Tag: books

Books I’ve read recently – The Price We Pay

Post author By saltspeak
Post date April 20, 2020
No Comments on Books I’ve read recently – The Price We Pay

This is another in my series of bad high school book reports on nonfiction books that I have read recently.

Name of book:

The Price We Pay – What Broke American Health Care–and How to Fix It by Marty Makary, (Bloomsbury Publishing 2019)

Why I read it:

This is the second in the series of books where I attempt to improve my understanding of the American health care system and health care economics. This book was a best seller and I was told that it was an easy read and interesting. So, I bit.

I had not heard of Makary, a Johns Hopkins MD with a national reputation as a cancer surgeon, who has authored several popular books on medicine and health care. This book is intended to dig into and reveal the “business side” of medicine and its problems. It’s a dramatic change from the first book I read in the series, Uwe Reinhardt’s book.

What I found interesting or worth writing about:

The book (Part I) starts with a collection of anecdotes or stories documenting problems on how American health care is delivered and financed. Makary pins responsibility for high health care costs in the US largely on a combination of:

Entities who provide care (e.g., hospitals, physicians, administrators, and air ambulance companies) and seek to maximize profits, often in ethically questionable ways, or who simply do not carefully and systematically follow best practices; and
Health care businesses, typically low-profile middlemen (PBMs, GPOs, insurance brokers, etc.), who use their positions in the complex US health care system to derive unreasonable profits in Makary’s view.

Oversimplifying things, Makary’s view is that the “health care cost crisis” is due to:

Overtreatment and inappropriate treatment – lots of procedures or drugs that are, at best, unnecessary or inappropriate or, at worst, life threatening; and
Various forms of price gouging and other questionable business practices by various participants that are possible because of the lack of transparency in pricing, third party payment, and the proliferation of various middlemen (PBMs, GPOs, insurance brokers, etc.) in the complicated U.S. “health care system.”

His proposed fixes are a combination of prodding providers to work better and smarter (Part II) or to make pricing more open and transparent (Part III) so that providers and consumers of care make better informed decisions and gaming by miscreants is minimized. In short, his view seems premised on a notion that the market doesn’t work (too much is spent wastefully) because of a lack of good information by the people making the key decisions – patients and physicians – and that with more transparency on multiple levels and education this can be fixed.

The book’s strength is its readability and storytelling; its anecdotes make clear many of the flaws and fobiles that the structure of American health care finance and delivery systems have created. After reading it, you will have to conclude that is a quasi-private market system that is not functioning well.

What disappointed me about the book:

The book’s strengthen is also its weakness; it’s all about revealing the problems with system through compelling vignettes, but despite its subtitle (“and How to Fix It”) it really doesn’t propose in my judgment any realistic solutions. All the things he proposes are sensible and probably should be done, but they will not measurably move the dial, at least in my judgment.

More troubling to me is his propensity to suggest that he is the one who discovered many of these stories, when in fact some of his specific examples appear to have been previously documented by the mainstream media, as my notes below suggest (e.g., NPR’s story on the helicopter ambulance business and the NY Times on the Carlsbad hospital’s pricing and debt collection, two of Makary’s anecdotes). His lack of clear crediting of those stories seems borderline unethical (at least I did not notice him credit the stories, which appear to predate his personal experiences). They just happened to be ones that I was aware of and it made me wonder if most of his compelling stories had not, in fact, been dredged up by a research assistant and Makary, then, headed to scene to provide his first-person narratives.

In reading the book (a few months ago), I took notes on each chapter, which I haves copied below for anyone who wants the excruciating details.

Part I:

Chapter 1: Health Fair

The center piece example in this chapter is the use by vascular surgeons of health fairs at African American churches in the DC area to promote inappropriate and unnecessary use of angioplasty and stents in leg arteries. It is a pretty clear and outrageous abuse that is enabled by the fact that third parties (insurers, self-insured employers, or government programs like Medicare, Medicaid, and Tricare) pay for most health care in the US. The subtext is when others are paying unscrupulous providers can easily use their authority, knowledge, and lay people’s deference to them to provide expensive and very profitable and unnecessary services.

Chapter 2: Welcome to the Game

This chapter delves into the bizarre pricing used in the US health care industry, where hospitals and other providers use a wide variety of prices – their “rack” price (or the “out of network” price that the uninsured individual who walks in off the street pays), various negotiated discounted prices charged to insurers, the Medicare price (set by the federal government), and the Medicaid price (set by some combination of federal and state government); these prices are typically opaque – i.e., not only are they not disclosed or they may be almost impossible to find out. Doctors, nurses, and many administrators often do not know what the price is and cannot or will not tell when the question is asked. Makary tells the story of a French national who has a heart attack when he brought his son to college in DC. The hospital tells him the price of a bypass surgery is $150K but starts cutting it when the administrator realizes that he will go back to France, where the price will be much lower. The final reduction to $30K is still higher than the French price and the Americans lose the sale.

