Matthew Holt

Vic Fuchs Speaks!

I was absolutely delighted that after several polite “maybe later” responses I was able to  recently interview Victor Fuchs, the Henry J. Kaiser Professor Emeritus at Stanford University. Vic is best known as the “Father of Health Economics” and perhaps less well known (but more importantly to me!) the professor who taught the first health economics class that I ever took.

Matthew Holt: Victor, thanks so much for agreeing to come on THCB. I must admit Vic when I joined your class I had no idea about your background and reputation in health economics. So, I was just delighted to figure out that I blundered in right at the top. It’s a real pleasure to have you on the line

Victor Fuchs: I think you’re doing a great job and therefore I’m glad to spend some time with you.

Matthew Holt: Fantastic! You’ve, obviously, been observing and commenting on– and more recently sort of promoting ideas around –health reform for quite a while now, so let’s jump into a couple of things that you’ve published very recently, in fact just these past few weeks.

The first is a paper in The New England Journal of Medicine about a conceptual future for new biomedical innovation and I’d be grateful if you could just explain just a little bit what your general concepts are here. You’ve been working on this for quite a while. In fact, back when I was in your class, you were publishing some stuff with Alan Garber about technology assessment and this is sort of a continuation to that in some ways. So, I’d love to hear your thoughts.

Victor Fuchs: Well, I think there were two key elements here, one of them better understood by a larger audience and one of them I think rather new. Let me do the new one first. The new one is that we are going through what I call the second demographic transition.

The first transition was when every country had high mortality and high fertility and then the mortality especially of young people started to drop, but fertility did not drop right away, so you had a divergence there and in some cases it lasted for a couple of decades and during that time the population soared because there was this discrepancy between mortality and fertility.

You see the high fertility made sense when mortality was high because you wanted to have at least a couple of children survive to adulthood, but when mortality dropped it didn’t sink into people’s consciousness right away, so it took quite a bit of period which the historians and the demographers referred to as the demographic transition, okay. I don’t know if you’re familiar with it or not, but —

Matthew Holt: Yeah, I get the concept and there’s been some stuff written about that in terms of the impact on social security and healthcare.

Victor Fuchs: And some of the third world countries are going through it now, but now the second demographic transition is the one that I talk about in the NEJM piece a little bit. It has the following elements.

First is that a very large and increasingly large percentage of the population cohort lives until age 65, whereas at the beginning of the 20th century only a small percentage lived until 65. Now we’re going to 80% and we’ll eventually approach close to a 100% living till 65.

The second element is that life expectancy at 65 is increasing and it’s increasing at a quite brisk pace in recent decades. You put those two things together and you find out a very large and growing percentage of all the additional years that are lived if you have increasing life expectancy will be lived after 65.

The beginning of the 20th Century only about 20% or not even 20% of the additional years were lived after 65. Now we’re getting to a point where close to 80% of the additional years are being lived after 65. Now that’s very important because the conditions of people over 65 are very different from the ones under 65.

Over 65 they’re not in the labor force. Four out of five men are out of the labor force and nine out of 10 women and they are very highly dependent on transfers from the younger people and that means more taxes on the younger people and so on.

So I think that the people are going to realize that increasing life expectancy as a major goal of biomedical innovations doesn’t have the same compelling force behind it as if it did when the population was different and when much of the additional years from additional life expectancy would be lived before 65 when people were in the workforce contributing to production and the tax base and so on.

That’s what I call the second demographic transition and I have no doubt that it will take a while for the implications of it to sink in to people just as the first one did, but eventually I believe it should result in a change in emphasis away from innovations that increase life expectancy to innovations that improve the quality of — that’s the first point and I don’t think it’s well understood.

The second point has to do with the economic challenge of having healthcare expenditures growing so much more rapidly than the rest of the economy and most people realize that somehow that has to change. I think a lot people do realize it and my point is that what we ought to be doing there is changing the emphasis from increasing life expectancy at any cost to finding innovations that would lower the cost of medical care without necessarily changing life expectancy or health outcomes generally.

As I said, that’s better understood, but it needs to be emphasized because there is still large elements in the population that resist that notion, because they have a stake in having things continue, that’s the sum of it I think for those two.

