Health Care and Furnace Repair

Filed Under (Health Care) by Nolan Miller on May 6, 2010

I recently had a problem with my furnace.  Water was dripping from a joint in the PVC exhaust pipe.  So, I called the heating company.  The repair man came out and told me that it looked like the original installer had had a problem with that joint, so they smeared a bunch of glue over it to seal it.  He said that he could do the same, and it might work for a while.  But, if the joint opened up, there was the possibility that exhaust/carbon monoxide would enter the house.  The other option was to rebuild the exhaust pipe, which would cost $150 more but would eliminate the added risk of killing me and my family.  I weighed the options and chose to rebuild the pipe.


I thought about this story when reading this recent article from the New York Times about efforts to teach doctors about the costs of various medical treatments.  In particular, I wondered what the right role of a doctor is in deciding, based on cost, whether I should have a particular treatment or not.  Suppose, for the moment, that medical care were not insured.  You could imagine a conversation very much like the one that took place between me and the furnace repair man.  “We could put you on drugs, and that might help.  Or, we could do surgery, which would fix the problem but cost $5000 more.”  I could then weigh the costs and benefits and make a decision.  Actually, now that I think of it, the doctor doesn’t even really need to know the cost of the treatments.  Dr. Jones could explain the health effects of the various treatments, and then Smith from the business office could come in and explain the cost of things.


If people are given this kind of information and make decisions based on it, then we will tend to choose expensive treatment when we think the benefits warrant the extra cost.  While this may not bring the cost of care down to European levels, it will at least improve efficiency – we’ll tend to spend money on services we think are more valuable.  But, this is really a point about giving patients information on costs, not doctors.


So, what is the role of doctors in medical cost-benefit analysis?  I’m not sure.  But, it seems like there are at least two key differences between health care and furnace repair.  First, there’s insurance.  If I’m paying $0 out-of-pocket regardless of the treatment, I’ll tend to choose treatments that have higher cost.  So, informing the doctor of the costs and benefits of treatment might be important here.  But, this would only be the case if the doctor then makes different choices than he or she would without the information.  My sense is that doctor’s often view themselves as advocating for patients against insurance companies.  So, the doctor, just like the patient, may say that the patient doesn’t pay anything more for the high-cost treatment than the low-cost treatment, so why not go with the better one?  It is unclear whether just giving the docs information, without any financial consequences for choosing high-cost treatment, will make a big difference.


A second reason why health care is different than furnace repair is that people in need of health care often do not have the time or capacity to make well-reasoned decisions.  If I am acutely ill, doctors may have to make choices about how to treat me without consulting me about how I feel regarding various cost-benefit trade-offs.  In such a case, it is also unclear whether the doctor would get anything useful out of knowing the cost of various treatments, except maybe in the case of treatments that are dominated both on cost and benefit grounds.  As one surgeon put it “I get them out of the operating room alive.”


In the end, while it is interesting that medical schools are beginning to invest more time and energy into teaching doctors about the cost of care, it is unclear whether and how that will translate into changes in the overall cost of medical care in this country.

Atul Gawande on How the Senate Bill Would Contain the Cost of Health Care

Filed Under (Health Care) by Nolan Miller on Dec 17, 2009

Atul Gawande just wrote (yet another) great piece on health care reform for the New Yorker.  Rather than spout off about it, I’m just going to copy a particularly interesting paragraph and give you the link.  Enjoy.

“There are, in human affairs, two kinds of problems: those which are amenable to a technical solution and those which are not. Universal health-care coverage belongs to the first category: you can pick one of several possible solutions, pass a bill, and (allowing for some tinkering around the edges) it will happen. Problems of the second kind, by contrast, are never solved, exactly; they are managed. Reforming the agricultural system so that it serves the country’s needs has been a process, involving millions of farmers pursuing their individual interests. This could not happen by fiat. There was no one-time fix. The same goes for reforming the health-care system so that it serves the country’s needs. No nation has escaped the cost problem: the expenditure curves have outpaced inflation around the world. Nobody has found a master switch that you can flip to make the problem go away. If we want to start solving it, we first need to recognize that there is no technical solution.”

Read more:

Will reducing obesity lower health care costs?

Filed Under (Health Care) by Nolan Miller on Dec 11, 2009

A number of the comments on my recent postings have focused on the idea that we could reduce health care costs in the U.S. if we lived healthier.  In particular, if we reduced obesity.  Sounds plausible.  So, I thought I’d check it out.