My take: Makary finds price discrimination and opaqueness to a big indictment of the health care system. The typical person would likely agree. But how is that different from what occurs in other well-functioning, competitive markets? For example, the same charge could be made about how airline tickets and cars (new and used) are priced and sold – in both cases, there is rampant price discrimination (buyers of the same car or ticket paying wildly different prices) and a fair degree of opaqueness.[Note: MSRPs for new cars are an exception. I think the law requires that and there is no guarantee, though, that you can purchase a car for the MSRP if demand exceeds supply by a lot.] We don’t consider that to be a policy problem or a cause for government regulation. Why is health care different? Makary never addresses that issue. It strikes me that analogizing from Lasik and cosmetic surgery to more general health care is fraught with problems – these are elective decisions for nonessential purposes (not like cancer treatment, e.g.) that are typically made occasionally by middle- and upper-income consumers.

Makary also uses the pricing of emergency room visits and surprise billing (when you discover one of the providers in your in-network hospital is actually out-of-network) and contrasts it with the way Lasik and cosmetic surgery is typically priced in a transparent way and patients/customers make informed decisions that take price into account. The markets for Lasik and cosmetic surgery typically do not involve third-party payers – patients/customers pay cash. These markets probably are effective and well-functioning. But unlike most health care these services are discretionary, nonemergency, and the quality of their results are more easily evaluated by informed lay persons. I consider them to be more like getting a haircut than treating your cancer, so I think his analogy is not very apt.

Chapter 3: Carlsbad

This chapter details how the only hospital in a small city (Carlsbad, New Mexico) uses a combination of high prices (probably common for hospitals for their out-of-network patients) and routinely sues patients who fail to promptly pay their bills. Many of his example patients have insurance, but still cannot pay. The hospital regularly sues them, gets de fault judgments, and, then, garnishes their wages. The folks in his examples are typically working poor or low-income individuals. He does not say this, but I assume the increases in deductibles and the spread of “high deductible” HSA plans probably mean that more people with insurance have very large medical bills as a result of these high prices and end up in medical debt as a result. (The hospital in the next closest city – still far away since this is NM – has lower prices, he notes.) He details this in a colorful way and finds that the hospital (part of a for-profit chain) is probably not an outlier.

This tendency of health care providers to sue nonpayers and garnish wages has been documented by the media. A recent Pro Publica story about Coffeyville, Kansas and the widespread use of the contempt power (i.e., the ability to throw nonpayers in jail) is particularly shocking. This suggests that our health care system as it applies to low-income families who do not qualify for Medicaid is verging on becoming Dickensian if it hasn’t already crossed over to that in some states or localities. In fact, the NY Times covered the exact example Markey uses (Carlsbad New Mexico) in a 2015 story. This is another instance where Markey creates the impression that he has uncovered an example that previously was the subject a national, mainstream media story.

Chapter 4: Two Americas

This chapter documents that Carlsbad practice (high prices, suing patients that do not pay, and garnishing wages for nonpayment) extends to the nonprofit sector as well. Makary notes that this tends to hit lower-income workers (of course) – hence, the chapter title (Two Americas).

My take: He draws examples from Virginia (close to Hopkins’ home in Baltimore), rather than Maryland. Maryland (a blue state) opted into ACA’s expansion of Medicaid; Virginia (Republicans controlled state government or had a veto over opting in) did not. He says nary a word about Virginia’s failure to opt into the ACA’s expansion, although I suspect you could find similar examples in Maryland. But for those with income below the ACA’s Medicaid limit, this is the elephant in the room, in addition to the inexorable movement to high deductible plans. If Virginia had opted in, I assume the effect for these folks (unclear how many of Makary examples, though) would be to (1) constrain the high prices, because Medicaid would dictate them and (2) eliminate the problem of suing the working poor for nonpayment. Of course, it would do nothing for people with incomes above the Medicaid income limit and high deductible policies.

Chapter 5: Ride

This chapter details another niche of excess in American health practices: the excessive use and high pricing of air ambulances (helicopters) that is spawned by the system of third-party payment. Of course, the fact that the ambulance is often “out-of-network” or not covered by government plans (Medicare, Medicaid, or Tricare) means yet more medical debt and financial pain for ordinary folks. Again, the media (e.g., NPR story about high prices) has documented this phenomenon; see this NPR story about how the problem (high prices that often fall on the individual, rather than an insurer or government plan) has led to a subscription model with its own abuses. Makary doesn’t discuss that angle.