Matthew Holt: Yeas let me ask you your opinion. How much do you ascribe of the increase in life expectancy and most people living over 65 and then increasing life expectancy post 65 to changes in medical care, broadly described

Victor Fuchs: Almost all of it. If you look where the big changes have come, let’s say decrease in infant mortality, tremendous decrease because they have technologies now that can keep very low birth weight babies alive. If you look at the declines in cardiovascular mortality and cerebral vascular mortality, again it’s mostly technology.

Matthew Holt: Right, so you’re saying medical technology’s got a pretty large contribution to what we’ve seen in terms of growth in life expectancy and longer life expectancy past 65. Now, I also recall from your colleague and good friend Alain Enthoven, the concept of “Flat-Of-The-Curve” medicine. There has been a lot of discussion — especially in the last couple of years about the work of Wennberg and his colleagues at Dartmouth about unequal variation, but also like unnecessary and nonproductive care.

Victor Fuchs: Those are two different issues. They shouldn’t be conflated. The statement that I gave you before I have a great confidence is correct. It is also correct that a lot of the expenditures that we have now contribute little or nothing to increase life expectancy.

One has to do with the curve being flat at a certain point as you have more and more MRIs and so forth. You’re not getting a lot from it. Technology moves the curve upwards, that’s an entirely different thing, so that any given amount of medical care buys you more in health outcomes. So both things can be correct.

The problem, for us, that as a country is how we can cut back on the expenditures without cutting sharply into the health outcomes. I think it can be done, but it can only be done under certain circumstances. My formula for how you get physicians to practice cost effective medicine, that’s we’re talking about here. For cost effective medicine, the physician needs three I’s. You need information because very often they don’t know what the contribution is of the different technologies and they certainly don’t know what the cost is.

Then infrastructure so that they can make use of specialized technology and specialized personnel. Give you an example, how do you treat people with diabetes? Well, the most cost effective way is to treat them with a team, mostly non-physician team. The third thing they need is incentives. If they don’t have an incentive to apply the information and to seek out the infrastructure, then it’s not to going do you any good.

It’s got to make sense to them and it’s got to make sense in dollars and cents as well as every other way. So, that’s where you reconcile all the Flat-Of-The-Curve Dartmouth stuff with the fact that it is technology which does increase life expectancy.

Matthew Holt: That’s a great distinction, I love your three I’s, information, infrastructure, incentives. We’ll move tangentially to to your second paper in a moment, but given that, what do you regard as the likely outcome for the system or for the way we practice medicine given what you were talking about in terms of moving from an emphasis on increasing life expectancy to an increase in quality of life?

Victor Fuchs: I’m very pessimistic over the short-term or the intermediate term. The reason why I am pessimistic has to do with the whole underlying information base and decision making within our political system. You are no doubt aware of the fact that now we have a highly fractionated system of messages to people. We have how many channels, I don’t know, but there are large number of radio talk shows.

We have bloggers, God save them, there are some great ones like you, but they’re numerous and what you have is people tuning in only to the messages that they want to hear. The messages that reinforce their opinions.  Psychological research has pretty well demonstrated that when someone has an opinion and they are surrounded by others with the same opinion, they will hold it more extremely.

Let’s say they think Muslims are very bad people, but then they are relating to and hearing and mixing it up with a bunch of other people who also think that Muslims are very bad people, that reinforces them, that intensifies the extent to which they have animosity toward Muslims and the same thing could be said of any other prejudice or bias and so — and given the ineffective political system that we have now – highly polarized, highly contentious, losing good people who don’t want to run again, who don’t want to serve in the Senate or the House and therefore the chances of getting good policy out of that mix seems to me to be very poor.

Matthew Holt: Some of the discussion that you’ve raised in this piece, especially around improving quality of life as opposed to the life expectancy is being picked up in various parts of the healthcare system by some people with some power in the public sector, the Don Berwick’s of the world and also in the private sector.

Victor Fuchs: He’ll go with quality of care not quality of life. Berwick wants to improve the quality of care, whichever way it goes. I’m talking about innovations that don’t extend life, but make life more pleasant for older people while they are still alive. That’s what I’m talking about.

Matthew Holt: But some of that involves, some of the things like the diabetes care teams that you talked about, they may extend life, but also quality of care.

