When Market Incentives Lead to Bad Outcomes, Continued

A couple of weeks ago, I wrote a post about Atul Gawande’s New Yorker article about health care spending and outcomes. I didn’t claim to have any particular insight about health care economics; I just thought that people should read his article – which, to summarize greatly, argues that there is no correlation between high spending and good outcomes, because the current system does not motivate doctors to seek good outcomes. (Apparently Barack Obama agreed, since the Times reported that “the article became required reading in the White House.”)

That post got a lot of interest, so here is a follow-up.

A lot of the data on regional variations in spending and outcomes come from the Dartmouth Atlas of Health Care, whose findings are summarized in the first paragraph of Jonathan Skinner’s Economix post:

“For the last three decades, John Wennberg and his Dartmouth colleagues have documented regional variation in Medicare spending and a puzzling lack of association between spending and better health outcomes. Regions that spend more on medical care don’t necessarily have sicker people, and they don’t get better results. It isn’t clear what benefit they are receiving for all the money they’re spending.”

Skinner’s post cites and then responds to criticisms mentioned in the aforementioned Times article and in a Wall Street Journal editorial. The most direct criticism, it seems to me, is that the Dartmouth study does not control for the sickness of populations; however, as Skinner says, studies that do control for population differences still find major spending gaps. In Economix yesterday, David Leonhardt provides an overview of this debate.

Finally, Leonhardt’s column yesterday addresses the political flavor of the same issue: rationing. His position is summed up here:

“Milton Friedman’s beloved line is a good way to frame the issue: There is no such thing as a free lunch. The choice isn’t between rationing and not rationing. It’s between rationing well and rationing badly. Given that the United States devotes far more of its economy to health care than other rich countries, and gets worse results by many measures, it’s hard to argue that we are now rationing very rationally.”

Leonhardt argues that the current health care “system” implements three kinds of rationing. First, businesses faced with higher health care costs compensate by reducing wage growth (to zero, in some cases) – so expensive health care comes at the cost of everything else. Second, higher health costs mean that many businesses do not provide health insurance; the rationing here is that some people get semi-comprehensive health care, and some don’t. Third, the current economic incentives lead doctors to provide some types of care (expensive procedures) at the expense of other types of care (spending time with patients, preventive medicine), even though the latter may be more important than the former; here, rationing is preventing access to some forms of care.

With financial reform watered down to “minor technocratic tweaks” (although I hold out some hope for the Financial Product Safety Commission, or whatever it will be called), the established health care interests must be encouraged.

Update: Atul Gawande was on Fresh Air yesterday.

By James Kwak

24 responses to “When Market Incentives Lead to Bad Outcomes, Continued

  1. I haven’t read the New Yorker article yet, but I read the NYT article and got the gist of it. I think President Obama is really on THE RIGHT TRAIN OF THOUGHT with the gaps in Medicare spending, the the results they produce. He’s on to something here. I really don’t want to sound like a President Obama worshipper, but you can see how sharp his mind is and how voraciously he reads that he picked out this article from the hay stack of articles and advice he must get. It DOES help to have a literate president. I read another article along these same lines in The New Republic magazine written by Jonathan Cohn. Cohn talks about the differences between a private system and universal health care and brings up some interesting points about spending and spending’s correlation with positive results (or lack thereof) I would think the administration would also be interested in. Also for anyone interested in health care economics ANYTHING written or spoken by Uwe E. Reinhardt is good stuff. Here is the link to the Jonathan Cohn article.
    http://www.tnr.com/politics/story.html?id=51faeaa7-5021-40d0-95d3-0f260b25edd4

  2. CBS from the West

    Though Gawande’s presentation of the situation is probably the most readable version of this from a lay perspective, none of this is new. Health professionals, I am one, have known all this for more than a decade and we have watched the numbers get worse each year. And it’s not just a matter of the economics. All of those unnecessary tests, treatments and procedures carry risk of bodily harm or death–this is a predatory industry that profits from the blood of its victims.

    Really, it is delusional to think you can establish a “market” in health care. The buyers (patients) have no way to assess the value of what they are buying. And, remarkably, our medical education system is so warped, that the sellers (doctors, etc.) typically have little comprehension of the value (or lack thereof) of what they are selling. At one time, when the system wasn’t so shot through with money, notions of professionalism, combined with the limited abilities of technology, restrained the system somewhat. But professionalism has been destroyed by rampant marketing (both to doctors and by doctors) and is now far too thin a reed to protect us. We either need a very heavily regulated system, or one in which doctors cannot increase their income by overusing or misusing services. We also need to restrain the drug industry from their relentless efforts to get everybody to take every imaginable drug.

