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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).


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.