My take: Wasteful air ambulance use, excessively high prices, and too many providers undoubtedly push up overall health care costs and bankrupt individuals who get caught in the trap of using them unnecessarily. In the larger scheme of things (i.e., relative to total national health care expenditures), the effects are trivial. But measures should be taken to mitigate the effects. State laws dictating that the maximum price is some percentage of the Medicare rate (125%?) would likely do the trick, but good luck getting that through state legislatures.

Part II: Improving Wisely

Chapter 6: Woman in Labor

This chapter is the first in the second section of the book, which focuses on how to improve health care practices. It focuses on inappropriate use of C sections, a widely recognized problem that varies a lot from place to practice and practice to practice. C sections have the twin problems of high cost and poor outcomes (when done unnecessarily). Makary leads with an anecdote about “Dinner Doctor,” a physician who performs C sections to accommodate his (one assume only a male would do this) personal schedule (being home in time for dinner) and more generally how C sections performed rise on Fridays, etc. He extends the examples to include unnecessary use of blood transfusions and, one presumes if you knew more about medical practice, many other instances could be found. Much of this is unconscious, due to inattention, reflects poor management, etc. He suggests sensible management techniques (e.g., peer comparisons to nudge physicians to improve) for making improvements.

My take: Similar inefficiencies are likely found in all sectors of economy, including ones subject to more competitive market pressures than health care providers. But the fact that the health care is pretty much immune to competitive evaluations of relative prices and quality likely makes it worse – just a guess since measuring this would seem to be incredibly difficult, if not impossible. The fact that physicians are subject to professional ethics and that his examples imply compromising them makes the examples seem more outrageous.

Chapter 7: Dear Doctor

This chapter extends the previous chapter’s discussion by describing similar problems with a common technique for removing skin cancers (referred to by the acronym MOHS). This involves removing skin cancer, doing a biopsy to determine if the surgery got all the cancer (are there positive margins?), and if not repeating the process. The physician is reimbursed at a higher rate if the process is required to be repeated, not surprisingly because more time/work is required. Statistical analysis shows that some doctors consistently do multiple procedures, receiving more compensation (and causing more pain for their patients) – i.e., they are at the right tail of the distribution. One assumes that this is unconscious and reflects inattention, poor technique etc. Marary’s point is that simply informing physicians of how they are doing relative to their peers will stimulate significant improvements – better outcomes at lower cost. That may be the case simply because it stimulates physicians to work harder or smarter or because they have been consciously or semi-consciously been gaming the system and now fear they will be fingered (Makary doesn’t say the latter).

My take: This seems an obvious thing to do, but the current pricing model does not encourage it and rewards looking the other way. A natural question is whether the pricing should be changed to increase the basic price and not paying more for excising additional blocks of tissue. One would need to be an MOHS expert to judge if that makes sense (e.g., would it lead to counterproductive excising of too much on average, are some situations more prone to judging how much to excise so that some practitioners would be systematically disfavored, etc.?) or how to do it.

Chapter 8: Scaling Improvement

This chapter details more opportunities for curtailing expensive overtreatment – elective back surgery, lumpectomies for breast cancers, etc. He concludes “That overtreatment penetrates most corners of medicine.” (p. 120) He does concede that many of the suggestions that he got from fellow physicians for improvements would not have been so easy to implement (as his examples are) because they did not lend themselves to clear measurements or agreements by the professional groups (maybe for political or other reasons?).

My take: In general, one of Makary’s consistent themes is that overtreatment (too many procedures) is a major cause of our high health care costs. I am sure that large savings could be realized by reducing the unnecessary services (in the billions every year, I am sure). But international comparisons, per Reinhardt (“It’s the Prices, Stupid”), suggest that numbers of procedures do not explain why the US spends such a larger share of its economic output on health care than other developed nations.

Chapter 9: Opioids

Makary discusses how he and other surgical practices inattentively over prescribed opioids – as I read it, this occurred, because they never really bothered to put much effort in rigorously determining what a good default rule should be based on the likely severity of the pain for varying types of surgery. When the growing attention on the opioid crisis induced them to do this, they discovered that they were mindlessly over prescribing opioids. (The implication is that his Hopkins practice has addressed this, but many other surgical practices have not?) Obviously, this increased health care costs – probably the direct costs were modest, but if those practices really were major contributors to the opioid crisis (I have no idea whether that is true or not and if Makary does, he doesn’t provide any evidence of it) the social costs are immense and they probably contributed to growing health care costs, since opioid addicts likely consume a lot of health care and addiction yields many other personal and social costs aside from the burden on health care.