    Taming the health care monster is vital to our national economic future. I predict it will prove as difficult as, or more difficult than, taming the financial services industry. Everyone agrees the system is broken. But every fix forces some vested interest to take a large hit, so there is no consensus, or even medium-sized coalition in favor of any particular solution. The public is eager to see health care access expanded for all–but they glaze over when you start talking about how it will be funded, or what controls will have to be imposed to make it sustainable. The pharmaceutical, hospital, and insurance industries will be zealously guarding their own interests, and collectively health care has, I am told, the biggest lobbying group in all of Washington. And unlike the financial services industry which is somewhat concentrated in a few areas, the health care industry is everywhere–so nearly all of our “representatives” have been bought off by them.

    The industry constituencies are all in favor of getting to or near universal coverage. Of course, more paying customers! Ka-ching! But make no mistake: if we end up with expanded access without cost control mechanisms that really bite, we are doomed–the death spiral will just accelerate as the health care industry sucks what life blood remains from us (literally) and from the economy.

    It will be interesting, and frightening, to see what evolves. While we have a moment now to fix one of our biggest problems, to me it seems far more likely that either the effort will yield nothing (as with the Clinton administrations efforts in the 90’s) or will end up with something that actually makes things much worse.

  3. I’m not sure if it fits in the category of rationing, but one cost of the current system that always seems to be ignored is the opportunity cost of new businesses that do not get started because people fear losing helath insurance. Someone could have a great idea about say, solar energy, but if they have a kid or a spouse with a chronic condition, the last thing they will do is leave a company with good health insurance and strike out on their own. I wonder how much innovation and creativity is lost due to this problem. There is also lost productivity from people staying in jobs they hate for the health insurance. I think our economy could be more vibrant and have stronger growth if we had a better system.

  4. Tippy Golden

    I’ve asked myself why I find myself getting angry when I read about the state of healthcare in America. (After all I am not an American citizen.) I think Robert Reich’s phrase “moral outrage” captures my sentiment.

    In Canada, we are long past the debate on whether, for example, a child from a low-income family is entitled to the best healthcare available our country can provide. This is a given. Income is not a factor when it comes healthcare in Canada.

    Below is a version of a comment I made over at Shadow Bankers blog.

    In Canada we have universal healthcare. While the current government in British Columbia, where I live, is right-wing and has privatized many aspects of delivery. Having said this, universal healthcare in British Columbia is still pretty awesome. For those Americans who may be interested, here’s how it works:

    If I have my facts right, for-profit doctors and clinics are free to operate in Canada. But doctors can only opt in or opt out of the public system. By law doctors cannot “cherry pick” the public system.

    From what I can tell the British Columbia government privatized: medical records (to Accenture); hospital laundry, food services, janitorial services; private companies building hospitals that our government rents (P3s); I guess they privatized just about everything accept doctors, nurses, specialists, ambulance services, and hospital operations.

    In a large urban centre, like Vancouver, there are for-profit medical clinics. The “sticky wicket” is, technically, for-profit doctors must either opt in or opt out of the public system. But in practice, I think the for-profit clinics are having it both ways. The government mainly looks the other way and once in a while a healthcare union takes the issue to court.

    That said, I’m also not sure the for-profit medical business is booming here. Mainly they make a lot of noise about how bad the public system is. Most Canadians with extra income use it to pay off their mortgage, or invest in a tax shelter for their children’s university education, or invest for retirement … or take a vacation.

    In Canada, anyone with a serious condition or illness — eg, premature birth, diabetes, cardiac arrest, stroke, organ transplant, HIV / Aids, cancer, catastrophic injuries, you name it — will get some of the best medical care available in a first world country.

    In British Columbia, acupuncture and traditional Chinese medicine is also covered.

    On top of this many companies and all the public sector employers top up this level of healthcare with dental, vision, prescription, paid sick days and other benefits. While the wealthy can buy all the private medical care they can afford.

    So there are plenty of options in Canada !

    Furthermore, universal health care makes our economy more competitive because businesses are not burdened by the cost of providing (or not providing) their workers with healthcare.

    The United States has more than enough resources to provide a similar level of healthcare to its citizens. (After all Canada only spends 10% of GDP on health care.) I guess the problem is finding the political and logistical will to make this happen in the United States.

    I personally subscribe to the view more money does not equate to better health outcomes. Best of luck with your healthcare reform !

  5. An interesting thing about the entire health care debate is that most of the discussion of “private” vs “government” health care really only discusses the payments part of the system (“insurance”, if you will). No one (or very few are) is talking about whether other parts of the “system” should be public or private. For example, one might envision having Doctors and hospitals be government employees, but turning all “insurance” activities over to the private sector (maybe because it’s a lousy idea — I’m not sure at this point). Or pharma and equipment makers, or malpractice law, or other parts of the “system”. All are opportunities to reduce cost, but all the attention focuses on the payments side (with the possible exception of the push toward electronic records, which will initially require a big capital investment).

