Drops in the Bucket: How Far Along Are We Really Toward Reducing Healthcare Spending?

This is a guest post by Jeff Mosenkis, a freelance producer with Freakonomics Radio who holds a Ph.D. in psychology and comparative human development.

Ezekiel Emanuel has a series of columns in The New York Times exploring healthcare costs that’s worth examining. Emanuel is an oncologist and prolific bioethicist. He has an M.D. and a Ph.D. in political philosophy from Harvard, where he also taught. He advised the White House on healthcare and was recently named chair of the bioethics department at Penn. And yes, he’s the older brother of Chicago mayor Rahm Emanuel and Hollywood agent Ari Emanuel (fictionalized by Jeremy Piven on Entourage).

(Stethescope)

Two weeks ago, Emanuel pointed out that even though the U.S. outspends every other country on healthcare ($2.6 trillion a year; the equivalent of France’s entire GDP), we’re nowhere near the healthiest country. This week, he debunks ideas from the Left and Right about how to fix soaring costs. Emanuel starts by noting that healthcare spending “typically increases by about $100 billion per year.” He sets a modest goal of cutting 1 percent of total spending, which comes to $26 billion a year; then does something politicians rarely do in stump speeches: he runs the numbers.

First up, rallying cries from the Left: Could the solution be reining in profits of greedy insurance companies?

 [I]t turns out that the combined profits of the country’s five largest for-profit health insurance companies — United, WellPoint, Aetna, Humana and Cigna — were $11.7 billion, only 0.5 percent of total health care spending. Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold.

 So what about drug companies who charge more for brand name drugs and more to U.S. customers than those in other countries?

Between 2004 and 2009, generic drug use rose from 57 to nearly 75 percent of all prescriptions. Paradoxically, over those same years, the total amount Americans spent on drugs actually increased by 31 percent — the same rate as overall health care expenditures. Even the best estimates suggest that savings from expanding generics’ use even further are, according to the Department of Health and Human Services, “likely to be small relative to total spending on drugs.”

Same problem for re-importation from Canada:

Pharmaceutical costs account for roughly 10 percent of total health care spending, some $260 billion in 2010. Importing brand name drugs from abroad would cut about 2 percent from that — $5 billion per year.

Next he looks at ideas from the Right, like reforming the legal system. Right now, doctors’ costs are driven up by malpractice insurance, and they’re incentivized to practice “defensive medicine,” ordering extra scans and tests. Emanuel cites a CBO report finding that aggressively capping lawsuit non-economic and punitive damages would save a good chunk of money, but not enough on its own.

A package that included a $250,000 cap on noneconomic damages, a $500,000 cap on punitive damages and a one-year statute of limitations for claims by adults would save about $11 billion a year — 40 percent from reduced malpractice premiums and the rest in the form of fewer defensive procedures like M.R.I.’s.

Capping costs of the few super-expensive patients (refusing them additional treatment), even if we could identify them in advance, would also only go so far, as he cites insurance company data showing there were only 255 patients whose care cost over $1 million in 2010, which again would save only 0.5 percent.

Even if you quibble with Emanuel’s numbers, the idea that each of the “magic bullet” solutions is only a drop in the bucket shows how hard it is to fix a complex system with actors whose incentives don’t always align.  And let’s not forget that healthcare is more complicated than most systems – diseases often don’t act predictably, and neither do patients. Emanuel will offer some of his ideas in his column next week (he’s obviously been thinking about these issues for a while), but can you think of a precedent for the kind of reform we’re talking about here?

And just for fun, you can see a conversation with all 3 brothers here.


frankenduf

shees, what a coupla straw men- the problem with the insurance companies is the massive amount of administration cost in connecting patients to care (which single payer bysteps)- for example, the hospital i work at has a full time staff of @ 13 nurses whose sole function is to figure out who pays for what!- and i presume most MDs know this, rather than actually thinking the profits are the only inefficiency in our insurance industry- and his point about brand name drugs is a straw deflection away from the elephant in the room: the drug companies lobbied for NO federal negotiation of medicare drug pricing- this is so obviously corrupt on its face, and no other country would allow of such a 'law'- i can see MDs being unaware of the politics here, but certainly the politicians on this type of legislation know this

Mike B

Administrative costs are due to having to avoid selection biases by patients and doctors. Studies have shown that often times administrative costs involved with cutting unnecessary treatments and fraud may cost more money than they save, however if any one firm attempts to reduce those costs, they will instantly become the focused target of fraud and abuse.

