Passing along the cost of health care to consumers won’t save money

Republican budget guru Paul Ryan had a plan to end Medicare as we know it to be replaced with a series of less-generous vouchers. The House of Representatives has voted to implement this plan. The political side of this has been written about a lot, and I am not going to rehash what has been better covered elsewhere. I do want to address what seems to be a persistent fallacy or delusion which is held to a near-religious level by many free-market conservatives: The idea that market economics can have an impact on health care costs.

This concept has underpinned every major Republican health care plan since, well, since Mitt Romney’s proto-ObamaCare reforms. The idea is that consumers, when they have “skin in the game,” and when they are empowered and incentivized to see that their money is spent efficiently and only as necessary, will change their health care consumption behavior in a way which will force providers to compete on cost and quality and thus drive down costs. This is wrong, mistaken, misguided and inaccurate.

It’s undeniably true that markets do work in this way, most of the time.

The auto industry and the fall of Detroit is a perfect example of the invisible hand at work. It will not work in health care. Health care is a fundamentally different market for three major reasons:

1. Health care is generally not a refusable or elective service

By this, I mean that in most cases, the health care costs are driven by medically necessary procedures. You get pneumonia. Your knees wear out. You find a lump in your breast. You notice blood in your stool. Barring the denial/self-neglect approach that some people take, when you develop a medical problem, you need to spend money to remedy it. While the timing of your knee replacement may be elective, whether to do it or not generally is not, if the alternative is being disabled and non-ambulatory. It is an inelastic demand, like the demand for gas. When gas gets more expensive, you still have to fuel your car, and except for very small variations, the demand for gas does not vary with the price. Similarly, the demand for medically needed care is not going to be terribly price responsive. When your doctor tells you that you need chemotherapy, you don’t make the decision to proceed based on the cost, but on the need. And the number of recreational colonoscopies performed is actually very low.

It is true that some medical costs are elective and price sensitive — preventative care, luxury procedures like Lasik, some office visits. These, however are a tiny fraction of overall health care costs. As in my analogy, some people do drive less when the price of gas goes up — they take the bus instead — but this does not reduce demand enough to make a difference in the price of oil.

2. There is an asymmetry of information

This asymmetry relates to both price and necessity. When your orthopedist tells you that your knee pain is due to a degenerated meniscus and that the best treatment for that is athroscopy, most consumers are going to simply accept the surgeon’s advice. Now, as it happens, there is good evidence that arthroscopy of the knee provides no more benefit than placebo, but 99% of patients are not going to be aware of this and are not going to bother to do the research to find it out. Those that do, might find that the surgeon has an explanation why, in your case, he thinks it will be helpful despite the studies showing otherwise for other people. In most cases, the patient must trust the physician to provide accurate information on what is really needed. And if you should ask your surgeon what the cost of the arthroscopy will be, the answer will probably be “I don’t know.” Price transparency is poor to begin with but there is the very real fact that based on a patient’s individual payer status the cost will vary dramatically, and the surgeon probably does not know what the cost will be for your case. Finally, when consumers make health care providers compete against one another to decide by whom and where the care will be given, they tend to be concerned primarily with quality and with cost as, at best, a secondary concern.

All these factors greatly inhibit competition and the development of a free market. To some degree it is possible to mitigate these, through, say, all-payer price setting, and mandatory disclosures and publishing outcomes data, etc. However, the third variable, in my opinion, makes the rest all-but-moot.

3. Purchasing power is concentrated in the hands of a very small number of “consumers”

This is the wooden stake through the heart of the idea that consumer behavior can effect cost containment. The functioning of a free market is dependent on the ability of consumers to vary their behavior to force suppliers to compete. However, you and I can be as scrupulous and cost conscious as we like. We are not sick. (Well, I’m not anyway. I hope you’re OK.) The driver of cost is the small fraction of people who have serious medical conditions. It’s the old 80/20 rule writ large.

