If You Get What You Pay For, How Much Should You Spend?

I have been thinking lately about the state of the field of health services research. Having plied this trade for nearly 30 years, it struck me that many of the unanswered questions that I encountered as a doctoral student remain unanswered. I plan to post occasional blogs in which I pose these questions, discuss the state of the research, and explain why it is critical that we come up with better answers. The first question is really the big kahuna: If you get what you pay for, how much should you spend?

Everyone seems to agree that the U.S. spends too much money on healthcare. This has led many to embrace machete policies: Slash payments to doctors. Slash payments to hospitals. Slash payments to drug companies. Slash the number of specialists. Slash, slash, slash.

There is abundant research that past machete policies directed towards healthcare providers have adversely affect healthcare quality and access. There is also abundant evidence supporting the view that machete policies would curtail medical innovation. Medical providers and drug companies cite this evidence whenever they are threatened with payment cuts, proclaiming that any reductions from current levels would be disastrous for the American public.

(This is not to deny that a lot of spending is inefficient; unfortunately, no one has devised the machete that only slashes inefficient spending.) As I will explain in a moment, we are in no position to assess such claims. But note first that if cutting healthcare spending would be disastrous, the implication is astonishing: increasing spending would be wonderful. (I suppose it is possible, by sheer happenstance, that we are spending exactly the right amount of money on doctors, hospitals, and specialists, but the odds of that are about the same as the odds of getting a royal fizbin – astronomical.)

Unfortunately, health services research has taught us just enough to be totally confused about this issue. As I mentioned above, research tells us that if we follow a machete policy, quality and access will fall. But research does not come close to telling us everything we need to know about this tradeoff before we can reach a sensible policy decision. (Congressional Republicans deny the existence of this tradeoff and refuse to discuss it. This makes it easy for them to take out their machetes.) To determine whether we should slash, slash, slash we need to know two more things. First, exactly how much will quality and access suffer per dollar saved? Second, is too much?

Economists have produced interesting answers to the second question. Studying things like the tradeoff between wages and job safety, economists have concluded that we need to save at least several hundred thousand dollars to offset the loss of just one quality adjusted life year. The exact dollar amount remains open to considerable debate. Remarkably, this is the easier number to pin down.

We just don’t know how much quality will be harmed by a machete policy. We have some strong evidence that further reductions in Medicaid payments will cause substantial harm for patients with certain conditions such as heart disease, but those are cutbacks from levels that are already low and might not apply to other medical conditions. We cannot say whether these results will translate for Medicare or the privately insured. There are a few studies of Medicare cutbacks and while the results again suggest that there will be quality and access reductions, the standard errors are large enough so that all we can say is that the reductions will be anywhere from small to large. To make matters worse, these studies do not focus on physicians or distinguish among specialties, and are silent about cuts to home health care and other providers. And for the studies of medical innovation, we are quite sure that if drug profits fall, we will see fewer drugs. A lot fewer? We don’t know. Nor do we know if we will see one less statin drug or if we will never see the drug that cures Alzheimer’s. About all we can say, based on research by Harvard’s David Cutler and his colleagues, is that new medical technology is worthwhile in the aggregate (the health benefits of an entire generation of medical technology exceed the costs). But even the estimable Professor Cutler cannot identify the marginal impact of a machete policy on technological change.

When I started plying my trade, health care spending accounted for 10 percent of the GDP. Most people thought that was too high, but they could offer no logical reason why. It just felt that way. Today, spending stands at 17 percent of a much higher GDP. Nearly everyone thinks this is too much though a logical explanation is still elusive. It just feels like we are spending too much. Yet hardly anyone is proposing that we return to 10 percent though no one can state what the right number is. What will we be saying thirty years from now?

The bottom line when it comes to assessing health care spending, we don’t know much about the bottom line. We publish papers showing that some specific policy had some specific outcome, which is all well and good. At least we know that Congressional Republicans are putting their collective heads in the sand. But beyond that all we can do is make conjectures. The Congressional Budget Office is charged with making these guesses for federal legislation, but they have little to go on. They can project cost savings with a tiny degree of confidence. But no one has asked them if the savings are worth pursuing, which is just as well, because they cannot possible answer that question.

In a nutshell: When it comes to healthcare spending, we do get what we pay for. If only we knew how much we wanted to spend.

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36 replies »

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  2. In those some asian countries, patients who are treated free are learning grounds for new doctors.