    Is this just the way government has to think? Congress has little power other than budgetary, so they immediately try to reduce spending by figuring out what they are not going to pay for, rather than retooling the system from the inside out?

    I’m not making any recommendations here, just asking why the debate is so narrowly focused.

  6. Wow. Tippy Golden’s post came up while I was typing mine. Sounds like Canada had a more all-encompassing debate, and settled on something that works for them. Perhaps if we don’t have as wide-ranging a debate, we will ultimately end up with something sub-optimal.

  7. Rationing of profits.
    Rationing of salaries.

    There are more than three ways to ration, and different levels at which to ration. Strangely, the discourse never progresses beyond profit-preservation.

  8. I’m a physician – yes, healtcare in America is too expensive. But it’s bewildering that people accept comments like: “given that the United States devotes far more of its economy to health care than other rich countries, and gets worse results by many measures, it’s hard to argue that we are now rationing very rationally”. Outcomes in the US have something to do with the quality of health care delivery…but they have much much much more to do with the fact we are by far the most obese population of humans in the industrialized world. It’s not even close. Our aggregate adiposity doesn’t just lead to direct morbidity and mortality, but is a general reflection of American attitudes about responsibility towards personal health.

    Try telling a 300# person who complains of knee pains to lose weight…you’ll get asked for a prescription instead.

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  10. If this is the case then more health care advice is necessary, not the rationed by wealth and career choice option. The sooner you can tell a patient to change his/her lifestyle, the sooner they can consider themselves educated and start to take control of their lives as best they can.
    I didn’t see a doctor or dentist for 15 years, until I started to have symptoms of hypertension, because it cost too much and I felt okay and I had to pay for graduate school. Had it been affordable, it would have been caught before then.

  11. Tippy Golden

    Eugene, you might find this interesting.

    A former FDA commissioner and Harvard-trained doctor completed a seven year study on why there is an obesity epidemic in the United States. He has written a book and he is angry. His conclusion is the fast food industry has created products that alter body metabolism and brain chemistry to create food addiction.

    His conclusion is the not-so-secret ingredients to creating food addiction are: fat, sugar, salt. His observation is much of American food is layer upon layer of fat, sugar, salt; which alters body metabolism, brain chemistry and created food addiction. This on top of a culture where eating 24 hours a day, any time of the day, is acceptable.

    The American food industry could be playing a major role in this obesity epidemic. IMO, this former FDA commissioner’s observation is correct. Junk food, fast food, restaurant food is mainly layers and layers of fat, sugar, salt. There is a biological reason why humans prefer food with high fat and sugar content. The food industry is a sophisticated multi-billion dollar enterprise. It knows what it is doing. I find your judgement on obese Americans somewhat harsh. I think you may be blaming the victims.

    His name is Dr. David Kessler. Check this out.

  12. Go to this link. Scroll down with your mouse just a little. You’ll see Republicans’ latest Health Care Plan.
    http://www.timesfreepress.com/news/2009/may/14/plan/?editorialcartoons

  13. Tippy Golden

    Eugene, I look forward to your opinion on Dr Kessler’s work. Please post.

  14. CBS from the West

    Certainly our diet and exercise habits aggravate the situation. But, on the other hand, we have a much lower smoking prevalence than other industrialized countries. In some ways, we Americans are more irresponsible about our health than others, but in other ways we are less so. And, empirically, our health care costs were already outliers back in 1980 before the obesity epidemic took hold.

    As for the 300 pounder with knee pain who asks for a prescription, why don’t we give him or her simple aspirin or generic ibuprofen instead of some outlandishly expensive selective cox-2-inhibitor, and, while we’re at it, skip the knee MRI?

    Indeed, to close the loop with the more general themes of this blog, I think that we can identify innovation as one of the drivers of the health care cost explosion. New health care technologies are commercially promoted and uncritically adopted on a massive scale long before we have time to find out through valid research what, if anything, they are really good for. While we can point to innovations that have saved lives, reduced morbidity, and even saved money, we can also point to many others that are wasteful and more than a few that were ultimately seen to do more harm than good. That, it seems to me, is inherent in innovation when there is nothing to restrain its premature dissemination for profit.

  15. Nice article. Thank you for the link. Hits all many major points…

    – Best hospitals treat the least; worst treat the most

    – Overtreatment isn’t due to lawsuits (Texas laws now more rigid)

    – It isn’t “moral hazard” of insurance – patients can’t possibly negotiate with doctors; higher copays don’t really help

    – The reason is profit-seeking; best hospitals are non-profits

    – The current system is making it hard for good systems to survive; bad systems are killing them off.