Of course there is no guarantee that relaxing administrative burden won't eventually cause costs to increase in the future. Medicare was required to err on the side of paying out and over the years that has resulted in huge amounts of fraud. Someone should try to determining the tipping point where an additional dollar of administration results in less than an additional dollar of cost savings. In theory the new open access provision of the healthcare law will allow insurance companies to completely eliminate the overhead of screening applicants and attempting to later deny their claims based on pre-existing conditions.

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John B

Very thoughtful post. Really shows the problems isn't solved by simplistic solutions.

"[I]t turns out that the combined profits of the country’s five largest for-profit health insurance companies — United, WellPoint, Aetna, Humana and Cigna — were $11.7 billion, only 0.5 percent of total health care spending. Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold."

And if you took away all the profits, the companies may go out of business leaving the government in sole control.

HMMM... Sounds like the White House really does have a plan.

Joshua Northey

Obviously there are no magic bullet solutions... Who would quibble with that other than those pushing for those solutions?

I do take issue with:
" [I]t turns out that the combined profits of the country’s five largest...were $11.7 billion, only 0.5 percent...Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold."

What does that have to do with anything? I don't think the anyone intelligent is recommending profit confiscation. The complaint about the current structure of the health-care industry is NOT that they are extracting some huge PROFITS (at least not among people who know what they are talking about). The claim is that they are extracting some huge amounts of MONEY. They burn up that money in administration, marketing, pay for employees and management, facilities, et cetera. Thus they don't actually have huge "profits".

The question is whether the benefits they are providing are worth the costs they add to the system. It is a good question that we don't have an answer for, but how much "profit" they claim has little to do with it.

I think at heart the central drivers of increasing costs are really simple. They just don't have simple solutions:

1) Healthcare providers/consumers don't make rational decisions:
a) Healthcare is not something a lot of people can be rational about. (i.e. Whether or not having grandma around for another 6 weeks is really worth $200,000 is not a question humans evolved to respond well to)
b) Even those who could be rational, are shielded from the costs of their behavior (i.e. When society as a whole is paying for grandma's care you are even less likely to make the right choice).
c) We don't pool the risk in the appropriate ways, so we don't actually have "insurance". We have a system that redistributes money from the healthy to the sick with a lot of designed blindness as to whether the sick contributed to their sickness. This doesn't provide many incentives for the sick to control their costs. If people had to buy actual insurance (i.e. pool risk with people in similar risk categories) you might see a lot more people change their behavior.

2) Our model for providing therapy developed in a time where the demand for healthcare far outstripped our actual ability to provide it. So the model took a "provide as much care as possible approach". Now our capacity to develop new therapies is rapidly outstripping our ability to afford them, but we haven't changed our provision model.

This requires a hard look at actual benefits and actual statistics. We cannot afford to "always err on the side of health". It is simply too expensive.

One example:

I recently lost consciousness for unexplained reasons and fell off a bike. I appeared to just pass out. So the neurologist thinks it was "maybe a seizure". He does an EEG and it turns out I have an abnormal EEG that looks like the EEG of someone who has frequent seizures. Yet I am 30 and have had "maybe" one.

His recommendation: Put me on $300/month anti-seizure medication and "see if my condition improves". When I ask him how a rate of seizures could possibly "improve" when there is only one data point he has no good answer. 1 data point cannot establish a rate. The only real data we have is 1 "maybe" seizure in 30 years. Am I supposed to sit on the medicine for 30 years (at a cost of $108,000) and if I don't have another "maybe" seizure then my condition improved? That seems absurd.

So I am confused and ask him some questions about the actual rates and statistics. Is this a base rate/false positive problem with EEGs? He doesn't appear to know.

Well my out of pocket for the medicine is only $16/month, so if I was a less curious person maybe I would just spend $5,760 of my own money and $102,000 of everyone else's money over 30 years to see "if my condition improves". Since I am a curious person I am looking for another Neurologist who can actually answer my questions.

