Slowing health cost growth requires information AND incentives

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.

By | 2017-11-04T17:40:21+00:00 Tuesday, 21 April 2009|