The Business of Health Care

You Get What You Pay For

Two recent research papers remind us that it may be difficult to cut U.S. healthcare spending without harming quality. The first, written by a research team led by University of Chicago economist Tomas Philipson, appears in the latest issue of Health Affairs and has deservedly garnered a fair bit of media attention. The authors examine cancer spending and survival times for patients in the United States and ten European countries during the period 1983-1999 (later data were not available.) Their data confirm what we already know about health spending; the average cost of treating a cancer patient was about $15,000 higher in the United States. But the data also show that the typical U.S. cancer patient lives nearly two years longer; most of the difference is attributable to prostate and breast cancer patients. The gain appears to be due to greater longevity rather than early diagnosis. Using generally accepted measures of the value of a life, they conclude that the benefits of additional health spending outweigh the costs by a factor of 4:1 or higher. The latter calculation does not consider QALYs (quality adjusted life years) and so may be overstated. The authors acknowledge that other nations may do a better job of cancer prevention, so that their overall approach to cancer may be superior to that in the U.S., but they can find no evidence of this one way or another.

Philipson’s study suggests that U.S. healthcare consumers may get a substantial bang for their higher bucks. Maybe the U.S. system is not so inefficient after all. What about efficiency within the U.S. system? Some providers are far more expensive than others. Is the higher cost worth it? A new study by a team led by MIT economist Joseph Doyle, and released as an NBER Working Paper, suggests that you may get what you pay for within the United States. Doyle and his colleagues ask whether higher cost hospitals in the United States achieve better outcomes than lower cost hospitals. It is not easy to answer this question, because higher cost hospitals may admit more severely ill patients. This results in a statistical problem known as selection bias that is difficult to eliminate with available severity measures.

Doyle et al. do something exceedingly clever to overcome this problem. They take advantage of the fact that in New York State (which is an excellent source of hospitalization data), ambulances are dispatched to patients based on ambulance dispatch boundaries. In addition, more than one ambulance company may serve a given location. When this happens, ambulance assignment is based on a rotational assignment. Because different ambulances tend to serve different hospitals, the upshot is that emergency patients who live near each other are effectively randomly assigned to different hospitals. This eliminates any concerns about selection bias.

Once we understand their methodology, the results are easy to describe. Quoting from their abstract: “Higher cost hospitals have significantly lower one-year mortality rates compared to lower-cost hospitals.” The effect is dramatic – hospitals in the 75th percentile of costs have 4 percentage point lower mortality rates than hospitals in the 25th percentile. (The authors acknowledge that there seem to be diminishing returns with no further reduction in mortality above the 75th percentile in spending.) Their results seem to reflect greater treatment intensity rather than higher prices. I wonder if this has more to do with the quality of the providers at hospitals that do more expensive procedures, rather than the procedures themselves.

What does it all mean? Philipson’s study provides compelling evidence that there are consequences to wringing costs out of a nation’s healthcare system. The United States spends far more on cancer care than European nations, but also delivers the best outcomes in terms of cancer survival. (Within Europe, the nations that spend more also have better outcomes.) We can agree that there is fat within every healthcare system, and the U.S. may have more fat than most. But it appears that when it comes to putting a nation’s healthcare system on a diet, one cannot cut out the fat without cutting too close to the bone. And in the case of cancer treatment, European nations appear anorexic. Doyle’s study leads us to a similar conclusion about spending by U.S. hospitals.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. You can follow him on Twitter @daviddranove. This post first appeared at Code Red.

15 replies »

  1. The cost of above standard care goes beyond the pocket book. A a country the way we utilize the tax dollars put into health care should always be looked at. We have a great standard of health care in this country overall.

  2. I like this opinion. After all, if you are expecting others to spend on you, you should at least appreciate that there is a finite limit to expense.

    And you know what, one example why there is little difference between the attitudes of the rich and poor: what have you done for me lately!? One extreme of “I can’t afford it” and the other extreme of “I don’t want to pay for it”.

    Entitlement, in the end the same whether the wallet is empty or full.

  3. All Medicare and Medicaid beneficiaries should have a properly completed advance directive on file, including PA for health care, updated every five years or less, in order to receive benefits.