    Nothing is free, just like to point out. Yet, not saying expensive is better.

  3. Barry- I reached similar conclusion based upon my research and studies. I find great parallel between rising college tuition fees and healthcare costs. Consumer demand is altering basic nature of professions such as teaching and healthcare and away from their basic tenets. My one liner isecrack is that when ‘price is equated to quality, high price is what you will get’.

    Returning to theme of this topic, its an interesting question of how much is enough. Basic quandrum comes from body which has great resilience and its hard to say how much is enough for it can adapt to variety of hygeine, nutritional and pathogenic conditions. Difficulty in ascertaining per unit price, makes aggregate pricing difficult as well.

    On aggregate perspective, another question of how much is enough. When will next inflection point come, say healthcare at 30% of GDP, when it could be said by all, that we all need to compromise and look at just all options and stop further cost growth by all means?

    As I think, there is a lot more appetite for healthcare cost rise, going by determined resistance to healthcare cost and meek support by it’s supporters.

  4. That used to be the doctor’s job: Ease the pain. Accept the inevitable with the patient. Help the family start grieving the right thing.

    Can’t do it when you are nameless faceless bureaucrat doc. Have to engage the life you care for. It cannot be about consumerism or defensiveness.

    That used to be the doctor’s job.

  5. I always expected you didn’t live in reality Margalit:)

    Of the 7 billion people alive today exactly how many do you think have access to liver transplants? I would guess 10% or so.

    And that 10% that does have access how do you think they have access? They can pay for it, either directly, through insurance premiums, or taxes.

  6. No one should get a liver transplant unless they can pay for it. Can you imagine how costly it would be if you had to buy the liver as well?

  7. People can’t write checks for, say, liver transplants and you can’t give everybody enough cash to allow for that possibility, so who are you going to give money to, and how much?
    If all you are considering is ongoing care for cuts and bruises, that’s not where the problems are…

  8. “We just don’t know how much quality will be harmed by a machete policy. We have some strong evidence that further reductions in Medicaid payments will cause substantial harm for patients with certain conditions such as heart disease, but those are cutbacks from levels that are already low and might not apply to other medical conditions.”

    Those of us in the trade know that Medicaid is the lowest payer for just about everything. It is tougher to cuts costs when you start at the bottom. We would be much better off if everyone were in the same kind of system so that cuts would affect all care.


  9. Government healthcare spending is nothing more than economic stimulus wrapped in political pandering.

    Private healthcare spending is runaway anxiety funded by the impression that it is free or prepaid. People hit their annual decuctible and then it is a free-for-all.

    Each patient is a cash cow, easily mikede once they avail themselves to the system.

    We will collectively spend less is the patient had to write the check, choosing either to buy a unit of care or keep the money. Until this is the pattern there will be no changing our collective spending, unless someone really makes us a collective.

  10. we have expensive and demanding taste and the GDP to pay for it, for now. This is why all the previous efforts have done nothing but throw fuel on the fire. If you have a population that likes to consume you don’t create a plan like Medicare that offeres unlimited basic care paid for by future generations. You don’t pass laws mandating more coverage and less accountability.

  11. Thanks for the response on drug importation, Nate. I can imagine, though, that if an American bought lower cost drugs from a foreign pharmacy that he thought was reliable but wound up with counterfeit drugs that caused harm, he would be looking for someone to sue. I think there would need to be something of akin to swim at your own risk signs when no lifeguards are present that protects U.S. providers and the government from suits by people that purchase low cost drugs from another country that turned out to be defective.

    The more I think about the difference in healthcare costs as a percentage of GDP between the U.S., Western Europe and Canada, the more I’m inclined to conclude that most of the cause is cultural as opposed to, say, the fee for service payment model vs. capitation and bundled payments though I think we should move toward the latter two as much as possible. The American attitude is basically I want what I want when I want it. If something goes wrong, I want to be able to sue the provider. If I’m at the end of life, I want access to a full court press even if the outlook is hopeless. If I’m in the hospital, I want more services delivered more quickly than patients in other countries routinely accept as reasonable. I want an MRI even if my doc doesn’t think it’s necessary and I want to get a prescription for the latest drug I saw advertised on TV even if there is a much cheaper generic that works just as well. I want my employer to provide me with health insurance that lets me access care from any provider I want to see. And, I want someone else to pay for it all.

