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.

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  1. frankenduf says:

    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

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    • Mike B says:

      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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    • edel says:

      Agree 100% with frankenduf!

      Also, I was wondering what about that one of the reasons why competition does not work properly in healthcare (in part like funerary homes, people don’t have to shop around with a for these services) is the impossibility of comparing one with another. What about a federal mandated 10 plans to be offered by law by all insurers. Then we could easily compare.
      Of course, they can make extra plans besides those 10 mandated.

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    • adam says:

      Medicare and Medicaid fraud comes in at least $100 BILLION. That’s 10% of the cost.

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  2. John B says:

    Hidden due to low comment rating. Click here to see.

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  3. Joshua Northey says:

    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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  4. Eric M. Jones. says:

    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.

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    • James says:

      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?

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    • stedebonnet says:

      Three Words: Physician Assisted Suicide.

      Our concern over keeping people at that stage in their life alive (with the public paying for it) is unprecedented in human history. The money we funnel into alzheimer’s patients in particular comes to mind (which some estimates project cost the US 100 billion per year).

      Having had two family members diagnosed with the disease, its sad to see those people suffer. Its even worse to think how much dignity they have lost. My uncle, who was diagnosed four years ago, planned to off himself after receiving the diagnosis. My aunt, who was too emotional to think about the lasting impact on the man’s dignity at that time, convinced him otherwise. Four years later, he is living in a nursing home (paid for by Uncle Sam) and has no idea who anyone is. She still sees him daily, but he doesn’t even recognize her. He is the type of person that would have never wanted to be in that position, his wife hates seeing him like that, yet we the tax payer provide the health care.

      While this is just anecdotal evidence, I can’t help but wonder why we pay so much money to protect the lives of terminally ill senior citizens? These types of situations have society caught in a prisoner’s dilemma, and organizations like AARP (and senior citizen voters) have the younger generations held hostage.

      I have no problem with spending this money, but I think its a terrible investment for the public. We should instead be spending those tax dollars on the future–things like education, infrastructure, and research and development.

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      • Enter your name... says:

        What I want to know is: Why is your uncle’s nursing home (if they’re normal) putting these people on low-fat, low-sodium diets? Who cares about heart health at that stage? If he’s happy eating double-bacon cheeseburgers and extra salt on the fries, then let him!

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      • stedebonnet says:

        Its funny you should ask…

        My grandmother, who is also in a similar place, has recently been taken off of all vitamins (except calcium) and encouraged to eat the most unhealthy foods possible. Its terribly sad, but for her sake, I think the majority of my family wants the suffering to end.

        As for my uncle, he is actually being fed through a tube at this point. While I am no medical expert, I imagine it might be pretty difficult to get a cheeseburger and fries through it.

        Given this wonderful lineage, I can only imagine that I will be suffering the same fate in my mid-70′s. Fortunately, my friends and I have already decided that by 65 whoever is still alive (we’ve led pretty ridiculous life-styles to this point) will have a “gun-fight at the OK Corral.” The last man standing will either off himself, or spend the rest of his limited days in prison. If only the majority of our seniors made similar pacts 50 years ago. ;) .

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  5. James says:

    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?

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    • Ankhbayar says:

      Health care costs are rocketing swryakd for lots of reasons. New technology, expensive labor, facility costs, insurance, lawsuits, etc…The big problem is that the cost projections are dramatically understated. Obamacare projections that it will save money are ridiculous. The republicans call for vouchers will fall way short and increase costs for consumers.Rock and a hard place. Costs are going up. People will have to pay more.

      [WORDPRESS HASHCASH] The poster sent us ’0 which is not a hashcash value.

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  6. Ryan P says:

    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.

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  7. David Leppik says:

    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.”

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    • Enter your name... says:

      Does the salary difference account for the difference in the costs of medical school? A country that saddles its physicians with $200,000 in debt has to pay them rather more than one that offers training for free (or for free, unless you move to the US to make money, which is a more common arrangement these days).

      Are they all working the same number of hours? Most full-time US physicians seem to have a higher workload than physicians in more rationally run countries. One I know (retired recently) started every day at the hospital no later than 7:00 a.m., and worked straight through until at least 5:00 p.m., at which point the clinic staff went home and he spent hours doing paperwork and returning phone calls to patients and the hospital by himself. That’s not counting the weekends and evenings he spent officially on call or when they got overloaded; that’s just a typical work day and a typical workload. I wonder how many other countries expect a 75-year-old physician to work 12 hour days, five days a week, and then take on-call duty as well.

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  8. MW says:

    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.

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    • Joshua Northey says:

      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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    • Adam Block says:

      Generally, Republicans tend to disfavor litigation by individuals because they believe that, by increasing the cost of doing business, it adds to the cost of products and services. (Bear in mind that, in the United States, except in rare circumstances, even a company or doctor that wins a lawsuit will have to bear his own litigation costs.) Liberals or Democrats tend to believe that limiting lawsuits will allow businesses to abuse individuals. Obviously, there is some truth in each of these views. Republican proposals often have the potential to curb valid as well as non-valid litigation, but there is indeed a lot of litigation in the United States, and obviously not all of it is valid.

      I am interested in why you would think the left would tend to support malpractice reform. Is that the case elsewhere? Perhaps you envision reform in some other way, but here it usually means limits on awards and possibly legal hurdles (e.g., a suit must be sent to arbitration first, or there would be a higher threshold of proof) before a suit can go forward or succeed. I can envision a different kind of legal reform. Given that most victims of malpractice do not sue (thus the system becomes something of a lottery) a system that gives smaller awards but simplifies the process (and increases the number of successful claimants) might be supported by the left, but I know of no such proposals.

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      • James says:

        The problem with “malpractice” lawsuits is that a sizeable fraction of such cases aren’t malpractice by any reasonable definition, but are the result of doctors having deep pockets and being unable to work miracles, so that anything other than 100% perfection becomes plausible grounds for a suit.

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      • MW says:

        I am interested in why you would think the left would tend to support malpractice reform.

        This sort of malpractice reform would be the government regulating what would otherwise be a private* interaction between parties, for the greater good** of society. This is why it seems to me to lie more naturally with the left.

        * well, private but mediated by the courts
        ** ‘greater good’ in the opinion of the would-be reformer.

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    • Joe J says:

      The short simple answer, look at the professions of the majority of left wing politicians and look at who contributes the money to them.
      To them the concept of limiting in any way power or profits of lawyers is laughable. Money trumps logic.

      One of the best suggestions I’ve heard with politics is that they should wear NASCAR like suit. With labels and logos all over their clothes denoting who donated and how much to get them elected.
      In General in the US it would be..
      On the Right: Mainly big buisnesses, and religious groups.
      On the Left: Unions, Lawyers and big buisnesses.

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