Victor Fuchs: That’s cost effectiveness. That will have benefits both in length of life and quality of life. Cost effective is a different issue. These are separate things

Matthew Holt: Let me flip to the a different issue. You just authored a new piece from the Institute for Economic Policy Research at Stanford with John Shoven, This is about a dedicated VAT solution.

Victor Fuchs: Yeah I can explain that fairly quickly. Domestically the U.S. faces two big problems, which the commission on deficit reduction have been asked to address. The first one is to find an additional source of revenue and the second one is to get a handle on healthcare cost.

In fact, as Alice Rivlin says and she is a member of the commission, long-run fiscal policy is health policy. Now we have proposed that if there is a dedicated value added tax, dedicated to paying for basic care for everyone, universal coverage, that will simultaneously increase revenue and get a handle on healthcare cost, provided that what people are then entitled to do is to in an accountable care organization that will be paid on a risk adjusted capitation basis.

And we know that we can realize very extensive economies in that form of organization and delivery and at the same time we’ll also have cut out a lot of the costs associated with the present way that we finance care with employment- based insurance and income-tested insurance, individual insurance. The whole thing is really, you might say, a mess.That’s the long and the short of that piece, although we go into it some detail.

Matthew Holt: So, let me ask you about that because of course your work on this which goes back 15 years or so was also basis of course of the book which you didn’t author, but you were clearly a big part of with Ezekiel Emanuel – ‘Healthcare, Guaranteed’ and the concept of a value added tax tied to a voucher system, tied to a system of Accountable Care Organizations. We didn’t get that in the the PPACA Act that just happened. So, can you give me a sense about how you think we can get people to think about this more systematically and more logically?

Victor Fuchs: I don’t think we can. What I’m relying on here is something that De Tocqueville found about the United States a long time ago. He said that the United States moves from the impossible to the inevitable without ever stopping at the probable.

Another way to put this is that American history is studded with examples of major policy changes that were completely off the radar screen, they were politically infeasible until they became politically possible and I’ll just give you two examples; first, the emancipation of the slaves. No way that, that was going to happen and then suddenly it did happen and the slaves were emancipated. I’ll give you a much more recent example, $1 trillion to bail out the major financial institutions.

Go back six months before that, no possibility; that was not politically feasible, then in a matter of three weeks the whole thing turned around and it became politically feasible.

So, what I’m saying is that I am trying to weigh out what I think is the best way to go, but the mechanism by which we get there will not be sort of painful, long drawn out discussions, but it’ll be response to a crisis and suddenly everybody; both houses, the President and everybody will realize that they have to do something substantial and they’ll do it and my hope is that they’ll do something sensible. But you see the two examples that I gave illustrate the way my thinking runs on how you get major policy change in America.

The interesting thing is that the De Tocqueville realized that 100 years ago and that was already true in the country. You go from the impossible to the inevitable without ever stopping at the probable.

Mathew Holt: That’s great. And talking about that, I want to ask you about the long drawn out debate that ended up in PPACA, the Affordable Care Act – legislation. You wrote an article in The New England Journal, I think it was early 2009 suggesting that there was going to be severe difficulties getting something done. I remember you wrote an article way back in ‘93 or ‘94 in  Health Affairs or  The New England Journal suggesting that the moment wasn’t right then for health reform. So did you expect something to pass like the bill we got and did you think it was what you’d call real health reform.

Victor Fuchs: The answer to the last question is no, it wasn’t real healthcare reform. As a matter of fact by summer of last year the word healthcare reform was never heard from Obama or the Administration after that, it always became health insurance reform, you know, to reform the insurance companies was a much more doable target.

To get real healthcare reform, there just wasn’t the support in the country and they found that out, they saw that was happening. Insurance reform they got and then they went into a kind of rope-a-dope thing where they were shifting the cost back and forth and nobody could tell really exact what the plans stood for and there were a lot of complaints among Obama’s supporters that he didn’t really explain his plan.

I want to tell you that if he had explained it, the opposition to it probably would have been greater, that was part of its chance of getting through was like everybody thinking that there would be some benefit for them and that it wouldn’t cost them anything, because a lot of bit was re-distributive. There was an excellent article by David Leonhardt, in The NY Times, that day after it passed, in which he pointed out that the primary function of this legislation was re-distributive, it didn’t change the healthcare system.