First, obesity in the U.S. is high and growing.  The obesity rate in the U.S. was about 25% in 2006.  One study estimated that, based on current trends, all adults in the U.S. will be overweight or obese.  Clearly this is not going to happen.  But, obesity is a clear and growing problem.

Second, what does obesity do to health care spending?  A recent study by Eric Finkelstein and coauthors in the journal Health Affairs estimated that the medical costs of obesity in 2008 could have been as high as $147 billion dollars, which is around 10 percent of all medical spending.  That’s a lot.  The average obese person incurs $1429 annually in additional medical costs when compared to a typical non-obese person.  If we could reduce this cost from our medical bill, this could represent a significant savings.  It wouldn’t bring our per-capita health expenditures in line with those of Europe, but it would help.

Or would it?

The Finkelstein paper above answers a particular question.  If you compare the annual health expenditure for an obese person and a non-obese person, how much higher are the obese person’s medical expenditures?  This answer provides an important part of the answer to the overall question of whether reducing obesity will reduce health care costs, but it isn’t the whole story?  Why, because reducing obesity will result in people living longer.  And, the longer you live, the more years you are around to incur health care costs.

Now, moderate obesity reduces life expectancy by 3 years and severe obesity reduces life expectancy by around 10 years.  So, let’s say that eliminating all obesity increased life expectancy by 5 years.  These years probably come when the beneficiary is on Medicare, and average annual Medicare spending is about $8000, so this would add $8000*5 = $40,000 on average to a person’s lifetime health care cost.

So, eliminating obesity reduces average health expenditure by $1429 per year but adds about $40,000 in health expenditure at the end of life.  So, it would basically take about 28 years of annual savings to offset the additional spending at the end of life.  Of course, there are many factors that must be taken into account, like the time-value of money,  changing technology, and the fact that when people live longer they also draw non-health benefits like Social Security for longer.  But, once you factor in that the obese people will live longer and make greater use of the medical system during that time, it is no longer so clear that reducing obesity will reduce overall health care costs.  In fact, here’s a study that looks at this trade-off (between lower costs and longer life) and concludes that while “obesity prevention may be an important and cost-effective way of improving public health, … it is not a cure for increasing health expenditures.”

Now, you may think that what I’ve said is absolutely nuts.  So, let me take a moment to defend myself.  Here are statements I agree with:  (1) reducing obesity would improve health.  (2) if a person loses weight and goes from being obese to not, they will on average reduce their annual health care expenditures.  (3) if a person loses weight and goes from being obese to not, they will on average increase their life expectancy.  (4) the U.S. should be making greater effort to reduce obesity, especially among the young.  But, based on the available evidence it seems that these goals, while desirable, will not result in lowering the overall cost of health care in the U.S.

Final Score on New Mammogram Recommendations: Everybody Else: 1 Blue Ribbon Panel: 0

Filed Under (Health Care) by Nolan Miller on Nov 19, 2009

This week the United States Preventive Services Task Force, an independent panel appointed by the Department of Health and Human Services to create guidelines for preventive care, revised the recommended screening regimen for breast cancer.  The New York Times reported on it here.  The USPSTF report appears in the Annals of Internal Medicine here.  The new guidelines, and the reactions to it, provide an interesting window on the battle ahead for those who would try to improve the efficiency of our health care system.

The main revisions of the guidelines is to recommend that, for most women without particular risk factors like a family history of breast cancer, regular mammography should begin at age 50 rather than age 40, and that for those aged 50 – 74, they should get screened every two years instead of every year.  These recommendations are based on new evidence regarding the benefits and costs of early screening.

The benefits of early detection are clear.  If a cancer is detected early the patient’s prognosis improves significantly.  However, according to the USPSTF report, this benefit is greater for women aged 50 to 74 than for women in their 40s.

In addition to the benefit of screening, the USPSTF also identifies costs of screening in a section entitled “Harms of Detection and Early Intervention:” 

The harms resulting from screening for breast cancer include psychological harms, unnecessary imaging tests and biopsies in women without cancer, and inconvenience due to false-positive screening results. Furthermore, one must also consider the harms associated with treatment of cancer that would not become clinically apparent during a woman’s lifetime (overdiagnosis), as well as the harms of unnecessary earlier treatment of breast cancer that would have become clinically apparent but would not have shortened a woman’s life. Radiation exposure (from radiologic tests), although a minor concern, is also a consideration.

