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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  • Greg Judd

    SFax, I completely agree with almost everything you’ve written, but I believe you nonetheless make a critical misstep in your assertion that demand for health care is not sensitive to price. 

    The misstep involves time. Your assertions are all about a short-term world in which behavior has no time to change. But of course behavior DOES change – over time. The behavior of that large portion of the population that accounts for a tiny fraction of total health care spending at any given time – and especially its arc – is important to long-term spending results. Many if not most of the “high-spending” “rescue care” cases of future months & years comes from that “low-spending” population. And many of THOSE cases result from the accretion of, the consequences of, suboptimal health habits. You have to – HAVE to – shrink the number of potential high spenders who become actual high spenders if you’re to manage cost trends in any fundamental way. You won’t eliminate all of those cases, or even most, but you can reduce them by some number. It’s possible you can reduce them by a “sufficient” number.

    A daunting number of things have to change about the way we do health care in the US to accomplish this. But each of them is “do-able”. 

  • Todd Yecies

    1.  Health care often is a refusable or negotiable service.  Sure ER trauma may not be, but your examples don’t hold water.  In a cash based system where the money for a procedure comes right from my HSA, I can shop 10 orthopedists to find who will do my knee replacement for cheapest.  As a healthy person, you could negotiate a cheaper global payment then an obese diabetic who is likely to have complications.  I can compare chemo rates from different oncologists.  I may ask my primary if it is absolutely necessary to get those labs annually or if biannually will suffice.  I might go for that 2x/day generic instead of the 1x/day new formulation.

    Hospitals would also have to begin to compete on costs. Right now they compete by services, meaning you lots of people get that private room, better food, 200 channels on the TV etc.  In a more cost-sensitive environment, more people would opt for a more bare bones approach on costs.  
    2.  Information asymmetry is a major issue, but is becoming less of one every day.  Any patient can find information (both good and bad) about their condition online, and be as proactive as they like.  Its like going to the mechanic.  There is assymetry, and there are excesses (unnecessary repairs, high prices), but that can be mitigated by education, second opinions and shopping around.  I was told by 1 ENT that I needed a septoplasty.  I saw another one who said it wasn’t necessary.  Guess what?  I didn’t get the procedure  

    3. Yes healthcare consumption is concentrated in a proportionally small number of individuals.  Why should that matter?  We are still talking about millions upon millions of people, definitely a large enough number for market economics to come into play.  And those with costs that would exceed the ability to pay out of pocket can still be made to have some skin in the game.  I think an ideal plan would be for everyone to have an HSA + high deductible catastrophe insurance that still has a significant co-pay.  You’re covered for catastrophes, but theres no “we’ve hit the deductible, so F*** it”

    • Anonymous

      “I can shop 10 orthopedists to find who will do my knee replacement for cheapest.”

      So each orthopedists is going to give you a free consult?  Or are you going to pay a couple thousand dollars to find the cheapest surgeon using the cheapest knee?  What happens when that cheap doctor only practices in an expensive hospital?  Are you going to shop for an anesthesiologist also?

      My father had a knee replacement and ended up in the ICU for 2 days.  His doctor also ordered an echocardiogram.  Should he have shopped around at that point for the best deal?  If his HSA was empty and he couldn’t afford those two nights in the ICU, should he have just gone home?

      Of course, the cheapest knee replacement can be done in India.  Even with travel costs, my father would have paid only a fraction of the cost and perhaps avoided that hospital caused complication.

      “I think an ideal plan would be for everyone to have an HSA + high deductible catastrophe insurance that still has a significant co-pay.”

      Clearly, you are someone who is healthy.  It’s easy to put money in an HSA when you’re not paying significant medical bills every year.  What happens when you don’t have any money in your HSA?  At what point is the dollar value considered a catastrophe?  What is a significant copay when you have cancer?

      I wish that those who advocate a market based health care system would just come out and say they don’t want to pay for sick people, that they could care less if an individual was able to afford needed care.

  • Anonymous

    I have to disagree with the premise that making patients pay cash for their healthcare would not save money.  Many people would not be able to afford healthcare and forgo treatment.  It would save everyone a lot of money if I chose to die instead of spending $100,000 on cancer treatment.  Many of the elective healthcare…isn’t it all elective..would have not been affordable for me.

    If we truly want a market based healthcare system, making all medications available without a prescription would reduce costs.  If I am knowledgable to make informed decisions, then I don’t need permission to take medication.

    • jamesp

      “making all medications available without a prescription would reduce costs.”

      Excuse me????  It may not reduce costs since it would require patients to self diagnose and treat which could lead to higher costs in the end due to errors, but it would certainly result in many more deaths and increased suffering!

        Am I the only one who noticed this outrageous statement????

  • Ana Fradkin

    Hi Dr. Shadowfax

    I agree with almost all of what you had to say but want to
    add one point of view.  I work for a
    health plan and regularly analyze the average cost of common procedures across
    facilities.  I can tell you that there is
    a wide variation in cost between hospitals for the same procedures, and with
    ASCs as well.  Particularly for patients
    with PPO, the patient will often go wherever the physician directs them, even
    if a less expensive alternative is available. 
    For PPO patients with, say, a 20% coinsurance, 20% of a $5,000 procedure
    is much less than 20% of a $10,000 procedure, and they may well choose the
    cheaper alternative if they knew about it. 
     Although I would agree that the
    physician often doesn’t know about these costs, a lot of times they do.  We often see cases where a physician will
    send a patient to the hospital that happens to be right next door to his/her
    office, rather than a hospital (or ASC, when appropriate) that’s a mile
    away.  We also see cases of physicians
    refusing to send patients to ASC’s that are owned by a competitor.

