Four Truths About Medical Care

Jennifer is a Republican from New Jersey, an Associate Professor of Economics and Business, a wife of 20+ years, and the mother of two teenage sons, one with Autism. Prior to entering academia, Jennifer was the Senior Administrator for the Division of Cardiology at New York Presbyterian Hospital-Cornell Medical Center and a Consumer Advocate for the New York City Department of Consumer Affairs and Department of the Public Advocate.

The Senate finally released a “discussion draft” for health care reform: let the sound bites and vote counting begin. However, getting to 50 does not mean getting it right, and better than Obamacare can still be pretty bad. Amidst all the sound and fury four frequently forgotten truths about health care have significant policy implications.

1. There is no cure for death. While the exact nature and timing of illness may be uncertain, we will all die and most likely spend hundreds of thousands of dollars on medical care in the process. The inevitability of much medical care spending has two policy implications. First, efforts to address any particular medical issue from smoking or obesity to the cancer moon shoot will not solve our spending crisis. To put it harshly, preventative care keeps people alive longer to get sicker later. One reason why we are seeing more cases of Alzheimer’s is that we’ve done such a good job treating heart disease. To be clear, I am not arguing against preventative care or life-saving therapies, just against such care as cost-saving measures. We overemphasize cost savings from preventative care, early diagnosis and treatments because we artificially count expenses on an annual rather than a lifetime basis.

Second, increasing certainty about medical expenses as we age means that we have our health insurance system backwards. Insurance is intended for unexpected events. When we are younger, health shocks are more unexpected and more costly because they take us out of school and work and consume savings that can no longer earn interest (when interest is positive). But the older we get, the more certain we’ll need care, and the more time we’ve had to prepare. Moreover, once we have a “pre-existing” condition we don’t really want insurance per say, just a way to pay our known medical bills. Similarly, room and board lumped into nursing home fees have artificially inflated long-term care costs. Predicable expenses in old age or for pre-existing conditions should not be financed with annual insurance contracts that distort legitimate insurance markets for truly uncertain events.

2. Medical care is as much of an art as a science. It sounds great to say let’s pay for what works and not what doesn’t, but it is rarely obvious what works in any specific case — and patients are only interested in their specific case. Only 14% of the over 4,000 clinical guidelines to treat a cough are backed up by randomized controlled trials. Moreover, average benefits from large trials don’t translate directly into individual benefits for a particular patient. In addition, health outcomes short of death are hard to observe and valued differently by different people. What constitutes “good” health for one might not be for another: for example, walking with a cane may be a great outcome for someone who was previously in a wheelchair, but a horrible outcome for another accustomed to running marathons.

Recognizing the art of medical care requires limiting our faith in cost-effectiveness analysis and so-called value-based payments to control medical care spending. To the extent that medical care is a science and we do know what to do, medical decision support systems can reduce errors and speed care. However, we should beware of unintended consequences of forcing doctors into narrow decision paths and penalizing them for using the judgement they hone over years. Practice protocols take time to develop and implement and as a result can’t keep up in real-time with changing technology, patient lifestyles, expectations and ailments. We won’t save money by fighting the last medical war.

3. Medical care spending is highly skewed. Perhaps the most salient statistic in medical care is that the top five percent of patients account for nearly 50% of spending. In other words, the mean patient is meaningless. According to data from the US Medical Expenditure Panel Survey analyzed by the National Institute for Healthcare Management, the average per capita spending for the bottom 50% of patients is only $234 while the average is $8,386 for the top 50% and $97,859 for the top 1%. Moreover, patients in the top 5% are not all old (62% are under 65) or sick (less than half report poor or fair health, and 7.8% report excellent health). Even among those with persistent high spending (top 5% for two consecutive years) less than half are over 65 and in poor or fair health.

One size fits all makes no sense in the face of such highly skewed spending. We should not design a health care financing system for the many that is intended to pay the costs of a very few. Americans are increasingly experiencing this mismatch as they pay thousands of dollars in insurance to cover others while still paying thousands more out-of-pocket for their own care. This is not to argue that we have no responsibility to help care for each other. However, pooling financing means centralizing decision making. Forcing everyone into large diversified insurance pools forces people with very different needs and values into the same bureaucratic decision rules. Single payer would be the most extreme example of one-size fits none.

4. Most medical care costs are fixed. Health care providers incur substantial costs even if no patients walk through the door — costs like salaries, rent, electricity, equipment leases and malpractice insurance. Variable costs per patient are much smaller –single use items like gloves and gowns, per-use equipment (e.g. agents, film) and marginal costs of energy, cleaning, wear and tear on facilities and equipment. Health care is more specialized than taxi services and thereby not amenable to the Uber gig economy. Few nurses or doctors are willing to wait on the curb for day-work to meet variable patient demand, nor would just-in-time labor contracting provide the continuity and coordination necessary for quality care. Moreover, in many expensive corners of health care such as emergency rooms and ICUs we demand on-call excess capacity to accommodate emergencies.

The primacy of fixed costs means reducing medical care use will not save money unless we also reduce capacity. For example, reducing emergency room visits will save money only if we close emergency rooms eliminating the fixed costs. True, the bill for an office visit is less than the bill for an emergency room visit — but what patients and insurers pay are distorted charges, not actual expenses. Rather than constructing bureaucratic pre-certification hoops and financial penalties to reduce care, we may save more by better capacity utilization from scheduling efficiency and reducing throughput time to provide more services with fewer fixed resources.

In light of the four truths about health care, we shouldn’t expect or accept easy answers. There are trade-offs and unintended consequences associated with all proposals individually and in interaction with each other. It is time to recognize the limits of large diversified insurance pools to finance predictable medical expenses that result from inherently individual decisions and are driven by mostly fixed costs. Neither the House nor the Senate bills currently recognize these truths.

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