The report identifies false positives as being particularly likely among women in their 40s.

Why the change in the cut-off?  The USPSTF study found that screening reduced the relative risk of death from breast cancer by about 15% for both women in their 40s and women in their 50s.  However, because breast cancer is more common among women in their 50s, they would need to screen 1904 women in their 40s to prevent 1 breast cancer death, while they would only need to screen 1339 women in their 50s to prevent a breast cancer death.  Although the benefits of screening are similar, the risk of breast cancer is higher for those in their 50s than those in their 40s, and this, coupled with the harm from screening discussed above, led them to revise their recommendation.

The New York Times reports that the physician group that advises the National Cancer Institute on new cancer research, has decided that the new evidence merits inclusion in the body of information it distributes to interested parties.   In particular, the previous screening recommendations, issued in 2002, came out at a time when there was “limited research on overdiagnosis and no statistical modeling asking how often women should get mammograms.”  And, the problem of overdiagnosis is the primary reason the USPSTF cited for changing the recommendation. 

Whatever, you think of the recommendation, that’s what it is.  Agencies like the American Cancer Society are studying the recommendation and the underlying evidence and may or may not revise their recommendations.  However, the reactions have provided an interesting insight into what happens when someone recommends reducing the use of a medical procedure.

Kathleen Parker in the Washington Post suggests that the timing might be political.  “Could the research be aimed at cutting costs at the expense of women’s health?”

A group of female House Republicans are arguing that this is what happens when you put the government in charge of health.  From the NY Times’ Caucus blog, according to Rep. Cathy McMorris Rogers of Washington, it’s “an example of how government-run decisions could be made,” and “The timing is very curious to me.”  Marsha Blackburn of Tennessee said “This is the little toe in the water and this is how you start getting a bureaucrat between you and your health care.”

Doctors have also been reluctant to embrace the guidelines.   Some argue that their patients are going to want the test, anyway.  In addition, if we screen fewer patients, there are going to be more women in their 40s who get cancers that are not discovered until later than they would have been if they had been given yearly mammograms.  This will lead to additional deaths.  If we screen every two years instead of every year, there will be women in their 50s whose cancers grow for a year longer before they are detected, which will also lead to additional deaths.  Doctors are understandably reluctant to take responsibility for these additional cancer deaths.  Public health is about averages, while a doctor’s practice is about a relative small group of actual people.  If the guidelines have served them well so far, why should they deviate?

And this brings us to the personal dimension.  Many people can point to an actual person who survived cancer because of early detection, or to someone who might have survived cancer if their cancer had been detected earlier.  This provides a very personal reminder that reduced screening means more deaths.  Even if it is a small number of deaths, and even if the small number of deaths is dwarfed by the cost, and even if the money used on screening women in their 40s for cancer could save more lives if used to screen some other group for a different disease.  People are fundamentally not wired to set aside these “real” lives in favor of statistical lives and someone else’s dollars.

I started writing this on Monday, when the new recommendations were first announced.  The final word came down today when I picked up the New York Times and say the headline “Screening Policy Won’t Change, U.S. Officials Say.”

The Obama administration distanced itself Wednesday from new standards on breast cancer screening that were recommended this week by a federally appointed task force, saying government insurance programs would continue to cover routine mammograms for women starting at age 40.

Perhaps the new recommendations are right, and perhaps they’re wrong.  I don’t know.  If it were my friend or relative, I’d probably say it is too early to discard the old recommendations, especially if .  But, what is clear is that if we are going to reduce the cost of medical care, we are going to have to start making choices of this sort.  Much of the Obama administration’s promised reduction in health care spending is supposed to come from using Blue Ribbon Panels of experts like this to evaluate scientific evidence and recommend ways in which we can provide better care at lower cost.  If we do this (and I think we need to, since the alternative will be reducing care based on something other than scientific evidence) we’re going to have to trade off statistical lives against dollars spent in various different ways in attempt to get the most bang for our medical buck, and recommend doing less of some things and more of others.  Doing so is going to give ammunition to politicians looking to score points, threaten providers, stoke advocates, and twist the emotions of everyday people.  Along the way we are going to have to interpret complex scientific and statistical evidence that does not definitively establish what the right thing to do is.

This case study may night provide a lot of insight how we will solve this problem in the future, but I think it says a lot about how we got where we are today.