Chapter 10: Overtreating Patients Like Me

More details are presented on overtreatment using examples drawn from his personal (not professional) experience – using Nexium (a heartburn drug) and statins rather than making diet and lifestyle changes or recognizing that the risks being addressed don’t need to be.

This is the last chapter of the part of the book that largely focuses on medical practice dynamics and includes a bunch of quotes about how overtreatment is a serious (perhaps the most important?) component of the health care cost crisis. Here’s a sampling:

In recent years, a plethora of studies have shown that doctors have been overtesting, overmedicating, and over-operating. (p. 144)

Overtreatment is not just a side issue in medicine. It is the root cause of our greatest public health crisis. (p. 146) [Note to be fair to him: this is not necessary about costs, since outcomes are involved too – e.g., the problem with opioids, antibiotic resistance, and so forth. He notes a Korean example of overtreating thyroid cancer.]

Makary cites estimates of overtreatment elsewhere in the developed world. Since all other developed nations spend so much less of their economic output on health care, that may suggest (given Reinhardt’s point that it’s the prices) that overtreatment isn’t the explanation for the US’s spending so much more than everyone else. Rather, overspending is probably an international problem; perhaps it is simply inherent to health care – a combination of high demand (i.e., health care being a superior good) and the difficulty of evaluating what is a cost-effective treatment. Marary describes even more outrageous examples of overtreatment in the developing world that verge on or clearly are outright fraud – providing unneeded treatment that at best is inappropriate and at worst is life threatening.

Part III: Redesigning Health Care

Chapter 11: Starting from Scratch

One of Makary’s general themes is that the health care business needs disrupting (following I guess the high-tech business cliché – Uber etc). He turns to the example of Telsa’s marketing practices – transparent pricing and no haggling, I guess (maybe coming around to my point that there are similarities between the price and selling of cars and medical care). He holds out a specific Arizona clinical practice model, IORA, as a disrupter. Although he isn’t very explicitly about exactly how the clinic works, it appears to be a staff model HMO that uses capitation pricing and strongly focuses on attempting to move its customers/patients into a more cost effective (e.g., life style changes) treatment by relying on a team of providers who work collaboratively.

Chapter 12: Disruption

This chapter returns to the price discrimination theme – the example he uses is an out-of-network emergency room treatment of a friend (“Dina”). The fact that it is out-of-network means that the highest Chargemaster price will apply. The consent forms a patient must sign to receive treatment includes an agreement to pay whatever these prices are. [Note: This is where my analogy to pricing of cars breaks down a bit (a lot?) in that medical care is often purchased/consumed before the price is revealed at all. That is not the case with car and truck sales or with airline tickets. That element of health care purchasing is part of a broader point relating to the complexity and often emergency nature of individual’s health care decision making; when authorizing treatment, one may not know exactly or even generally what treatment will consists of or what the alternatives are (much less any of the relevant prices), This is one of the reasons why the competitive market model, in my judgment, will always have severe challenges as a way to allocate efficiently resources to health care.] (Makary thwarts this by making them print out the form and crossing out that portion of the agreement – not something that would be possible if she had signed it electronically. He knows that federal law requires the hospital to treat her.) The price they attempt to charge her is, of course, ridiculously high ($60K for some sort of minor surgery for which the in-network price was $12K).

The disruption in the chapter title refers to an individual, Jeffrey Rice, who created a business, Healthcare Blue Book, like the Kelly Blue Book car pricing service. It publishes the various prices of health care prices for procedures charged by providers and sells services to self-insured employers who attempt to steer their employees to use lower cost providers by providing various incentives and disincentives. Makary cites a recently enacted Florida law which requires providers (some or all?) to publicly disclose what they are actually paid for procedures. In Makary’s view (p. 175) the difference between Chargermaster prices and what is received is “at the dark heart of health care’s cost crisis.”

Reinhardt’s book refers to Maryland’s all payer law – i.e., a state regulation that requires some providers to charge everyone the same price – Makary, despite practicing in Maryland and despite the fact that this is squarely on topic with his critique of price discrimination and lack of transparency, never even mentions this. Not sure why – maybe because it is inconsistent with his bias toward “market” (rather than regulatory) solutions or because it is controversial (read: partisan or opposed by his fellow providers?).

Makary cites a “large Rand study” about consumer/patient behavior when individuals are not responsible for paying for the cost of health care services. He says this study found that they (probably perversely, although he doesn’t explicitly say that) opt for the more expensive services on theory that they are better – there is evidence for this in other contexts (e.g., how consumers use price as a proxy for quality – automatically thinking that high priced wine is better is the example I remember). Makary does not explicitly ID this study, but I’m guessing it’s the one done back in the 1980s summarized here. I was not aware that it showed the perverse price effect that he cites – rather that it just shows that overall consumption drops some as prices rise. A more recent Rand study of the ACA (addressing health insurance choices) is more optimistic. He does not cite the NBER paper that Reinhardt relies on to reject the efficacy of using “skin-in-the-game” to constrain high health costs.

