Who should decide whether additional medical care is worth the cost?

Who should decide whether additional medical care is worth the cost?

Let’s take a step back from the day-to-day battle on health care reform battle to focus on a core question. As I wrote earlier, I believe most of the health care debate boils down to the following:

Resources are constrained, and so someone has to make the cost-benefit decision, either by creating a rule or making decisions on a case-by-case basis. Many of those decisions are now made by insurers and employers. The House and Senate bills would move some of those decisions into the government. Changing the locus of the decision does not relax the resource constraint. It just changes who has power and control.

The value decision that underlies most of this debate flows from the question: Who should decide whether additional medical care is worth the cost?

Unfortunately, some high-level rhetoric has obscured this question.

Former Governor Sarah Palin highlighted one extreme. She created an image of government bureaucrats on “death panels”denying sick seniors life-saving and affordable treatment. By focusing on the possible denial of low-cost high-value care, it’s easy to inflame passions.

The President spent much of August rebutting this straw man. While doing so he highlighted the other extreme: when a chemically identical generic drug can be substituted for a more expensive brand name drug, one can save money without any medical downside. His “red pill – blue pill” example is less provocative but equally unconstructive. If there are cost savings with no medical difference, then it doesn’t matter who makes the decision, because the decision is a no-brainer. His reassurance is a false one.

Both leaders ducked the harder questions. Today I will illustrate the hard choices with two examples. In a follow-up post I will discuss your policy options for who should make these hard choices.


Example 1: You break your wrist (the one you write and type with). You have a doctor visit and an x-ray, which combined cost $300. There are two treatments available:

  • The first is a traditional cast. Healing time = 6 weeks. Additional cost = $100.
  • The second is a[n imaginary] new pain-free version of a high-tech treatment called Skele-Gro, which causes bones to heal rapidly. Healing time = 1 day, and the healed bone will be 10% stronger than one healed with a traditional cast. Additional cost = $5,000.

Is the second treatment worth the additional cost? Who should make this decision?

Who gets to decide whether 6 weeks of healed wrist and a 10% stronger result for you are worth an additional $4,900?


Example 2: A[n imaginary] new treatment for heart attacks increases the probability of survival by 1%, at an additional cost of $5 million per use.

There are a lot of heart attacks each year. Assume that if insurance covers this, your premiums will increase by $400 per year.

Who should decide whether you buy the $400 more expensive insurance that includes this treatment, or the $400 less expensive insurance that does not? Who gets to make the call about whether it’s worth a certain additional premium cost of $400 per year to increase your probability of survival, if you get a heart attack, by 1%?


I constructed example one to be medically significant but far from life-threatening or even life-altering. It’s a moderate-consequence example, and it’s about the tradeoff when you’re getting the care.

I constructed example two to illustrate a tradeoff of a small but consequential medical benefit at a high financial cost. It’s only an additional 1%, but a 1% greater chance of not dying. Then again, you only get this 1% benefit if you have a heart attack, so it might never apply to you. And since this is a decision about buying insurance, you don’t have to pay the $5 m, but only the $400 incremental cost in your insurance premium, if you want this treatment to be covered. This example is about the tradeoff when you’re buying insurance.

In both examples, one treatment is medically superior and more expensive than the other. That’s what makes these hard decisions, and better demonstrations of the true tradeoffs, than either Governor Palin’s or President Obama’s examples.

Many chafe at being confronted with these kinds of choices. They argue that, if we confront these choices, then we need to devote more resources to health care.

The problem is that there is always a resource constraint. Maybe yours is 10% or 15% higher than mine, or maybe you would redistribute funds from other people to make someone’s pie bigger. But a bigger pie does not allow you to avoid these tradeoffs. It just means you confront them at a different cost level. The question of who gets to decide is unavoidable, no matter where you fall on the policy or political spectrum.

Elected officials are particularly vulnerable to this trap. The President has fallen into it, perhaps unwittingly. No elected official wants to explain to voters that ultimately someone will have to say no to medically beneficial treatments that are expensive, so they fall back to trivial cases like the President’s chemically identical generic drug example, which ducks the tradeoff.

In my next post I will take these two examples and relate them to the pending legislative debate by focusing on the who should decide question. For now I leave you with a simple thought experiment.

  1. In example 1, assume that your insurance covers the cast but not the Skele-Gro. Given your financial resources, would you spend an additional $4,900 out of your own pocket for the Skele-Gro treatment? If not, how much would you be willing to pay out-of-pocket for the additional medical benefit?
  2. If you could design your own insurance policy, would it include the new heart attack treatment? Assume you would pay the full $300 premium increase (each year) out of your after-tax wages. If not, how much more would you be willing to pay to have this new treatment covered?