Can Preventive Care Save Money?

Filed Under (Health Care) by Nolan Miller on Nov 12, 2009

Last week I suggested that the road to improving health may be to keep people basically “in good health” for longer, and that one way to do this might be increased focus on preventive care through early- and late- middle age.  However, it is a stretch to go from “preventive care improves health” to “preventive care reduces the cost of health care.”  And, the latter point is one that more often comes up in the context of health reform.

The logic behind preventive care is straightforward.  By increasing screening you identify diseases at an earlier stage.  And, if diseases are identified before they become serious, they can be treated and/or managed at a lower overall cost than if the diseases are identified only later once they do become serious.

Sounds good.  So, what’s the problem?  The problem is that screening costs money.  And, you will screen many, many people in order to identify a small number who can benefit from early treatment.  Even though screening is relatively cheap, and the benefits for the small number of people are large, the sheer number of screens that must be done to convey this benefit to a small number of people can often make early screening for a population very costly relative to the benefit derived from it.

This leaves several possibilities with regard to preventive care.  One: the preventive measure lowers overall cost.  Two: the preventive measure increases cost, but the medical benefits associated with it justify the increased cost.  Three: the preventive measure increases overall cost without commensurate medical benefits.  There is widespread agreement that we should adopt measures of the first kind and avoid measures of the third kind.  In the frenzy to reduce the overall cost of the health care system, measures of the second kind are often overlooked.  If, compared to how we currently spend medical dollars, a particular treatment (whether it is preventive or not) has a ratio of health benefit to cost that is significantly larger than typical treatments in our current arsenal, then we should do more of the new treatment and less of the current ones.  Although we are understandably reluctant to increase the cost of care, the necessity of improving the quality of our health care implies that we should make changes of this sort whenever we identify them.

Enter a 2008 study entitled “Does Preventive Care Save Mondy? Health Economics and the Presidential Candidates,” by Joshua Cohen, Peter Neumann and Milton Weinstein that appeared in the New England Journal of Medicine that looks at the costs and benefits of preventive care.  The study finds that, in general, blanket statements about how preventive care can reduce cost are not justified.  Taken as a whole, there is a distribution of cost/effectiveness ratios for preventive care that looks a lot like the distribution of treatments for existing conditions.  In other words, preventive care in general is not superior to waiting for conditions to emerge and treating them only then.

While preventive care in general does not appear to be cost-saving, some particular treatments, such as flu vaccinations for toddlers and colonoscopies for men aged 60 – 64 do appear to reduce overall costs.  Other preventive measures, such as screening newborns for certain enzyme deficiencies and high-intensity programs to prevent former smokers from relapsing, have very high cost/effectiveness ratios (i.e., they are the second type of program above) and should probably be encouraged.

So, can preventive care save our health care system?  The short answer is no.  In a letter in response to an inquiry by the House Subcommittee on Health, the Congressional Budget Office argues that, “for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.”  A particularly compelling example is the following:

[A] recent study conducted by researchers from the American Diabetes Association, the American Heart Association, and the American Cancer Society estimated the effects of achieving widespread use of several highly recommended preventive measures aimed at cardiovascular disease—such as monitoring blood pressure levels for diabetics and cholesterol levels for individuals at high risk of heart disease and using medications to reduce those levels.4 The researchers found that those steps would substantially reduce the projected number of heart attacks and strokes that occurred but would also increase total spending on medical care because the ultimate savings would offset only about 10 percent of the costs of the preventive services, on average. Of particular note, that study sought to capture both the costs and benefits of providing preventive care over a 30-year period.

So much for the silver bullet.

Is U.S. Health Care Efficient?

Filed Under (Health Care) by Nolan Miller on Oct 15, 2009

In the past weeks, I’ve argued that the US spends more than other countries on health care.  This fact is not in dispute.  However, one could argue that, if the increased expenditure on health care is buying more health, then the US system might still be efficient.  We’re a rich country, and we choose to spend more on health care and get more health because of it.  If true, there would be nothing wrong with spending a lot on health.

There are a lot of academic studies on this point, and maybe I’ll discuss some of them in future weeks.  (My favorite is a paper by Alan Garber and Jonathan Skinner that appeared in the Journal of Economic Perspectives last year entitled “Is American Health Care Uniquely Inefficient?”  The short answer is, yes.)  Today, I took some time to play around with the OECD health data.  The OECD is a group of 30 wealthy, developed countries.  If we are going to compare ourselves to other countries, then the OECD is probably the right group of countries to look at. 