Chapter 13: Buying Health Insurance

This chapter focuses on brokers who sell insurance to employers and how the typical financial arrangements (i.e., the way insurers compensate brokers) create conflicts of interest and may/will interfere with the recommendations that brokers make to employers. Makary advocates for a flat fee (I suppose more accurately a model where the advisor provides services to the employer and is paid for those services unrelated to the amount paid for or the type of insurance purchased). This seems sensible and is like the recommendation that individuals should not rely on financial advisors who receive commissions based on the investments or other financial products they buy but should rather hire fee-only advisors. Undoubtedly, the model he disparages likely drives up the cost of health insurance. The ACA attempted to address this by allowing small employer coverage to be sold on the exchanges. But I assume (w/o knowing) that that has not worked because of the complexity of the products and the relationships between brokers and employers (as Makary points out) causes most employers to simply relying on the brokers that they have always used and trusted (perhaps misleadingly). As an aside, Makary rarely discusses the ACA, even if it seems relevant to the points he’s making. I assume that he is trying to avoid touching a political hot stove or he is a conservative Republican.

Chapter 14: Pharmacy Hieroglyphics

This chapter goes after Pharmacy Benefits Management (PBM) companies as another explanation for high US health costs. Again, Makary thinks their fees (the structures for which are opaque and complex) lead to conflicts of interest and drive up costs. This industry is concentrated, so oligopolistic (“obligopsopic” – making up a new word – since PBMs are purchasers not producers) behavior might be going on here. None of this is obvious to me – i.e., why PBMs drive up the prices, rather than help hold them down. I assume that the entities (employers or insurers) that contract with them are sophisticated and can judge whether they are getting value for what they pay. Makary largely fingers PBMs, rather than the drug companies themselves, who are typically considered a logical culprit for high drug costs. They obviously have a legal monopoly (patents) and other methods for milking the system even after the drugs are off patent to maximize profits. Makary may simply perceive that (bad Big Pharma) is a well-accepted public narrative and he is trying to demonstrate that PBMs are also a problem? I am not convinced by his arguments. I know that Big Pharma tends to point a finger at PBMs when their own pricing practices are questioned.

Reinhardt’s book has a good graphic (Figure 1.9; p. 35) that shows the nature of these arrangements.

Chapter 15: 4K Screens

Moving on to another miscreant who may be responsible for high costs, Makary takes on GPOs, entities that I was unaware of. They are General Purchasing Organizations and either directly or indirectly buy or select the medical supplies and equipment that hospitals and clinics typically purchase. Again, this is a concentration and monopsony type problem that, in his view, drives up prices and stifles innovation in medical supplies and equipment. Federal law apparently provides an exemption for them from anti-kickback rules, heightening his suspicions. This seems counter intuitive to me. I can see a myriad of reasons why there is market failure in delivering health care services (lack of information, third party payments, consumers who don’t have the knowledge or expertise to make informed choices, etc.), but most of those do not apply to institutions contracting with service providers like GPOs as he describes them.

Chapter 16: Diagnosis: Overwellnessed

In this chapter, Makary takes on the wellness industry, i.e., the army of consultants and providers selling “wellness services” to employers – i.e., companies who try to get employees to make lifestyle changes (stopping smoking, exercising more, improving their diets, and so forth). Studies have shown his point is well taken. He also takes on genetic and biometric screening as a problem of “fishing for diseases” that probably are best left untreated. As usual, he has some good examples. He points out the problematic practice of using these programs to collect health data that, then, is sold without the subjects being aware of it.

Again, I assume that the dollar amounts involved are peanuts in the larger scheme of things. I also assume that employers will wise up or maybe employees view some of these incentives as valuable compensation. But all this stuff does add up eventually. One must wonder whether there is something about the US health care system that makes it particularly susceptible to this stuff. Are other developed countries similarly wasting their money?

Chapter 17: The Words We Use

Here Makary addresses medical education and how (in his opinion) it wastes a lot of time and money on stuff that is not helpful to practicing physicians and how it fails to train doctors in some key skills that they need to succeed – being good listeners, working well on teams, being empathetic, etc. My observation is that these complaints probably echo those made about other types of professional education (i.e., they are similar to what I regularly heard about legal education from lawyers and how law schools fail to teach many practical skills lawyers really need to practice effectively, leaving that to law firms). He makes some good points obviously, but none of this is likely to bend the cost curve, as they say. [Note: I thought his ideas about screening potential med students for the desired personal qualifies after they meet minimum (but high) intellectual requirements make sense. But of course, then, potential students will start figuring out how to game those criteria, I suppose.]