    Of course we have a large number of people who don’t like gubmint telling them what to do — freedom, you know — who seem more than willing to have food stamps recipients drug tested and everyone carrying an official photo ID in order to vote. I get as cognitive dissonance thinking about it, but if government can peer into a young woman’s uterus surely an advance directive is not too much to ask of seniors.

  4. Thanks.
    And yup, ya get what you pay for…

    Howard Dean Advises Corporate Health Care Clients To Fund ‘Both Sides,’ Run Attack Ads
    One of the biggest problems with lobbying in Washington D.C. is the extent to which so many influence peddlers work behind closed doors, refusing to disclose their clients or register their work with the ethics office.

  5. “But the data also show that the typical U.S. cancer patient lives nearly two years longer; most of the difference is attributable to prostate and breast cancer patients. The gain appears to be due to greater longevity rather than early diagnosis.”

    I’m curious where the basis for attributing the survival gains to longevity rather than early diagnosis comes from. Dranove observes that the main difference in cancer survival is in prostate and breast cancers, two cancers where Americans are screened at much higher rates than people in other countries.

    These are also cancers where screening has been observed to have high false positive rates and over-diagnosis (of cancers that were never destined to cause harm). That’s not a very persuasive case that the additional spending is beneficial. 5-year survival is a pretty terrible metric for determining the effectiveness of cancer treatment due to lead-time bias caused by early diagnosis due to screening. The author should have used mortality.

    It also seems like the Doyle study (or people reporting on the study) is over-generalizing their findings.

  6. When I saw the post title here are a few items that came to mind that we pay for.

    §TV ads — some of the most expensive air time for some of the most costly productions in the ad industry.

    §Mammoth executive bonuses and golden parachutes for both health care administrators and insurance companies

    §Facilities with manicured landscaping, marble floors, lived plants, flat-screen TVs in every room, and concierge food service

    §Elaborate accounting arrangements by which large so-called “not for profit” health care systems, often augmented by equally large, embedded insurance companies (BSBS comes to mind) launder bills mostly for the benefit of very profitable clinics, specialty practices and device manufacturers.

    §”Free scooters” advertised for Medicare beneficiaries. Sometimes comes with a free recipe book or lighted magnifier “just for making the call!”

    §Catered meals and other treats for hungry office staffs, compliments of your favorite drug or other supplies sales representative.

    §And speaking of sales, don’t forget the sales bonuses for high performers. The only people in America with no limit to how much they might earn are not in medicine or other specialties, but in sales. (Investment bankers are in the running, of course, but they are in fact limited by how much capital and/or credit they have. Enterprising sales people have only transportation, cosmetics and a few other expenses.

    §Don’t let’s leave out some red meat for the tort reform crowd — legal and accounting services, and a grey area often called “defensive medicine.”


    With the exception of a dedicated group of community volunteers who provide a few ancillary goods and services, every dime of all that has but two sources:

    1.) Medical bills
    2.) Government grants for teaching hospitals and research by NIH. (taxes)

    What am I missing?
    Yes, of course.
    I almost forgot — MEDICAL CARE!

  7. off today, so was perusing the net and found these two articles off links, and will make sure readers know what my sources are:

    1. is from, which the article was harsh in it’s tone and rude to Santorum, but, the point about the care of his daughter is important to note:

    and 2. is from, a fairly partisan conservative/Republican rag but again had a good article about the financial misdirections that I believe Democrats continue to foster:

    So, read and ponder, and realize this, even if PPACA survives, will America tolerate the pervading two tiered system that will continue and be used pervasively by the very politicians who forced the legislation on us in the first place?

  8. This article does a good job of explaining why the US is no longer in the healthcare business, & everything beyond stiches & antibiotics will be outsourced in the next 5 years.

  9. “You know what I have learned watching older people go through full court press care for prolonging the inevitable, it really isn’t about what is in the best interests of the patient, but, the selfish family who can’t and won’t let go.”

    I agree. I think part of this is because middle age children often haven’t yet come to grips with their own mortality and they don’t want to take the responsibility for signing off on ceasing treatment.

    This is why it’s imperative for everyone to have a living will or advance directive or at least to have a discussion with their family members about what care they want and don’t want at the end of life if they can no longer communicate. With respect to cancer specifically, patients are able to communicate well into the disease progression and it is generally characterized by a relatively rapid decline at the end. This is not the case with Alzheimer’s and dementia though.