My findings are in four charts.  I apologize that the country labels blend together, but the US is conveniently so far from everyone else that it is always easy to identify it!

The first compares per capita GDP to per capita health care expenditures.  Here, we see what we expect to see.  The US spends more per capita on health care than the other OECD countries.  One might expect that wealthier countries spend more on health care, and the trend line shows that this is the case.  But, the US is way above the trend line, indicating that our expenditure is more than can be accounted for simply by our high per capita GDP.


The second chart plots life expectancy from birth (2005) against per-capita health expenditure.  Although the trend line shows that, in general, higher health expenditure is associated with higher life expectancy, the US is well below the trend line.  Even if you don’t believe in the trend line, it is clear that life expectancy in the US is no larger than it is for other wealthy countries, and the US clearly spends more on health care.


 The third chart looks at infant mortality per 1000 live births vs. per capita health expenditure.  Here, the US is well above the trend line, suggesting that our extra health expenditure is not associated with lower infant mortality.


The final chart compares something called “Potential Years of Life Lost” (PYLL) to per capita health expenditure.  The OECD explains PYLL as:

PYLL is preferred as a summary measure of premature mortality since it treats the life year saved – rather than life – as the unit of output.2 In effect, in the calculation of PYLL deaths are weighted according to their prematurity preceding an age limit – 70 in this study. With this age limit, the death of an infant (70 life-years lost) will be given fourteen times the weight given to the death of a person aged 65 (5 years lost). Conventional mortality rates, on the other hand, implicitly give the same weight to all the deaths irrespective of age. Usually, for cross-country comparisons, the number of PYLL is expressed as rate for 100 000 population.

Thus, PYLL is a measure of mortality that gives greater weight to young people who die than older people.  In general, increased expenditure is associated with a decrease in PYLL.  Once again, the US is well above the trend line.  Here’s the chart.


***NOTE: although graphically there appear to be trends in all cases, in the case of infant mortality and PYLL, the statistical relationship for the crude regressions is boarderline significant at best***

So, what do we make of this?  What is clear from the data is that the US spends more on health care than other countries but our results do not, at first glance, appear in line with this increased expenditure.  Before we make too much of it, however, we should all recognize that these charts do not tell a causal story.  If, for example, Americans are sicker than other people, it may be that we have to spend as much as we do in order to achieve the rather poor results illustrated in these charts. If we were to reduce our expenditure to a level more in line with other countries, we might do even worse. If that were the case, I’d be fine with the data.  Maybe we should even be spending more.

In my opinion, the US is so far off the trend line on so many different dimensions of health quality that I tend to believe there is something about our health production function — the way we finance and deliver care in this country — that leads us to spend money without appreciable results.  There seem to be many pieces to the puzzle – overuse of technology, paying for procedures instead of paying for health, defensive medicine, and more.  There probably isn’t a single source, but rather a lot of smoldering fires that combine to create a lot of smoke. And, given that every player in the health reform debate has their own turf to protect, this makes starting to attack the problem all the more difficult.

Why does health spending outpace economic growth?

Filed Under (Health Care) by Nolan Miller on Oct 8, 2009

That’s the question asked in a paper by Sheila Smith, Joe Newhouse and Mark Freeland that just came out in the journal Health Affairs.  The paper reports that real per capita health care expenditures increased by a factor of nine between 1960 and 2007, implying an annual growth rate of 4.8%.  (This is slightly higher than I reported in a past post, but if Joe Newhouse says it, then I believe it.)  The paper looks at data from a variety of countries over a number of years to try to tease out what, exactly, is driving this growth. [Note, this is less a paper about why the US is different than other countries than a paper about drivers in all countries.] They posit a number of possible drivers.

Technology:  Technology improves over time, and new technology is expensive.  Inasmuch as health economists agree on anything, it is that new technology is a major driver of cost growth.

Rising Medical Prices: If the prices of medical care increase faster than the economy as a whole, this could also be a driver of cost growth.

Insurance Coverage: Insured people tend to consume more health care than the uninsured.  So, growth in the proportion of people covered by health insurance could increase health expenditure.  In addition, increases in the generosity of health benefits might also lead to spending growth.  The paper estimates that the share of health expenditures paid out-of-pocket by consumers dropped from 55% in 1960 to 14% in 2007.  People tend to consume more when they pay 14 cents on the dollar than when they pay 55 cents on the dollar.