Makary makes a more general point (as suggested by the chapter title) that word selection matters a lot and that the profession needs to talk more simply and clearly. Some of his specific suggestions puzzle me and some of them are clearly slanted toward his analysis of what is wrong with the system (i.e., paying too much to brokers, PBMs, GPOs, etc.).

Chapter 18: What We Can Do

His underlying prescription/theme is that if the health care system has more transparency in its pricing and responsibility many (most?) of the problems (high costs) would go away. “Most of health care can behave like any other marketplace in any other industry: it responds to customer demands for non-urgent services, which account for most health care services.” (p. 245)

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Books I’ve Read Recently – Priced Out

Post author By saltspeak
Post date April 20, 2020
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This is another in my series of bad high school book reports on nonfiction books that I have read recently.

Name of book:

Priced Out – The Economic and Ethical Costs of American Health Care by Uwe E. Reinhardt (Princeton University Press 2019)

Why I read it:

Reinhardt, a long-time economics professor at Princeton, was one of the nation’s pre-eminent health economists (he died in 2017). I regularly read his NY Times blog on health economics and found it to be very insightful. From an ideological perspective (best to get his priors out front) Reinhardt generally favors single payer arrangements; for example, he designed the Taiwanese single payer system. But see below for his more nuanced application of that preference to America’s situation.

As a retirement project, I decided that I should educate myself more on health economics and the working of the US health care system because it is the preeminent domestic public policy issue facing America. It is best to outline why I think that, since it infects (pun intended) my approach to this and explains the answers and insights I’m seeking. (Caveat: I’m a rank amateur on health economics and the operations of the American health care system.) My view is that there are two key, but interrelated, policy issues that need to be faced (by policymakers, voters, or whomever):

Issues related to access to care – a fair number of Americans are not covered by insurance, Medicare, or the various state Medicaid programs and, thus, do not have access to basic services beyond what they can afford to pay out of pocket (not much). Also many with coverage have low-quality insurance (e.g. with deductibles or copays that are so high that they cannot afford to pay them for any substantial procedure).
Issues related to the cost or the mispricing of care – for various structural reasons, America pays much more for health care than other developed nations and spending on health care has been growing faster than the rate of general inflation and/or overall growth in the economy. In short, America spends a lot more than any other country (relative to the size of our economy) on health care and that spending has long been growing faster than the overall economy. That is not necessarily a problem, if that is what we as a country want, of course. My instinct is that because there isn’t really a functioning market system for health care goods and services (the normal way a capitalist system allocates scare resources), we can’t know whether that is what people want. My suspicion is that they don’t. Truth be told, I reach that conclusion probably because that is not what I would want or, secondarily, because other countries spend so much less and get about the same outcomes. In any case, I don’t derive my income from the health care sector, so there is that bias in my preferences.

Although the issues are separate, I have tended to view them as interrelated. Democrats traditionally have focused on #1 – expanding access – while not addressing #2 or putting it off until later. As a matter of fairness and politics, that seemed understandable if shortsighted. Extending something (health care coverage and access to service) to people is more popular than imposing rules that will ration services or hold down their prices. The fact that somebody will be disadvantaged is clearer for the latter than for the former. Although somebody must pay for the expanded access, that is a secondary focus and often fuzzy (specifically who will pay and how much), while it will likely be the primary focus for “cost containment” efforts.

Republicans and conservatives, by contrast, come at it as either issue #2 needs to be addressed first or both issues should be addressed simultaneously. Truth be told, they seem preternally inclined to be less or unconcerned about issue #1.

When I saw Reinhardt had written a book on the general topic, I immediately bought a copy figuring it would help me in my quest to resolve that dilemma (how to marry expansion with workable options to control costs/growth of consumption of medical services) or at least provide insight into those questions. I read it last fall and just re-read it.

To cut to the chase, the book really doesn’t directly address my issue #2 or get at the dilemma as I have cast it. In fact, if I’m reading it correctly (a main reason why I reread it after a few months passed), Reinhardt is essentially arguing that issue #2 is being used (by Republicans, fiscal conservatives, and others) simply to prevent addressing issue #1 and the very fundamental social and ethical considerations that underlie it. In my experience that is an unusual position to be taken by an academic economist, since it is essentially a normative or value-based argument. Economists typically wash their hands of ethical or normative considerations, at least when they are operating as economists. So, I found the book unusual and interesting from that perspective and not really what I expected when I bought it.