Financing, if anything went in the wrong direction of more income tested insurance and more employment based insurance. fee-for-service and so that all remains to be seen, those are promises. You know there was a piece by Orszag and Emanuel in NEJM a few weeks ago, did you see it?

Matthew Holt: Yeah, I did.

Victor Fuchs: But anyway, if everything worked out exactly as it’s worked in the legislation, then there’s a chance that there will be some good changes in the organization delivering, but given Congress the way it is and given the other obstacles, I think the chances of those things working out are very small until the country gets into some kind of crisis situation.

We don’t know what that crisis will be. One possibility is China stops buying U.S. Bonds. There might be other possibilities. I’m not a political forecaster, but I can tell you that it will take a crisis to really turn healthcare around and in that case I hope they turn in the direction that I’ve been advocating.

Matthew Holt: So let’s do a little bit of economic forecasting of that. We’re at about a little over 17% of GDP at the moment, a number that will obviously tick up the worse the recession stays, because health spending is still exceeding the growth of the GDP, or the lack of increase in GDP, currently and we’re going into double dip recession at the moment and we are having more money coming into the system via the Affordable Care Act and more people coming into the system. Give me your best guess forecast about the rough economic timing, how much more can the economy sustain of increased health spending before the moment is right where that crisis will hit?

Victor Fuchs: Matthew I love you and I love talking to you but that question is above my pay grade.

Matthew Holt
: It’s above your pay grade? There is nobody else who can answer that!

Victor Fuchs: Well, I answered everything that I thought I was capable of answering right, but this one I have to pass on.

Matthew Holt:  Vic Fuchs, Professor Emeritus at Stanford University, thanks for talking with me

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14 replies »

  1. Thank you for a very useful site… I have you bookmarked, and will keep my fingers crossed that I may generate traffic to my site!

  2. Up With The Rich
    Down With The Poor
    Down With The Muslims
    Down With The Mexicans
    Down With The Old and The Sick
    Up With The Rich
    Down With The Vets, The Poor, the Muslims
    the Hispanics
    & The Old LAZY PEOPLE!
    Up With the Rich!
    Down With the Poor!

  3. Matt,
    Outstanding interview. Glad that Maggie Mahar wrote a piece on her HealthBeat blog praising it and offering her interpretations.
    This Fuchs interview needs to be re-published and circulated widely
    Dr. Rick Lippin
    “Quality of Life Doctor for Over 35 Years”

  4. Wouldn’t it be sort of nice if we could also look at the industries which profit enormously from making (and/or keeping) people ill? So then, maybe, we could look at something beyond VAT solutions and into more advanced options that address structural change toward greater social good? Yes, I know I will be mightily criticized for proposing this, but could not resist throwing it in the mix. Barre Pouvier New Hampshire

  5. Matthew,
    I think the issue of low tax rates paid on capital gains, qualified dividends and hedge fund carried interest could be addressed by including that income in the income base to which the Alternative Minimum Tax (AMT) rate of 28% applies. That way, higher income people would pay 28% on such income while lower income folks who have modest income from capital gains and dividends could continue to pay the lower rate on it. It is also noteworthy that the top capital gains (and ordinary income) tax rate was 28% under the 1986 Tax Reform Act passed when Ronald Reagan was President.
    I’m more moderate than you are on the estate tax. If it were up to me, I would freeze the exemption at the 2009 level of $3.5 million ($7 million for a couple) and limit the top tax rate on the balance to the to top marginal rate on ordinary income – currently 35% and scheduled to rise to 39.6% if the Bush tax cuts are allowed to expire for people who earn over $250K per year.
    Regarding employer provided health insurance, I thought the Wyden-Bennett approach made sense. My own preference would be to phase out the employer health insurance tax preference completely and lower marginal income tax rates, raise the standard deduction and enhance the Earned Income Tax Credit (EITC) to ensure that the federal government does not collect any more revenue from the income tax than it does now. If individuals were buying their own policy, it would then be clear that the end customer is the individual and not the employer which would be a huge improvement in itself.