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Eric M. Jones.

The problem of how to avoid spending outrageous amounts in the last year or two of life needs to be seriously addressed. My father had very low healthcare costs until age 77 (and for the next two years until he died) when he had $250,000+++ spent on his medical care by MediCal.

And he wasn't happy with me when I allowed the doctor to write DNR on his chart....And Dad lived another two years.

James

I live in FLA, and the issue here is rampant. When is enough enough as far as end of life care, and why aren't people who have lived full happy lives able to choose their own way to go?

James

Another place to look might be the various biases towards newer and more expensive "high tech" treatments, when there is no real improvement in outcomes. For instance, many kidney stones can be treated equally well either with lithotripsy at a cost of roughly $15K, or with a week of inexpensive painkillers to allow the stone to pass naturally. But when the doctor's practice has invested in an expensive new lithotripsy machine, and the patient's costs are mostly covered by insurance, what do you suppose the treatment of choice will be?

Ryan P

If the non-economic damages caps work to reduce health care costs then we should see lower health care costs in states, like Texas, which have already introduced such caps in their state laws.

But we haven't.

David Leppik

The places to cut are obvious, if this is to be believed:

http://www.medicalbillingandcoding.org/medicals-costs-2/

In particular: "Americans pay $500 per person on administration, double then next most expensive country," and "doctors make 5x more than the average patient. In other countries, this is approximately 3x more."

MW

As a non-American, I'm curious: why is reform of medical malpractice law a right wing cause? If it is not non-partisan, I'd have picked the left wing as a more natural supporter of this idea.

Joshua Northey

In America we have a strong "tort" culture. That means that you can typically sue people for stuff you couldn't sue them for in other countries.

Traditionally lawyers and progressives want to expand people's ability to bring lawsuits, conservatives and established interests want to restrict it. The legal profession pours a lot of money into liberal political campaigns and has long counted the left as an ally.

Just to be clear in case you are confused, by "reform the malpractice laws" they actually mean "make it harder for patients to sue doctors for problems/mistakes". They DON'T mean "make legal remedies more available".

I happen to personally think we have a too tort based culture hear. Japan has 10X fewer lawyers per capita and you don't see their society falling apart into lawlessness (their are of course many reasons for that). While having a robust tort culture has a lot of benefits it also has a lot of costs.

It drives up insurance and transaction costs. If we are doing a $50,000 business deal we should probably be able to work it out ourselves with just a little guidance. But in the US one of the parties will hire a $3,000 lawyer, so then the other party needs to hire a lawyer to protect themselves from their counter-parties lawyer. All of a sudden legal jargon has created a $6,000 tax on the transaction.

Anyway there is some background. Does that help?

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Preemptiveplacebo

Fact is, healthcare costs are being driven by the patient. We all feel like we're getting ripped off by the system so we do everything we can to get as much out of the system that we can. This perverse vicious cycle creates a nocebo - a negative placebo - where people are actually making themselves sick so they don't feel like they are getting ripped off.

We must tip the system on its head. Those who indulge in the myriad of self-destructive habits that cause the preventable chronic conditions that constitute 75% of our healthcare spending should subsidize the health insurance costs of those who eat healthy, exercise and avoid self-destructive habits.

Right now it's the other way around. The healthy become financial enablers for the willfully unhealthy. The fit subsidize the unhealthy habits of the unfit.

By flipping the system on its head and forcing the self-induced-chronically-ill to subsidize those who do everything in their power to be healthy, we would create a race toward health. It would light a fire under those currently unmotivated to change. It would reengage the all-powerful placebo effect by forcing the willfully unhealthy to pay their own way.

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Matt Flynn (MD)

I will have to see where he goes with this next week to make final judgement, but his numbers are somewhat cooked here and indicate an agenda. The most egregious is the claim the reimporting drugs would cut drug costs by 2%. The U.S government is the #1 purchaser of meds in the world and pays the highest prices for those meds. In many cases, those prices are 2-10 times what other countries pay. The generics argument is also invalid, because the cost of many generics has exploded. Either there is inadequate competition, or there is price fixing. This is an enormous problem. I could cite example after example from what the North Carolina State Health Plan pays. These errors of omission or whitewash are so egregious that I believe Emanuel is going to put forth proposals directly from Pharma and the Hospital lobby.