What I found interesting about the book and worth writing about:

Reinhardt’s book consists of two parts (my breakdown; he divides it slightly differently). The first part analyzes how the American health system works and its various deficiencies. The second analyzes the ACA and the two alternatives that the Republicans proposed to replace the ACA – the book was written in 2017 when Congress was unsuccessfully attempting to repeal and replace the ACA, even though it was published in the fall of 2019. This is stale news, but it is worth reading because it reveals the nature of what powerful Republicans (if not necessarily the most thoughtful Republicans) would likely do about health care policy. It’s not pretty in my judgment and I guess the electorate held them accountable in November 2018 for their callousness.
By contrast with my framing the issue as having two separate and interrelated elements (as I outlined above), Reinhardt comes at it differently. He treats my first question as the issue and frames it as a matter of a philosophical or ethical choice for society – are we going to have a two-tiered health care system that provides markedly different care based on your wealth and income or not? Framed that way, the answer (at least to someone like me) is obvious: no, that’s unfair. But, of course, it does not assuage my concern about run-away spending on health care that does not come close to optimizing individual preferences the way a private market does for most goods and services. In fact, by addressing the ethical concerns it increases the misallocation (albeit more fairly), since quite bit more will be spent on health care in total. The flip side, of course, is that less will be available for other uses – housing or whatever.
I particularly found chapter 7, The Mechanics of Commercial Health Insurance, a good refresher course. I was not aware of 80-20 Rule that in a large group of healthy people, 20% of them incur 80% of the group’s health costs. This, I think, tends to undercut the idea that high deductible plans have much chance of restraining prices or costs; the lion’s share of spending must be on items in excess of even the highest deductibles.
Essentially, then, he is saying that expanding access should not be contingent upon developing a mechanism to contain costs (holding down prices for health services since the number of services will go up if you expand access). That is largely the Democratic view of the issue. So, how does he get there?
His essential response is that a wealthy nation like the US can afford it. For example, the popular political notion that continuing Medicare on its current path is “unsustainable” must be posited on unwillingness to pay (not inability). Going through the math, he shows that if Medicare were fully funded under CBO’s growth predictions that would still leave remaining GDP to spend on other stuff that is projected to be 35% higher in 2050 than now (pp. 4 -5).
Reinhardt goes through many of the gory details of how the US health care system works and doesn’t work – community versus medical rating of health insurance, lack of transparent pricing, surprise billing, etc. This is all done in very accessible but, to my amateur eyes, accurate way. That alone makes the book worth reading – even for someone who thinks they understand a lot about how the system works.
I had known this from his blog posts, but the book remakes a key point: the US’s high spending on health care is NOT driven by more procedures or services consumed by Americans. Rather, it is that procedures and services in America have higher prices. He wrote a 2003 article in Health Affairs called “It’s the Prices, Stupid: Why the United States is so different from other countries” that made the point. This is important, in my view, because it means that the US structure for delivering health care (i.e., the fact that individuals typically access service w/o paying much of anything out of their own pockets) is not ramping up demand and production of services. That is a central tenet of those who argue for changes that add price signals/brakes on health care consumption, such as high deductibles paired with HSAs. I suspect proponents of those plans would respond that he’s comparing US consumption to systems that have free or socialized medicine, so they are over-consuming too. But the point to me is that the lack of a competitive market brake on spending in America has, in fact, largely led to higher incomes of individuals and businesses in the health care sector, not consumption of more services than in countries with government guarantees of coverage. I consider that an important point.
Reinhardt spends a fair amount of time documenting how incredibly much the US system spends on administrative costs – this is essentially dead weight loss, of no intrinsic value to anyone. One interesting stat (p. 29) – the typical doc spends $80K/year interacting with insurers.
He posits three alternative methods (p. 44) for allocating or rationing health care – (1) making some basic level of care available to everyone and paying with a general tax (i.e., income redistribution in some manner from the upper income strata), (2) income-based rationing whereby lower-income families receive lesser levels of care/service (essentially what we have now), or (3) the method used in most other developed countries – price regulation by the government. I’m a little perplexed by his putting “price regulation” (a cost containment strategy or my issue #2 as an alternative to (1) and (2), which I perceive rather as way to address access, my issue #1. This is one of the few places in the book where I found him talking about my issue #2.
I’m coming around to the view that regulation of prices is only viable option. But I’m also skeptical that serious price regulation will ever happen in the US for the same reasons Reinhardt does not believe single payer is viable option for the US (see next bullet).
Although he generally favors a single payer system, Reinhardt does not believe that single payer would work in America because of our politics, so he would not advocate that America go that route. I find the basis for his conclusion on that interesting. Running a single payer system largely turns over to the government (rather than relying on a market or quasi-market-based system) the job of running of the basic health system – what services will be covered, prices for them, and so forth. Reinhardt believed that the US government (mainly Congress, I assume) is incapable of making those kinds of decisions in a thoughtful and unbiased way. He was convinced that they were too beholden to various interest groups that would indirectly benefit from the decisions made (drug companies, hospitals, physicians groups, and so forth, I assume) and other political factors would skew their judgment (pp. 153 – 154 – part of an Epilogue that quotes from previous interviews of Reinhardt, not something he wrote for the book).
From my perspective that is a very big concern with Medicare For All or similar proposals – conceptually, it’s not realistic to think we can construct a functioning competitive health care market (for a whole lot of reasons, which unfortunately Reinhardt’s book does not discuss much beyond a summary dismissal), but I also have little faith in turning the key decisions over to politicians. Where that leaves one is between a rock and a hard place. In a perfect world, we would have Plato’s philosopher king design and run a single payer health care system for all but the most basic of stuff (for routine services one probably can rely on people to make choices in a private market, but even that might be wishful thinking). In the real world, I can’t come up with or even imagine a practical system.
Reinhardt has an interesting life story, as detailed by his widow in the book’s epilogue. He was small child in WWII Germany and emigrated to Canada after the end of the war, where he pulled himself out of an impoverished existence to earn an economics degree before moving to the US. This life experience clearly help to shape his world view and policy preferences.