Rising Incomes: If health is a normal good, and if health care contributes to health (or if richer people just like more health care), then rising real incomes could also contribute to higher real health expenditures.

Demographic Factors: The population is getting older, and older people use more health care.

So, how much does each factor contribute to the increase in health care costs?  Technology is, indeed, a major driver of growth, accounting for between 29 and 43 percent.  Rising incomes are similarly important (29 to 48 percent).  Price increases contributed about 5 – 19 percent of the growth, and increases in insurance coverage was about 10%.  Demographics didn’t seem very important in the historical data, although the paper notes that this may change as the baby boom generation ages.

What does all this mean?  Well, I don’t think anybody is going to argue that we should reduce incomes as a method of controlling medical costs.  So, that’s out.  Insurance coverage and increasing medical prices account for relatively modest amounts of growth.  This leaves growth due to technological innovation as the most likely target of efforts to slow down the pace of cost increase.  However, it is unclear that this kind of growth is a bad thing (raise your hand if you want to return to 1960s medical technology!), and it is difficult to see how we could take steps to rein in technological growth without evoking cries of “Rationing, Socialism, DEATH PANELS!”

Maybe we should just focus on speeding up the growth of the rest of the economy relative to health care rather than the other way around.  That might be easier.

In health care, more is not necessarily better, but less may be even worse.

Filed Under (Health Care) by Nolan Miller on Oct 1, 2009

Time for another one of the big mysteries of the US health care system.  There are a number of studies that document this fact, but I also want to point you toward a couple of really cool tools. (1)  The Dartmouth Atlas of Health Care is an ongoing research project that documents regional variation in health care spending.  Its web site is  If you go to the site and poke around, you can actually generate a lot of tables and charts that will allow you to compare medical expenditure at various hospitals across the country.  (2)  The government has a web site, that will allow you to compare hospitals on various quality measures.

I went to these resources and pulled some information on four hospitals.  The first two are in Rochester MN, Rochester Methodist and St. Mary’s Hospital.  These two hospitals form part of the Mayo Clinic system.  The second two are in the McAllen, TX area, Edinburgh Regional Medical Center and McAllen Medical Center.  (I couldn’t find McAllen Medical Center in HospitalCompare, but Edinburgh is listed as South Texas Health System, 1102 W Trenton Road).  There are many other measures available on these sites, but I just selected a couple for illustration.


Total Medicare Spending in last 2 years of life

(per patient)

% patients given antibiotics before surgery

% heart attack patients given aspirin at discharge





McAllen Med.




Rochester Meth.




St. Mary’s.





The first column compares spending per Medicare patient during the last two years of their lives.  McAllen and Edinburgh clock in at almost 1/3 more than Rochester and St. Mary’s.  Now, one might argue that Edinburgh and McAllen treat sicker patients, in which case it is no surprise that they spend more on care.  However, the numbers here are spending in the last two years of life.  So, the numbers already look at the sickest patients, and it seems that McAllen Texas spends more on its sickest patients than Rochester Minnesota.  (Looking at raw spending per Medicare beneficiary, McAllen spends about twice the national average.)

Now, poor McAllen has gotten a lot of attention over this fact, almost all of it bad.  It turns out that it spends more on health care (at least for Medicare patients) than just about any other place in the US.  The reason, as far as we can tell, is that McAllen just does more procedures than they do in other parts of the country.  If you don’t believe me, check out this fascinating article by Atul Gawande that ran last summer in the New Yorker that takes a close look at McAllen.

Now, it wouldn’t be such a bad thing if McAllen were spending more on health care but also getting more for it.  But, that doesn’t seem to be true either.  Even if you think McAllen does a great job at providing quality care – the two quality measures in the table above are near 100%, which would seem to be pretty good – other areas do as well for significantly less money.  Take, for example, Rochester MN.  Few would argue that there is a better health system in the US than the Mayo Clinic.  It ranks highly across the board.  On top of delivering high quality, they appear to do so at a cost that is significantly lower than areas like McAllen.

This finding is not limited to the few facts I cherry-picked for the table above.  There have been a large number of academic studies, many of which are associated with the Dartmouth Atlas project (look for author names like Elliott Fisher, Jonathan Skinner, Amitabh Chandra, and Kate Baicker), that document “small area variation” in health care practice/cost that does not fully translate into differences in performance.