  • Paul Trentham

    Dr. Shadowfax, I appreciate your point of view. Certainly the ballooning costs of medicine over the last few decades is formidable (and largely due to federal agreements to pay what was charged for years). However, there is a distinct procedural and high-cost bias in your reasoning. On point 1 – I can imagine you see most of medicine as a service not refusable or elective in the ER/ED, but there are thousands of us who practice medicine one could consider elective or refusable. I speak of primary doctors (and other clinicians) who deal mainly in the management of life threatening conditions like diabetes and hypertension. Certainly these conditions are not immediately life threatening, but I’m sure you realize they place a significant burden on you when these patients roll into your ER/ED with acute MI or conditions that mimic it. Certainly many of these patients find themselves in this position because they are unable to find physicians or clinicians willing to treat them in this acutely shrinking field. Some of them may simply decline to take the time or spend the money to deal with these issues, but these services are certainly refusable and may be considered elective by many. The current health care management does not support physicians in doing this important work, nor does it encourage physicians with an entreprenurial bent to develop market-based solutions, and certainly will not with ACA. Primary physicians are flocking to hospital-owned practices instead. 

    Your final point is interesting too. I respect the personal challenges you mention, but there has been no market-based effort to attempt to reduce the costs of the high end services which preoccupy you and a small percentage of our patients. A true market-based effort would be free of government intervention and regulation that only increases costs to providers, which is passed on to patients. We are already seeing some changes in this direction, as patients opt to go to other countries for care (outside US regulatory efforts) which is frequently comparable to care offered here for far less cost. Do these physicians outside the US have better skills or quality? I certainly don’t think so – it’s clear our physicians cannot provide that care here as cheaply, not because they are better or worse.

    I have recommended to patients for years a high-deductible insurance that does little to cover the relatively inexpensive care that I provide (which can be covered out-of-pocket) while using the force of the market to collect sums that can be paid out to those few who have expensive and catastrophic illness. I understand that it is difficult to find plans that offer an adequate combination of coverage and appropriate premiums, but the actions of government in concert with lobbyists for a few large insurance companies are to blame, not the market.

  • don peterson

    While your view is not without merit, the notion that healthcare choices are seldom elective may be something a physician may believe, but certainly not a consumer. If routine well-care were allowed to be advertise, I’d shop for sports and school physicals, throat swabs and other screening diagnostics.  Further, if I have risks factors for CVD, I’d shop for pulmonary function, echocardiogram and even CT angiography given the option.  If I needed routine surgery: knee/hip replacement, tonsillectomy or adenoidectomy I’d go with a surgeon with a good reputation, available references and published prices. As well, I’d ask the ENT WHY WHY WHY are you having pathology studies done on tonsils and adenoids when the literature says in less than .2 percent of cases of patients under 18 is there ever malignancy?  I’d leave that decision up to the patient and the ENT to determine when the tissue is excised and visually examined.

    Why does the FDA not approve sublingual immunotherapy.  The WHO does and has for nearly 20 years.  Half of the populations of Europe and South America are using sublingual allergy immunotherapy. We know statistically that only 30 percent of allergy patients ever make it to an allergist and of those less than a third ever complete allergy shot therapy.  Yet nearly half of Americans have allergies.  Chronic sinusitis and rhinitis has been linked to strep throat, chronic ear infections, ADD/ADHD and asthma.  Are we protecting the allergists’ territory?  Or are we the victims of big pharma lobbying to protect the billions they make on prescription and OTC allergy medications that don’t actually treat allergy, just some of its symptoms.  If I had vouchers instead of Medicare, I’d go to a physician willing to prescribe off-label allergy and pay for them out-of-pocket.    

    Why do insurers and Medicare disallow GP’s and PCP from performing carotid exams using ultrasound.  Are they saying a reasonably trained clinician cannot SEE the plaque in the largest artery closest to the skin or are capable of calculating velocities to determine that plaques are beginning to block this vessel.  Plaques in the carotid are principally responsible for TIA and stroke and of course we know that if you have visible plaques in your carotid, you have them in ALL of your arteries. If enough of us had vouchers we’d use them to pay our family practitioner to scan our carotids or do serial ABI’s to track our progression of atherosclerosis and ask them to prescribe statins if indicated.  But I would go to a doctor who offered these services at reasonable prices because the exams themselves are a commodity.  The interpretations are done by the appropriate specialist who I’m never going to see or know, yet that doesn’t seem to compromise my view of the quality of the work that I’m paying for.

    If we are to reduce the cost of healthcare the only REAL way to do that is to decrease the incidence of disease in our society.  We must start with the future patient, show them how to eat right (farm subsidies should go to those producing safe, wholesome foods) and promote healthy fast-foods at lower prices than comparable bad fast-food.  We should boycott producers who fight labeling, disclosure and transparency in the production of food and distribution of food.  We successfully fought big tobacco.   It’s time to do the same with food producers.  If we get healthier over the next 30 years, our healthcare costs will come down no matter which physician you choose.

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