    The same mentality carries over to other parts of the society. Too many people expect to live in bigger and grander houses than they can comfortably afford. They want to drive nice cars whether they can afford them or not so, if they have to, they will lease instead of buy. They want all the frills of modern life and they can’t say no to their kids. In the end, they spend too much and save too little and they have a sense of entitlement. They want someone else to pay taxes instead of them and if government needs to cut spending, it should be on someone else’s program but not theirs.

    In the end, I think Americans are going to have to accept insurance plans that offer less provider choice which is starting to happen with narrow network and tiered network insurance products. They will have to pay more out of pocket to access more expensive doctors and hospitals whose care is no better than the more cost-effective providers. They may have to accept a lower level of service in hospitals. Tort reform would also be helpful to mitigate the fear of litigation that pervades the medical culture. A more sensible approach to end of life care is needed as well. There are plenty of ways to mitigate medical cost growth but the culture among patients is going to have to change to make it possible to implement and sustain those strategies.

    By contrast, to look at Germany, for example, there is much more of a culture of thrift. Even Germans that have plenty of money don’t spend as freely as Americans do, at least at the population level. Their home ownership rate is the lowest in Western Europe at about 40% and many that do own homes probably live in smaller houses than Americans with comparable incomes do. They accept hospitals with amenities more similar to a Days Inn or a Motel 6 than a Marriott or a Hilton. I say again that in the U.S., the enemy is us.

  12. They say its for FDA to guarantee safety but they don’t do it now. Counterfit drugs are getting into pharmacies already. Its not the governments job to protect us from ourselves. If someone wants to do research and find a reputable foreign pharmacy then our government shouldn’t stop them.

    If its safe for me to travel to these countries and buy the drugs in person how is it unsafe for me to have them delivered to my house?

    The foreign ordering would only be short term anyways. The Pharma companies would be forced to equalize prices then there would be no reason to wait for them to be shipped from overseas.

    If they restrict supply I would expect other countries to respond by loosening patent protection. One of the biggest savings today is ordering generics that are available in other countries but 1-2 years away in the US. If they want to play that game then we will just import more generics.

  13. well, research means you will not be sure you will get the required results or not. it remains question mark till end. so there might be some value able results or not. but effort must be there, you will loose or get something out of it. there is huge investment but positive effort definitely leads towards success and we have seen a lot of success in this regard. So i will suggest all these questions are valid but have to take chance.

  14. Nate –

    Isn’t the issue with drug importation the need for the FDA to be able to certify the safety of the drugs coming in from outside the country which they say they can’t do? Are you suggesting that we don’t need to do that or that we should just rely on the authorities in the countries of origin to perform that function? Also, if we could import drugs, I’ve heard it suggested that the drug companies would just restrict the supply of drugs they sell to countries with lower prices to enough to satisfy their own population plus a modest allowance for growth but not enough to cover potential export demand. At the same time, generics are actually cheaper in the U.S. than overseas. Go figure.

  15. “the unregulated U.S. pharmaceutical market”

    Its the regualtions that prevent insurers and plans from paying for imported drugs that maintain this perversion. Allow insurance to cover Canadian or Indian drugs and prices would plument over night. Since Rx makes up 20% of total insurance cost a 5% savings in total healthcare spending would be very doable. 5% with a simple regualtive change

  16. I have to agree with Nate on the level of service. Although the actual care is often as good as it is here, the amenities are not.

    As to non-profits, we have created a rather odd class of “non-profit” corporations which distinguish themselves from their for-profit counterparts only through their much more straightforward way of avoiding taxation.
    True, these so called non-profits are not beholden to shareholders. Instead they are beholden to a set of ego-maniacal boards hellbent on empire building (literally), and CEOs who in many cases draw multimillion dollar salaries, while firing workers, ignoring patient safety, advertising on every billboard in the region and buying arboretums. Takes a lot of feeding tubes to finance greatness.

  17. “U.S. hospitals have more employees per licensed bed than their foreign counterparts though it’s not clear, at least to me, exactly why that is.”

    I can help you with that Barry, American’s would never tolerate the level of service and care that is common in most other developed nation’s hospitals. We demand the latest, best, quickest, care and we want lots of it, all of that takes staffing.