To be continued…

(photo credit: Shelly T.)

23 responses

  1. You're correct but it's much worse than simply ignoring the unavoidable allocation and resource constraint issues. The Federal government's current allocation decisions all involve a present value resource transfer of trillions and trillions of dollars to current generations from future generations. This point, and relatively simple math behind it, has been made over and over again by economists of all political viewpoints (e.g., Kotlikoff, Smetters, Gokhale, Auerbach, Gale, etc.) as well as by the government groups that study the issue, especially CBO and the Social Security and Medicare Trustees. It's an issue where essentially all economists agree on one thing (insolvency within a generation or two) and all politicians agree on another thing (no voter support for doing anything about it). All of this raises a question that no politician wants to answer: if you were required to implement fiscal policies that had each cohort fully paying for its own government benefits on a present value basis (in other words, intergenerational equity), what would they be and why are they not being implemented? It's a question our kids need answered if we expect them to accept the debts and commitments we're dumping on them.

  2. Excellent post that cuts to the heart of debate of rationing.

    In example you ask would you spend an additional $4900 for a Skele-Grow treatment. Assuming you have a choice of private insurance companies, the choice will be made when you choose the particular policy. You might choose a policy that pays the entire cost of the procedure, in which case you would probably go with the more expensive policy. Or you might choose a policy with a high deductible where you not choose Skele-Grow.

    The problem, as some see it, is that the well off can afford the Skele-Grow treatment or the low deductible policy and get the better treatment, whereas the poor would have to go with the less effective treatment. What a single payer system does is to give everyone equal access to health care. However rationing is inevitable and the single payer, if it's government, is unacceptable to me.

    I do believe that society has an obligation to the poor and should provide a minimum level of health care to the needy. We have a Medicaid program which I support in principle but I understand it is not very efficient.

    klee12

  3. 1) No I would not pay for skele-gro, but I would if that amount of money was nothing to me. How much I would spend for it would depend on my money constraints and how much I wanted to avoid being in a cast.

    2) No I definitely would not pay extra for the heart treatment. My insurance plan would not have it. I would wait until there was a problem, listen to my doctor about what I should do, and make a decision. I don't know how much I would be willing to pay. Again, it would depend on after-tax income. If $300 wasn't a real bite out of my budget, I'd just go ahead and do it, probably.

  4. Love this post.
    Wish everyone would start thinking about the trade-offs – problem is, with our predominant 3rd party payment system, patients and doctors rarely think about them.
    Look forward to your next post.

  5. Looking forward to Part 2. For now, I'll just say that once again Keith is showing how exceptionally good he is at laying out a rational framework for thinking through questions at the heart of public policy debate.

  6. It's all about choice..Do we want to make our own medical decisions based on what we can afford or do we want some Gov't Joe Schmo telling us what is best for us. At least now we have the options of different insurance plans or Gov't health care for those that can't afford insurance. The problem with a single payer system is that it will not bring the poor up to a privately insured persons level. Instead it would lessen the quality of care a privately insured person will receive. All in the name of leveling the playing field. And we'll be taxed for all of it!!

    • I'm not sure I understand. Even in a single-provider system like UK (which is typically cited as the most extreme example of socialized medicine), it's possible to purchase private insurance. Same in France. In all these countries, as with everything else, the rich have more options than the poor. So why does this lessen the quality of care for a privately insured person?

  7. No question, I want to make the decision based on what would be best for ME. Case #1: presuming that I had the $5k in savings to even give me the option, my decision would rest on how much income I would forfeit if my injury prevented me from working during 6 weeks of recovery. If none is forfeit, then I have lost little by choosing the cheaper option. If I would lose >$5k during the 6 weeks, then it would benefit me more to spend the money on the more expensive choice of treatment. Case #2: there's no way that only MY premiums would increase by $400 if the more expensive treatment were covered by insurance: everyone else with identical insurance coverage would also be paying a premium at least $400 greater than otherwise. Since MOST of the cost of the special treatment would be laid off on everyone else with that coverage, of course I would choose that special treatment. At an increase of $400 per year for me, with a limited number of years [left] in which to collect, it's cheap at the price (for me, anyway, if not for thee.)
    But you see, these are the tradeoffs that I can make for myself, and be content with, however they may turn out. A government bureaucrat would not make the same determination of what's best for ME and mine; he would consult some index to find a pre-determined cost/benefit formula, and then find a point on each of the x and y axis, and bingo: there's my indicated treatment.
    If the decision is made by the patient, at least some will benefit; if made by the government, everyone loses.