    I do think there is one point that is missed… The EASY part of the answer is to say that we should drop treatment that is causing more harm than good. But there are circumstances where very expensive procedures/drugs have marginal improvements (according to measures that are often flawed). This piece becomes a classic rationing issue – someone or some thing (like personal wealth) has to say the benefits to the individual aren’t worth the costs to society. This will prove politically painful, especially if people _perceive_ this is happening (even if the treatment has no gain).

    In addition, the article does not discuss the large share of resources in the system that are being dedicated to accounting and compensation/payment management.

    But one very practical piece of advice stands out: If you ever call/email a doctor and they tell you they can’t discuss something over the phone (and therefore you need to make an appointment), get a new doctor.

  16. Look at the profits that the current Health care industry has created. http://blogs.webmd.com/mad-about-medicine/2007/08/ceo-compensation-who-said-healthcare-is.html

    Here is a sample; # United Health Group
    CEO: William W McGuire
    2005: 124.8 mil
    5-year: 342 mil

    # Forest Labs
    CEO: Howard Solomon
    2005: 92.1 mil
    5-year: 295 mil

    # Caremark Rx
    CEO: Edwin M Crawford
    2005: 77.9 mil
    5-year: 93.6 mil

    # Abbott Lab
    CEO: Miles White
    2005: 26.2 mil
    5-year: 25.8 mil

    # Aetna
    CEO: John Rowe
    2005: 22.1 mil
    5-year:57.8 mil

    # Amgen
    CEO: Kevin Sharer
    2005:5.7 mil
    5-year:59.5 mil

  17. some guy in a cube

    You can expect that health care “reform” American-style will go the identical route as all of the financial responses we’ve seen over the last year.

    Namely, all will be done to protect a small cadre of powerful, connected, entrenched interests at the expense of the greater public good.

    You can count on it. These people have not let me down before, and they won’t let me down this time (with health care), either.

    As I have said on this board many times before, this generation of American elites is not capable of doing the right thing. It is simply not in their bones. Even if they wanted to do the right thing, they would not have the slightest clue how.

    True reform will have to wait for a generational (i.e baby-boomer) die-off.

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  19. Wow! That is so true

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  21. I’ve started a few companies in my time, and this is always a concern of mine — if you’re part of too small a pool, if someone becomes ill, you’re screwed, especially here in Pennsylvania, where there are very few limits on how high premiums can go if you get sick.

  22. Dr. Gawande’s New Yorker article starkly depicts the problem with healthcare in the United States. It eloquently demonstrates that just changing how you pay doctors won’t help. “CBS from the West” is right: a market-based system will also fail. But neither Dr. Gawande nor previous commentators have diagnosed the problem. We need to pay doctors to practice medicine: do proper histories and physicals, not just order tests. And patients should see specialists only when needed. Otherwise tunnel vision prevents accurate diagnosis and treatment.

    A recent blog post (can’t find the link) describes a classical story. An executive developed chest pain, so he saw a cardiologist. $200,000 and several complications later, his heart was pronounced normal. The executive next saw a gastroenterologist, thinking the pain came from heartburn. Another big workup yielded no diagnosis and no relief. Finally he saw his primary physician, who found the pain came from muscle spasm.

    Dr. Gawande praises the low-cost, high-quality care at the Mayo Clinic, which he attributes to how Mayo doctors are paid: salary, not fee for service. But Mayo’s quality comes from doing meticulous histories and physicals. They **listen to the patient**. Growing scientific evidence shows that areas of the country with predominantly primary care physicians have much better health outcomes and 30% less cost (see the American College of Physicians position paper, http://www.txpeds.org/u/documents/statehc06_1.pdf)

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  24. tyson vandament

    I continue to read that the system/gov’t/ect has failed to provide proper incentives to the healthcare business in order to control cost/raise quality. This is true, the healthcare industry does respond to incentives, and up until this point the incentives were, like there are in all capitalist enterprises, to make as much money as possible. The have responded swiftly to these incentives, which is illustrated by a earlier post detailing their profits. The gov’t public option will help to provide new incentives; ie, cut costs or go out of business (this may not acutally happen, but the insurance industry may lose a large segment of the market, and the government will be able to set new price floor/ceilings due to economies of scale). This is a good thing, as even those who choose to stay in private plans will benefit from increased efficiency. Also, the insurance lobby has argued to meet new cost standards they would have to pressure suppliers to cut costs and so on. This is a bad thing because? This is the precise business model Walmart uses and many have argued will unfair, is incredibly efficient and passes low prices onto consumers. Many of the same conservative economists who decry a public option have defended Walmart’s practices, arguing they almost alone keep the inflation rate down due to their rabid cost cutting. Finally, while Mr. Obama has said he will engage all stakeholders, the primary goal of this policy should be to both 1)provide quality healthcare at a reasonable cost; and second 2)avert financial catastrophe. I hope that compromise will not trump competence in this bill, as compromise for its own sake is nothing to smile about. Results matter, not the path that lead you there.