  6. Politically the VAT thing is a non-starter until as Fuchs says we skip the probable…
    I’m on balance opposed to VAT for Barry’s reasons (hard to collect, declining base and a real pain to deal with as a business–thanks to Health 2.0 in Europe I know all about that now!) but specifically in health care I dont think we need a new tax, rather a way to shift==as Jeff says–off the employer base onto something more rational.
    The most rational is to use a proper progressive income tax, and to stop the rampant cheating at the top end that capital gains and dividend taxes affords the super rich–predominantly hedge fund managers and those who own huge blocks of stock that get taxed at 15% when the rest of us pay double that. (I’m also in favor of a real confiscatory high end death tax–I see no reason why the Walton kids need $20 billion each of daddy’s money. I think they could scrape by on $5m each somewhat similar to what Buffet is going with his money)
    In the end though, we have to transition away from employment based payment for health care–Wyden has a decent plan for doing that which got shafted by the unions. Just proving that rationality in our system is impossible
    So we must hope for a crisis that causes a civil war that frees the slaves, or its health care equivalent…

  7. Jeff and Maggie,
    If the dedicated VAT had been in place in 2005 or 2006, there would have been a significant year-to-year decline in revenue raised when the recession hit in 2008-2009 as both the housing and auto markets imploded. Even if the money raised from the VAT were sufficient to finance health insurance before the recession, it wouldn’t have been afterward.
    Secondly, Emanuel and Fuchs implicitly assume that the VAT would apply to all transactions that make up the GDP. I’ve said several times in the past that the broadest based VAT’s in Europe only apply to about 40% of GDP. I doubt that the VAT will apply to government purchases or financial transactions, and I find it hard to believe that there will be much support for applying it to health insurance and healthcare expenses or to college tuition. Necessities like food and gasoline will probably also garner political support for an exemption.
    Third, the VAT lends itself best to manufactured goods like autos and appliances produced by large companies. These products are in secular decline as a percentage of GDP as products made by smaller businesses and personal services comprise more and more of economic activity. In the case of personal services, the seller is essentially selling their time and expertise while their cost of goods, on which they may have paid the VAT, is minimal or at least low enough to allow them to pass the cost on to the end customer while evading it on their time which accounts for most of the end price (and value added) of the service.
    Fourth, I recently asked a neighbor who is a retired IRS agent why the agency doesn’t more aggressively go after small and medium size businesses that are evading taxes on a significant portion of their income. His response was that the IRS is very good at matching up documents like W-2’s and 1099’s but they would need “an agent on every corner” to try to do what I suggested. I doubt that they would be any better at detecting evaded and unpaid value added taxes.
    Finally, even if employers no longer provided health insurance and we paid for it with taxes instead, wages would presumably have to rise in order to provide employees with after tax income comparable to what they were earning before the change. While I can ultimately see the U.S. imposing a VAT (with appropriate exemptions) in the 5%-6% range to help deal with our structural federal fiscal imbalance, I think a dedicated VAT to pay for health insurance is unlikely to gain any traction for the reasons I laid out and because the tax rate would have to be far higher than 10% even to do part of the job (replacing employer provided insurance).

  8. As painful as it is to agree with Maggie Mahar about anything, I also agree w/ the Fuchs/Emanuel financing strategy and emphatically agree on getting the employers out of the funding loop. We need to get the financing of private health insurance OFF the wage base and onto consumption. Financing health reform with taxes on capital gains and a de facto employer mandate was really stupid if you expect an economic recovery. Absent a recovery, implementation of this law is going to be really tenuous. . .
    Liberals should note that the VAT is a more progressive solution, because of the high concentration of spending in the top 10% of the income spectrum. The political problem is that there is an absence of trust in most members of the public that Congress won’t manage the reallocation properly, and treat the VAT as additional federal revenue to squander.
    Keeping employer based insurance was the biggest mistake in PPACA, a sop to the unions. It really muddies the waters that insurers cannot definitively answer the “who’s the customer” question with the current model. As it is, you have to “pretend” that it’s the subscriber, rather than the employer. Some would argue that if PPACA’s subsidies were a little more generous, that it was almost a back door transition to the model Vic has advocated.
    Victor Fuchs is a very wise man, the closest we have in healthcare to Peter Drucker.
    It was a pleasure listening to him.

  9. The “Medicare coverage decisions that incorporate cost-effectiveness” worries me that their will be services renders to a low level of professionalism… We would just be a number and not a person since the demand of would be so high. Am i looking at this the right way?