  8. As usual, thought provoking posts. However, the second example highlights (but Keith does not identify) the anti-selection issue. Many people argue that consumers should be able to select what they are covered for (so men would choose policies without maternity benefits, for example). If you leave this decision up to the individual, then those who are at risk of heart attacks will buy the coverage, which will become unaffordably expensive. That's why we have the current insurance system which, like so many things that the elites don't like, is a huge, messy compromise among many competing objectives.
    Insurance "bureaucrats" make coverage (and price) decisions to protect the bulk of their membership. Members of health plans often don't like the decisions, but they are a grand compromise, and anyone who doesn't like one company's approach is still free to go to another insurer. At least for now – the most scary element of the proposed "reform" is that the option to choose alternatives is eliminated (or soon will be).

    • Insurance "bureaucrats" are not the only ones determining what medical procedures should be covered. I'm in Illinois and I select the insurance that our small company offers to our employees. Starting this year if the employee selects family coverage then the family definition now includes non-married children under the age of 25 or 26. If the child is in the military, I believe the age then goes to 30 years. Every year there are new mandates from the state government. This has got to end. Maybe one result of this "congressional look" at health insurance will result in uniform coverage across state lines thus allowing insurance companies to better compete nationally. And tort reform or dare I dream too much?

      • Mark,
        I agree that government mandates should be reduced in the insurance industry but when you talk about "uniform coverage," I must be missing something. Uniform coverage sounds like identical coverage to me, and that certainly can't help insurance companies compete better. Like you, I would like to see insurance companies compete across state lines.

        As for tort reform, I'd like to see a detailed proposal. I don't like using legislation to limit what lawyers can earn. I don't like to hear that same idea when Obama talks about insurance companies and I don't like to hear it in discussions about lawyers (or butchers or bakers or candlestick makers), either.

  9. Agreed, all economic resources must be rationed in one way or another, since there will always be a limited supply. (If the supply of any good were unlimited, e.g. the air we breath, then it would be free and hence no longer an economic resource.)

    There is an implicit assumption underlying the argument for universal health care, and it is that society has a moral obligation to assure adequate health care for all its members. The question I don't hear being asked, however, is whether it's appropriate for government to use its police power to force all individuals to carry out their moral obligation. In other words, should government be enforcing morality?

    • I'll go out on a limb here and say why is it my moral responsibility to pay for other peoples health care?

    • Government should enforce morality especially when it comes to sex, contraception, marriage or drugs or foul language on t-shirts, killing criminal, torturing bad guys, and deporting children of illegal immigrants.

      Punishing immorality is fun. Helping people out is expensive and smells like tyranny.

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  11. In a single-payer system, where all get the same benefit, the $5M treatment could never be offered, as it would be too costly for everyone. If some were allowed (by being wealthy) to buy the $5M treatment, however, there is a chance that technology would improve, and it would eventually come down in price to a point where everyone could afford it and benefit.

    This is the biggest (although not only) problem I see with a single-payer system. Development of new technologies would be greatly retarded. I suspect this same mechanism operates on a large scale where new technologies are developed in the US, and eventually trickle down to single-payer countries. If the US moves to single payer, the world's most innovative medical market will slow development dramatically. Not only will this cost lives, but also hinder a source of jobs and wealth creation.

    • Now, I don't know if you would call France, single-payer, but my friend in France who has cancer was prescient enough to purchase gold-plated private insurance, which interestingly @ $300/mo for her family pays 100% of costs and her income while she's not working. There was an article in the NY Times two sundays ago from an ex-pat American in the UK talking about the NHS no being so but, but that she was happy they also had private insurance when her husband got very sick.

      So I don't understand why having universal care or single-payer automatically means not having better access for those who wish to pay more. Wouldn't this govt provided health care be analogous to the public school system?

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  14. What I would like to know is why do we assume we have any idea what the benefit of the alternatives would be? In fact we have no idea. Does Skele-Gro cause cancer after 10 years. Does functioning differ after 1 year?

    We have very little empirical data to know any of this. Most people's doctors have no idea which works better. Device manufacturers sure as heck won't tell you and they will lobby like hell to keep you from knowing.

    And I guess while we are at it, how do we know how much things cost? Or are we assuming that no one ever again gets a hospital bill with $10 for an aspirin or $15 for a re-usable ice-pack.

  15. Pingback: Who should decide whether additional medical care is worth the cost? (part 2)  |  KeithHennessey.com

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  17. Great post. Too much is trivialized on all sides. I think one of our issues as a country is that our economic policies don't track our social mores. For example, we would consider it morally wrong for a doctor to turn away someone in need at the ER, leaving them to die on the sidewalk, but have no economic provisions for handling this.

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