    Oncologists, for their part, frequently hold out false hope and are less than honest with patients about the quality of life implications of what they are signing up for if they opt for the most aggressive treatment option(s). Many oncologists view it as a personal failure if the patient dies and the old joke about coffins having nails to keep the oncologists out suggests that a more honest assessment of the patient’s prognosis would be helpful to both the patient and the family even though it isn’t pleasant for the doc to deliver or for the patient to hear. If the oncologist is uncomfortable doing that, then let the palliative care team do it.

  10. I wish i were surprised to hear this but I’m not. I think most people really already know this. It works in almost every area of our lives, except I did hear that the very poor and the very rich get the worst healthcare. We know why for the poor, but for the rich, it is because they instruct people on what to do and they do what they are told instead of what is best for the patient.

  11. So, allowing someone to survive cancer for 2 more years really gains what? In the end, do the elderly, hell, let’s make it more close to home so readers really can try to feel the point more personally, a 65 year old person with a moderate cancer presentation, truly benefit and provide to the community to have the malignancy controlled so it can recur and then be untreatable? Or what if the treatment leads to cardiovascular or immunological impairment and the patient later dies of iatrogenic causes?

    Hmm, all the readers who have been through chemo, radiation, and perhaps sizeably intrusive surgery raise your hands in saying recovery for people who are already compromised in multiple areas really are fully happy to gain 2 years, only to put family through another round of illness, even if not a cancer recurrence, appreciate the time. You know what I have learned watching older people go through full court press care for prolonging the inevitable, it really isn’t about what is in the best interests of the patient, but, the selfish family who can’t and won’t let go.

    Health care costs will never be contained if we save everyone from the inevitable when it is unrealistic in the first place. Yeah, I’ll be the bad guy in writing this comment, because in the end, I am probably one of the few who have the gonads to call it as it is. And I’ll add this just to annoy and anger some more in their pathological denial: who asks the 3 year old with a terminal illness, or profoundly disruptive congenital disease, if they want to go through all the invasive and time consuming care just to gain a few years, or even make it into adolescence and deal with the angst of that age to be shunned and marginalized by the community around them?

    Do people really think about this stuff before they just reflexively just say, “do it, it is the right thing.” For whom? I’ll acknowledge a three year old doesn’t have the capacity to know when to say stop, but, do we as a society know when? Yeah, when you personally are paying for it, in time, energy, and money. I admire parents who persevere and make the full sacrifices to help their children, they are the real examples of strength and courage along side their kids. But, what is society doing selling false messages of hope as of now with treatment options for illnesses we see?

    Back to the gorilla doin’ the Macarana in the den.

  12. “the average cost of treating a cancer patient was about $15,000 higher in the United States. But the data also show that the typical U.S. cancer patient lives nearly two years longer;”

    For those not afraid of the truth this creates a very simple question;

    Is two years of life, of an elderly person, worth $15,000?

    If we think it is then how and who pays for it?

    Along that line this would be a very simple and cheap insurance policy. Medicare and plans in general could provide baseline European level treatment under existing plans. If you wanted the more aggresive treatment that would be out of pocket. Either payable out of assets or a seperate cancer specific policy an individual could purchase.

    This would transform the decision from one subjected by society to one selected by the individual.

  13. Is it any worse than the conclusion that the US spends 16% of GDP on healthcare which is more than Europe so our system must suck and government has to take over now?

    His two points are far more scientific then the 100 years of liberal shrilling for universal healthcare.

    “Posts such as this are the reason costs remain so high here.”

    Let me guess the science is settled? Since when does additional knowledge perpetuate increased cost? You sound like a propagandist scared to death light is finally being shed on your dogma. Majority of the attacks on our healthcare system are BS based on bad studies meant to accomplish nothing but pushing a political agenda. Apparently the Healthcare Reformist are just as scared of truth as the Global Warming clowns.

  14. Your post extrapolates “conclusions” (which may be premature) from one small area of American health care to apply to ALL of U.S. health care. Posts such as this are the reason costs remain so high here. The sad fact is that the current level of spending is simply unsustainable, period. Start from this incontrovertible fact and work backwards, not the other way round.