To truly cut health care:
1. Negotiate drug prices.
2. Refuse to pay for branded generics. For example, Solodyn is generic minocycline packaged in a once a day formulation. It sold $880 million lasy year. Generics would've cost $50 million.
3. Require all brand pills to be released as once a day pills. This is easy to do. It also clearly improves outcomes: people are more compliant with once a day meds. This would prevent the Solodyn strategy, which is commonly used when patents run out on major drugs. Lipitor will be released as a once a day right after the patent expires, mark my words. This does nothing for patient care.
Together these would halve Pharma costs.

4. He is an oncologist right? Why hasn't anybody proposed a national oncology database? The U.S. through Medicare, Tricare (military), and Medicaid covers roughly half of healthcare dollars and a larger share of chemo and radiation therapy. Ok, pay every Oncology visit $20 or $25 more and require the Oncologist to have all the relevant information entered. In three years we would have far more cancer outcomes knowledge than has been accumulated in the history of humankind. This is not a huge outlay, perhaps $150 million a year. The government would recoup that simply by stopping paying for certain chemo drugs that are discovered not to work. It may help to know that chemo protocols vary widely between institutions for many cancers, so there will be plenty of variation to study.
5. Reduce bureaucracy. This is the behemoth that no one wants to tackle. My practice employs 18 people if you include outsourced billing. In 1990 that would've been 11. All those extra people do is work claims, fill out outrageously long and wasteful charts and forms, and spin wheels for Medicare, Medicaid, and other insurance companies.
6. Require electronic medical records to address workflow needs. All the gov't incentive programs do is serve to help overcome severe flaws in these systems. A simple demonstration of this: all us docs have smartphones. No one had to incetivize us to buy them. We bought them because they help us. There is NO widely used EMR that comes anywhere near what Google or Apple or Microsoft would produce. Many do not allow patients to enter their own healthcare data from the web. All require ridiculous numbers of clicks to perform simple tasks. None allow automated faxing of clinic notes to patients' other docs. Instead a person has to manually call up numbers and fax them. It goes on and on and on. They are grossly inefficient. The incetive program is a giant subsidy to an incompetent industry.

7. The inefficiencies in hospitals are legendary. All this added bureaucracy for Accountable Care Organizations and the Emanuals and President Obama fail to pick the low-lying fruit. Want to save a ton of money? Require all hospitals to report outcomes data on a defined list of adverse events, like post-op infections, central line infections, wrong medication events, wrong patient events, and so on. Spend money auditing charts to ensure compliance. Then publish the data and let market forces finally force hospitals to take long-known effective safety measures, like bar code or equivalent scans for every med and every patient before giving the med, following the recommended protocols for central line insertion and care, and using simple surgical soap baths pre- and post-operatively to reduce surgical infections. There are enormous savings and health gains to be had here.

It's late, but I could go on and on.

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Brian

I know two medical disciplines where costs have decreased at the same time treatment has improved dramatically: Plastic Surgery and Laser Eye Surgery. Anybody know what those two have in common? And what they don't have in common with all the other medical costs that are skyrocketing?

caleb b

The main problem is this: We don't know how much stuff costs BEFORE OR AFTER we have them done, and the current system of insurance only makes the prices more confusing.

"Doc, how much is this back injection going to run me and what are the chances that it helps my bulging disk?"
"I don't know how much it costs, you have to work that out with your insurance company. We don't really know if it will work, it might."

So I shell out $2,000 for a back injection that "might" work. And I'm STILL getting bills in the mail from all kinds of people that say they were involved in this five minute shot.

Wayne G. Fischer, PhD

Dr. Emanuel has a gift for the obvious. "Obvious" in that all of this has been well known for some time now in the healthcare community. And something else that is obvious to those who work in quality improvement in healthcare: Attempts to impose healthcare "fixes" from the outside will all fail miserably; they must come from the inside of healthcare organizations - where estimates of waste range from 25-50%.