Where Are the Savings in Health Care Reform?

One of the problems with the health-care debate is that it is, as President Obama implicitly acknowledged the other day, about health insurance, not about health care. If one is interested in reducing the cost of health care, there is very little in the current debate, or in the legislation before Congress, that actually addresses that issue. The reasons that we aren't going to reduce the cost of health care very much involve problems with challenging our trust in our doctors, and problems with accepting higher risks of bad outcomes.

If you ask why health care costs are so high, you'll get all sorts of answers, some of them, to fall into Aristotelian parlance, about efficient causes, some about material causes, some about formal causes, and some, I suppose, even about final causes. I'm going to look at efficient causes, and I'm going to look at some comparative data. There are a number of studies that have shown that costs per person vary from state to state, as well as within states. Here is one example from 2001 http://www.ppinys.org/reports/jtf/2001/Table%2042.htm. At that time, the Medicaid costs per person served in the United States were $4,307. But that concealed a variance from Tennessee at $2,075, to New York at $8,961. According to recent reports, the two most expensive cities in the country for medical care are Miami, Florida, and McAllen, Texas. (Here's an article from the New Yorker about McAllen - http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande.)

Now, how do we get to the cost of something? The usual way is the number of items purchased, multiplied by the price of each item. If you buy six bags of mulch at $4.00 per bag, your cost of mulch is $24.00 (plus tax). In the health care area, the cost per item doesn't vary all that much from place to place, partly because the government and the insurance carriers set some limits on how much they'll pay for given procedures. So, McAllen is more expensive than other places because the doctors there order more procedures, more tests, more prescriptions for their patients than doctors elsewhere. So, the reason that some states have higher costs than other, and perhaps the reason that the U.S. as a whole has health care costs much higher than other countries, is that doctors order too many tests, too many procedures, and too many prescriptions.

If the cost of health care is highly variable, and if one of the major factors driving it up is that doctors prescribe more tests and procedures than are really needed, the obvious solution is to drive down the cost of health care by eliminating all of those extra charges. That is what HMOs were supposed to do, and that is why HMOs are hated and derided across the country. The problem here is very simple: your doctor makes money by prescribing these things. If your doctor refers you to a surgeon for gall bladder surgery, he gets a referral fee, and the surgeon gets a nice fee for himself. Not for everything, but for many of the things doctors order, the doctor has a financial interest the product. Just think about that for a minute - your doctor makes money by selling you medical services.

So, we can't really expect doctors to slash their own incomes by reducing the numbers of procedures they prescribe, no matter how many studies we do and guidelines we issue. What is needed is a third party to decide whether every test or procedure ordered by the doctor is really necessary, and to refuse the order if it isn't. Such a person is the insurance company spoken of with disgust, the government bureaucrat the AMA warns you against, but that is the only way to reduce costs, as long as doctors make their money by prescribing things. As I mentioned above, one problem with this approach is that it implies that your doctor may be ordering you to have tests or procedures you don't really need, and that may put you at risk, in order to keep up the payments on his mansion. Most people, I believe, don't even want to think about this possibility, because if they can't trust their doctor's advice they have bigger problems than meeting their insurance premiums.

The other option, of course, is to stop the fee for service system altogether. Stop paying doctors like auto mechanics, and they'll stop acting like auto mechanics, who will, as Click and Clack say, estimate the cost of your auto repairs according to the size of their boat payment.

This little essay just scratches the surface of this issue. Let me say one more thing: The current debate about reforming health care will do one thing, and one thing only. By increasing the number of people with some form of insurance, it will drive up the cost of health services by increasing the effective demand for them. So we're looking at massive tax increases or trillion-dollar deficits as far as the eye can see, unless we get real reform. And that kind of reform is not on the table yet.