  10. Good for you. I have read many of Professor Fuchs’ books and articles. A brilliant individual if there ever was one.
    Interestingly it was he who engaged a certified genius, Prof. Kenneth Arrow, in the early 1960s to write one of the seminal articles on medical services and their financing that has been cited by many still today, Uncertainty and the welfare economics of medical care.

  11. Great interview, Matthew.
    I agree with Fuchs about longevity. A year or two ago, a group wanted me to give a talk on the topic. I said I couldn’t, because I’m against it.
    The number of us who will die of Alzheimer’s–it’s truly frightening.
    Callahan, the medical ethicist, has been making the point for a long time: we should focus on improving the quality of our lives, not the number of years we live.
    I particularly liked Fuchs’ point about how major changes in this country can seem impossible– until they happen. I think he’s right: this will happen with the value-added tax. We have to find another source of tax revenue.
    I’d add another example: the sea-change in American attitudes toward smoking. There was a time when no one believed that Americans would give up tobacco, even though it was widely known it is bad for your health–say in the early and mid 1960s. Then, rather suddenly, it became socially unacceptable to smoke, at least among college students, as well as many middle-class and upper-middle class adults. (Though of course we still need to address smoking as a health problem for lower income people–but at least Medicare is now paying for smoking cessation. .)
    The emancipation of the slaves is, of course, the best example of something people said could never happen–until it did. I often use it to argue that we can have “real” health care reform, despite the forces lined up against it.
    As you know, I think “real” healthcare reform is possible under this legislation, though admittedly it is buried in the legislation, and depends on the Secretary of HHS and Berwick using the powers the legislation gives them, to do an end-run around congress, and change how we pay for care, as well as how it is delivered.
    Finally, Healthcare Guaranteed, by Emanuel and Fuchs remains the best blueprint I’ve seen for healthcare reform. The idea of using a VAT tax to finance healthcare is brilliant. In that way, the VAT becomes progressive-as they describe in the book. Everyone should read it, if only because Rahm Emmanuel said it could never happen. It still could.

  12. I have long been skeptical about the concept of a dedicated value added tax (VAT) to pay for health insurance and I thought it was the weakest part of Ezekiel Emanuel’s book, “Healthcare Guaranteed”. Even if the goal were to just replace employer financing and to cover the currently uninsured while leaving Medicare and Medicaid intact, I don’t think it could work in the U.S. The reason is that once exemptions are factored in, the broadest based value added taxes in Europe only apply to about 40% of GDP. Just to replace insurance premiums and employer self-funding would require about 7% of GDP. To raise that much through a VAT that applied to 40% of GDP, the tax rate would have to be 17.5% on top of all the federal, state and local taxes that we already pay. I just don’t think Americans would stand for it, though the average VAT tax rate in the European Union is about 20% with the highest rate at 25%.
    If we reach a point of perceived crisis, however, other strategies might become doable and perhaps even inevitable. These include, in my opinion, (1) a more sensible approach to end of life care, (2) Medicare coverage decisions that incorporate cost-effectiveness, (3) tort reform that includes the establishment of special health courts along with robust safe harbor protection for doctors and hospitals who follow evidence based guidelines where they exist, (4) the elimination of confidentiality agreements between insurers and providers to clear the way for the establishment of good price and quality transparency tools, (5) more widespread use of capitated payments for primary care and bundled payments for expensive surgical procedures and, possibly, (6) age based rationing. On the tax front, we might be able to overcome union opposition and gradually phase out the tax preference for employer provided health insurance. However, I think the thrust of the efforts to deal with a crisis driven by healthcare costs that we can no longer afford will be strategies aimed at reducing utilization of healthcare services as opposed to finding still more revenue to pay for them.

  13. Great interview. Glad to see someone of national intellectual repute, finally, finally discussing cost effective medical care. Some commenters have presented information on that on this very blog.
    Information is important, but information overload ceases to have value.
    Infrastructure is important, but when the CEOs of the infrastructure pillage it with multimillion $ compensation, such infrastructure ceases to have value.
    Incentives to those ordering the therapies are important, but convoluted multi-hooped flawed outcome incentives cease to have value.
    Health care is the reserve piggy bank for the spend happy US Government and rough for many corporations, especially those selling poorly usable unsafe HIT systems to supposedly solve the first “I”.
    When they need money, take it from the doctors and the patients.