug Elmendorf’s early March testimony on reducing health care costs, the word ‘incentives’ appears around 35 times. While the focus of the testimony is on proposed reforms to reduce health care costs — health IT, disease management, and comparative effectiveness research — in all cases he stresses that their success depends on correctly aligning incentives. Ironically, if we instituted reforms that did correctly align incentives — e.g., reducing/eliminating the tax preference for employer-provided health care; shifting toward a low premium/high deductible model of insurance versus the high premium/low deductible model we currently have — then these reforms would likely come about organically through the market rather than having to be imposed by Congress. Unfortunately, as Keith notes in his post, the administration so far has focused on these relatively small-potatoes reforms and not enough on getting incentives right.
How about getting hospitals to price according to costs. They don’t currently do this, prices are arbitrary or the provision of self-administered drugs during an inpatient stay wouldn’t cost as much as the simulated hourly compensation of a neurosurgeon or the cost of a chest x-ray wouldn’t vary by as much as 250% across the US. This is the result of ad-hoc adjustments to the chargemaster line items to cover total costs. Efficiencies, if there are any, are not captured and the hospital can pocket gains from innovations they might adopt leaving payers ignorant of the innovations. Undertake a nationwide audit of all hospitals and force a standardized coding system for all chargemasters. Force insurers to use this same system and force Medicare and Medicaid to do the same. It would end the coding nightmare that currently exists and would keep hospitals from gaming the coding system. Hospitals throw people at problems not technology. They are the most inefficient institutions that now exist other than schools and universities. This problem is worldwide in developed countries.
Regarding health insurance, health insurance is really not insurance it seems to be simply a payment system. It does not fully insure for catastrophic risk as there are caps of typically $2 million lifetime. Many middle class families breach this cap every year for a variety of reasons and file for bankruptcy. I would rather insure for true catastrophe say any health emergency that exceeded $10,000 per year. Such a deductible would likely lower my monthly premium to about $300. Less than half what my employer provided plan now costs. My costs have more than doubled in 4 short years. I think it is possible to structure a catastrophic excess policy whose premiums are very low.
If I had confidence that the charges on my hospital bill were market prices then I would gladly adopt such insurance. But until there are comprehensive reforms of how hospitals do business I wouldn’t accept such high deductible policies as I would be at the mercy of a bloated institution without incentives to innovate. Simply raising copays through high deductibles does not give a hospital incentive to innovate.