  18. Margalit –

    Roughly 85% of U.S. hospital beds are owned by non-profit institutions and systems. I don’t think the quest for profits drives high costs. Executive salaries don’t either. Most hospitals report very low profit margins with quite a few generating losses. As I noted before, U.S. hospitals have more employees per licensed bed than their foreign counterparts though it’s not clear, at least to me, exactly why that is.

    Most doctors will tell us that they are just trying to adhere to the standard of care in their community. However, I suspect that the standard of care itself was developed, at least in part, with the U.S. litigation system in mind. Also, as noted previously, too many people in the U.S. think more care is better care and more expensive care (per procedure) is also better care. It isn’t. I think unreasonable patient expectations plus the pervasive fear of potential litigation among providers goes a long way toward explaining why healthcare costs in the U.S. are so much higher than elsewhere.

  19. AMA doesn’t cloak every self serving greedy action as being for the benefit of patients either.

    Every time the teachers union ask for more money its for the benefit of the children, well thats what they say its for.

  20. I think Barry, that there is one more difference between us and those other countries: their institutions are not profit driven.

    It may be that people here exhibit wishes that are different than those in other countries, but doesn’t it strike you as odd that these wishes align very well with hospitals’ interests to make money? So which one came first?

  21. Nate –

    When the late Albert Shanker was president of the United Federation of Teachers, a reported once asked him if he should also represent or at least factor in the interests of school children when negotiating union contracts, work rules, etc. in NYC. His response (paraphrasing) was: When school children start paying union dues, then I’ll represent school children. Sad but true.

  22. In case your worried about the teachers;

    Due to the law change, the Districts projected operating budget has moved from a negative $400,000 to approximately a positive $1,500,000. Earmarked in the operating budget are $300,000 related to merit pay, a program being explored for all staff for the 2011-2012 school year.

    Its about paying the good teachers a fair wage and getting rid of the bad ones, all for the good of the kids, sounds pretty moral compared to the unions and liberals that want to protect seniority at the expense of kids.

  23. http://www.jsonline.com/blogs/news/124727554.html

    Cost savings from worker contributions to health care and retirement, taking effect today as part of the new collective bargaining laws, will swing the Kaukauna School District from a $400,000 budget deficit to an estimated $1.5 million surplus, the Post-Crescent in Appleton reports. The district tells the Post-Crescent that it plans to hire teachers and reduce class size.

    Those coregous moral people you are looking for Margalit are plentiful, you just need to look on the other side of the isle.

  24. I think WI and OH has shown some people are tired of sensless cuts and want to do it different. There has been at least 3-4 school districts in WI that that have taken advantage of the new law to increase healthcare cost to teachers then used the savings to hire more teachers and reducxe class size.

    Time honored method of cutting is over, if we can throw the democrats out of office and silence the unions we can make smart cuts that actually improve the sitution not make it worse. The turn around in WI and OH are proof of this.

  25. While I don’t know exactly how they did it, I think most Western European countries and Canada developed a political consensus that spending 10%-12% of GDP on healthcare is about the right amount for them, somewhat less in the UK. Most countries are struggling with upward pressure on costs as their population ages and new technologies and drugs are developed.

    As we’ve discussed many times, prices per procedure are considerably higher in the U.S. While doctors earn more money on average in the U.S. than elsewhere, they account for only about 800,000 of the roughly 14 million people employed within the U.S. healthcare system. Roundly 5 million of those work in hospitals. It’s quite likely that U.S. hospitals have considerably more employees per licensed bed than other countries for reasons that are unclear at least to me. Compensation for the 13.2 million non-physician employees is not out of line with other countries, at least relative to per capita GDP as far as I can tell. Other countries also spend less per brand name drug dose than the U.S. does because of price controls which the U.S. doesn’t have. Since the marginal cost of producing most drugs is tiny, drug companies go along with this and the other developed countries are, in effect, free riding on the unregulated U.S. pharmaceutical market.

    My own sense is that a significant reason why our costs are higher than elsewhere relative to GDP is differences in the culture of patient expectations. For example, patients in other countries, we’re told, are more accepting of death when the end of life approaches and don’t expect a full court press when the prognosis is dire and the quality of life is poor in any case. We’re also quicker to insist on imaging for issues that probably don’t require it and more likely to ask for a drug we saw advertised on TV. Doctors who order lots of tests are considered more thorough. Our litigation system also contributes to costs through defensive medicine. The fear of potential litigation pervades the medical culture in the U.S. but lawsuits are extremely rare in Switzerland, for example. Politicians, for their part, are quick to cut provider payments when there is pressure to save money because they don’t have the guts to say no, we won’t pay for this procedure or cover that one, at least under most circumstances.