Passing along the cost of health care to consumers wont save money

Though the data is a few years old, I doubt the distribution has changed. To emphasize, HALF of all health care costs in the US is concentrated in only 5% of the population, and 80% of costs are accounted for by the top quintile! (source: Kaiser Foundation PDF)

So the effect here is that with such a concentration of costs in such a small segment of the population, the ability of the larger population to move the market is highly restricted. You can make 80% of consumers highly price sensitive, but they can only affect a tiny fraction of healthcare spending. And for the generally well, their costs are probably those which are least responsible for the spiraling inflation. They’re not getting $30,000 stents or prolonged ICU stays, or needing complex chronic disease management.

Conversely, those who are high consumers of health care simply cannot be made more price sensitive, since their costs are probably well beyond what they could pay in any event, and for most are well beyond the limits of even a catastrophic health insurance policy. Once you are told that you need a bypass/chemo/stent/dialysis/NICU etc, etc, etc, the costs are so overwhelming that a consumer cannot possibly pay them out of pocket. Since, by definition, these catastrophic costs are paid by some form of insurance, the consumer cannot have much financial interest in cost containment. For most, when they are confronted with a major or life-threatening illness, their entire focus shifts to survival, and they could care less about the cost. Further, many who are in this sick/expensive category have some diminished capacity with regard to their information gathering and decision-making. I’m thinking particularly of the elderly and those who have had strokes or any one of a multitude of illnesses which impact cognitive function or other functional capacity. These patients struggle with their activities of daily living — getting dressed, bathing, transportation, housing, taking their meds. Their ability (let alone interest) in price-shopping their doctors is minimal to nonexistent, even if they had an economic incentive to do so. Taking someone who has a serious illness and making them have more “skin in the game” would represent a cruel additional hardship, but would be ineffective in creating an economic environment in which consumer behavior brought down spiraling health care costs.

On a personal note, I’ve recently acquired some experience with the perspective of someone who is a member of the 1% club. As I have blogged, my wife is under treatment for stage IIb breast cancer. We are pretty highly functional and informed consumers, and we actually have the financial resources to pay for more of our care than most would, so if, hypothetically, we had a stronger incentive to seek out more cost effective care we would be in a position to do so.

So, in our case, would we? No, of course not. My wife’s chemo is going to cost >$100,000. I am sure that we could cut down the cost. Herceptin is pretty expensive — are there less expensive alternatives? Turns out there are not. We spent a lot of money on Neulasta to keep her immune system operational during the intense chemo. Maybe we could have gone without it and just risked neutropenia? Maybe saved some money and used neupogen instead? That would have been quite a risk at minimal savings. Maybe we could have skipped the expensive anti-nausea meds? Not a chance! Chemo is miserable enough that those meds were worth every penny. (not to mention that all these meds might actually be cost-saving in keeping her out of the hospital with complications of chemo.)

What other options do we have in deciding how we treat the cancer? Radiation is non-negotiable, but maybe we could shop between facilities for the best deal. Of course there may not be much price flexibility on radiotherapy given the huge capital costs required. We will be interviewing half a dozen surgeons to determine who will do the mastectomy and reconstruction, and we are 100% focused on quality in making that choice.

So, in the end, if we had the proverbial “skin in the game” in making treatment decisions for my wife’s cancer, I doubt it would make one iota of difference in the actual cost, or at very best only a small marginal difference in a very very expensive course of treatment. Bear in mind, we are the perfect test case! I can afford to pay $20,000 or more out of pocket if I need to, and it STILL wouldn’t make a difference. If families with more limited means were obligated to pay the same $10-20K, if would mean financial ruin, or inability to access the lifesaving care, but it wouldn’t allow the invisible hand to guide the market towards cheaper, more efficient care.

This is, ultimately, why people who believe that passing along the cost of health care to consumers will promote cost savings are wrong, and health reforms which are predicated on this concept will not work.

“Shadowfax” is an emergency physician who blogs at Movin’ Meat.

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