Which brings us to the $2.2 Trillion question.  Why are places like McAllen so much more expensive than places like Rochester?  And, if we can figure this out, is there some way to make McAllen more Rochester-like?  We could simply tell expensive locations to spend less.  But, merely forcing them to spend less would not necessarily leave quality unaffected.  Maybe, given the culture/technology/knowledge in these more expensive places, they need to spend 1/3 more than Rochester in order to achieve the same results.  Forcing them to spend less would only make things worse.  Certainly not all low-spending locations provide high quality care.

The success of the Mayo Clinic system, which drives the numbers in Rochester, has been attributed to it being a large, coordinated clinic that pays its doctors by salary, which removes their incentive to order care because they get paid more if they do.  Others have argued that Mayo’s success is an illusion arising from the fact that its patients are richer and healthier than other places.  (See the Washington Post Article “Is the Mayo Clinic a Model or a Mirage?  The Jury is Still Out.”)  Settling this question, and the Dartmouth Atlas’s more general finding that there is a lot of variation in US health expenditure that is unrelated to quality, should be one of our top priorities, because if we could somehow bring the most expensive locations in the US in line with ones like Rochester, that would go a long way toward solving this country’s health care cost crisis.

Will malpractice reform solve the health care cost crisis?

Filed Under (Health Care) by Nolan Miller on Sep 24, 2009

I was going to write about whether the high cost of U.S. health care might be driven by medical malpractice.  I was going to say that the best information we have says that malpractice increases health care costs, but only by a small amount.  And, while there seems to be isolated effects on access (e.g., a particular region has a shortage of obstetricians), that effect seems to be rather limited as well.

Then David Leonhardt wrote his Economic Scene article for the New York Times this week saying exactly what I was going to say.  He even cited the same studies I was going to cite.  In the context of the cost of care, the key points from the article are:

  • Total Direct Cost of Malpractice Insurance: The combined cost of malpractice insurance, which includes jury awards, settlements and administrative costs, come to about $10 billion a year.  This is about one-half of one percent of medical spending.
  • Costs of Defensive Medicine: Malpractice concerns seem to induce doctors to order more care.  A conservative (upper bound) estimate of the cost of this care is about $60 billion per year.  This is about 3 percent of annual medical spending.

So, even if we could eliminate all of the costs of malpractice and defensive medicine, it wouldn’t really solve the cost problem in US health care.

One point that Leonhardt did not raise that I find intriguing is the following.  One of the major drivers of the growth of health spending in the US has been increases in the use of imaging technologies such as CT scans and MRIs.  And, there is evidence that some of the growth in use of imaging technology is driven by defensive medicine.  A 2005 JAMA study by David Studdert and coauthors presents survey evidence in which 43 percent of physicians reported ordering imaging in “clinically unnecessary circumstances.” And, a 2007 study by Kate Baiker, Elliott Fisher, and Amitabh Chandra in the journal Health Affairs found that states with higher malpractice costs are associated with increased use of imaging technology for Medicare beneficiaries.  Now, the way defensive medicine is detected and its impact quantified is by comparing areas with relatively high and low malpractice liability, and it isn’t easy to come by datasets that are amenable to such analysis.  It is entirely possible that, if defensive medicine leads doctors to order more scans in geographic area, ordering a scan might become common practice in nearby areas and, eventually, all areas.  The same is true for doctors who order defensive scans on particular types of patients.  If practices that start out as defensive medicine quickly become generally accepted, then the cost of medical malpractice might be much larger than what we are able to detect in the data.

Even if fixing the malpractice system would not fix the cost of the US health care system, there are still good reasons to think about reforming it.  The current system does not seem to do a very good job of actually preventing medical errors.  As Leonhardt notes, the US has more medical errors than similar countries, and only a small proportion of them (2-3 percent) result in a malpractice claim.   On the other hand, the system often holds doctors responsible for adverse events that are not due to their negligence and makes them liable for, in many cases, huge judgments.  The current system also has the potential to create an adversarial relationship between doctors and patients that is not conducive to improving patients’ health.  I, for one, would rather have my doctor worried about making me well than avoiding a lawsuit.  

So, the current system fails to protect patients’ health, fails to compensate them for losses (whether due to negligence or bad luck), and distracts doctors from working toward improving patient outcomes.  This, rather than the potential to solve the health care cost crisis, would seem to be the compelling case for malpractice reform.