    If we want to really understand why our costs are so much higher than elsewhere, I suggest we patients look in the mirror. The enemy is us.

  26. Yes, but cut we “must” and cut we will, and following the time honored method of cutting, we will cut in a place where the knife goes in easy and silent and out of sight, and we all know where that is, and morality can only be asserted by courageous and moral people, of which we have none in knife holding positions.

  27. if a lot of people are not getting what they are paying for that means at least some are. Private Insured in UT for example? We spend a lot of time discussing the failure of the aggregate which is dragged down by terrible public plans and next to no time discusing the succesful plans, wonder of that has anything to do with the fact they are non government private insurance?

  28. ” (Congressional Republicans deny the existence of this tradeoff and refuse to discuss it. This makes it easy for them to take out their machetes.)”

    Almost as easy for liberals to pick up the pen and keyboard and hack hack hack. I seem to recall Democrats implementing some pretty hefty cuts to Medciare recently. Granted you could ignoe actual bills passed and just pay attention to the politicial rhetoric but that takes us back to the hack hack hack.

    Maybe the problem is as a researcher you don’t understand the real world manner in which republicans are discussing these options, what you view as denial of existance is just a discussion on a level reserachers don’t get?

    “unfortunately, no one has devised the machete that only slashes inefficient spending.”

    Actually basic administrative fraud controls which are common in private insurance administration would reduce the cost of Medicare 5-8% with no effect on quality or access.

    Private Insurance utilization review or care managment could easily save another 10% with only a minimial impact of provider cost of business. i.e. enroll the sickest 5% in case management.

    These would be examples of real world solutions researchers can’t grasp for some reason.

    “the implication is astonishing: increasing spending would be wonderful.”

    Only a researcher could say this. Them or a politician. Maybe we should pay teachers more while we are at it?

    “research tells us that if we follow a machete policy, quality and access will fall.”

    If we reduced patent time to 5 years from 7 and didn’t allow extension for ER and other gimics how would that lower quality or access? Are you saying the rest of the world has less access and lower quality Rx then us? Can you name any drugs only for sale in the US becuase the rest of the world doesn’t pay enough or allow 7 years of patent protection?

    “We have some strong evidence that further reductions in Medicaid payments will cause substantial harm for patients with certain conditions such as heart disease, ”

    This is only true if the cut back reduced care or treatment for heart disease. What if instead the reductions where achieved by reducing enrollment fraud? Or what if we fixed illegal imigration and thus reduced the rolls? Neither of those would effect outcomes for those with Heart Disease.

    Your argument is as weak as that used in education, if you cut education spending class size will increase. That only happens because the liberals and unions rather lay off a teacher then ask them to pay a $5 co-pay for their brand name drugs. Its not reducitons that lead to bad outcomes, its the decisions on how people make these reductions.

    ” At least we know that Congressional Republicans are putting their collective heads in the sand.”

    Yes Ryan and others who have actually presented plans have their heads in the sand where as Obama, Reid, Polosi, who haven’t even drawn up a plan have their head where? I would suggest checking the backside of researchers cause they have some serious BS comeing out of their mouths.

  29. The question is not how much to cut, but how to spend it better. The current US system has toxic incentives that encourage unecessary spending and discourage productive spending. We should not cut reimbursement, but eliminiate reimbursement as a methodology for paying providers. Other developed nations spend about half of what we spend per capita and get much better outcomes. ACOs and patient centered medical home models show imperfect movement in the right direction, but until we are ready to have a serious discussion about changing our healthcare system, cutting reimbursement will have littel impact.

  30. Professor Dranove seems to be setting up a straw man argument (slash or don’t slash) based on an erroneous assumption (“In a nutshell….”).

    Given the variations in spending and outcomes across the US health care system, it seems clear that a lot of people are very definitely NOT getting what they are paying for. And that’s the issue we should be addressing.

  31. Excellent post and questions. Of course, some part of the question “is it worth it?” is unanswerable by science, since it is about preferences and morality. Even if we could get perfect knowledge on the causes and effects of cuts, there would still be disagreements about which cuts are worth it. Many, not all, of the disagreements disappear.