What disappointed me about the book:

My biggest disappointment with the book is that Reinhardt spends little time or effort on what I perceive to be the conservative or Republican approach to a systematic solution. That’s fair in the sense that they really don’t have a formal one beyond the various proposals that they put forth in their spastic 2017 attempts to repeal and replace the ACA, which he spends time describing and fileting. I also get that he thinks their objections are largely wolves in sheep’s clothing (i.e., they are expressed as fiscal cost concerns or as a desire for market-oriented choices but are really just disguised opposition to spending more public money on health benefits for the average person). And that he thinks a society like the US can easily afford it, if it chooses to do so. But I think it would be more helpful to address them on their own turf, so to speak, and spend more time and effort documenting why “market-based” proposals to restrain use and/or price setting are not workable. Effectively, that government price regulation is the only realistic alternative.

Given that, it is useful for me to try and cryptically outline what I think their (thoughtful Republicans, conservatives, etc.) views are. My perception is that they view the problem as one of “market failure” – specifically because nearly all health care goods and services are paid in a non-market type context, i.e., they are treated as low or no-cost goods and services – consumers (individuals) over consume them and producers charge higher prices than would be the case if people were spending their own money. (As an aside, this view is superficially plausible based on a simplistic view of economic theory and how people behave. So, I think the criticism needs to be taken seriously, even though I don’t think it is well founded.) As a result, they tend to search for “solutions” that would interject more competitive market like behavior into the system. My perception is that the latest iteration of policy options is to use high deductible plans offered by competing private insurers (both in the individual market and the employer provided market). I assume that the idea is the health care market has two basic components:

The more mundane, day-to-day services that most people regularly use – e.g., dealing with the occasional mild injury or sickness, regular checkups, preventive measures, treatment of ongoing, but mild chronic conditions, and so forth. These services would be paid out-of-pocket (with pretax HSA funds to sugar coat the option by subsidizing the “out-of-pocket” element, that many people have been schooled to think should be covered by somebody else – their insurance or health plan). The idea is that because individuals would be using their own funds (not just getting no-cost services paid with “other people’s money” – by their health plan or insurer), they would engage in traditional market-based behavior – i.e., decide whether or not to buy the service based on their preferences and its price and to shop among different providers for the best combination of quality and price, if they decide to buy. This would allocate these services the way the private market does for most stuff, clothing, refrigerators, etc. The theory goes that this would both reduce usage to levels consistent with people’s preferences and would operate to constrain the prices charged.
For more catastrophic or larger costs – i.e., the type of events or conditions that people need to “insure” against happening, those that are unpredictable and unexpected and are too big to otherwise pay – the health plans/insurers would pay. Examples include heart surgery, major cancer treatment, appendectomies, chronic conditions that are inherently expensive to treat, and so forth. Here, the health plans would have limited networks of providers and would have negotiated prices with them in advance. These negotiations would, in theory, hold prices in check because the plans could play groups of hospitals, clinics, and physicians off against another in the negotiations. Because the use of the service is triggered by a clear need and a relatively high cost, the assumption is that there isn’t an overconsumption issue or that health plans/insurers could control that.

This model does not address the access issue, focusing mainly on restraining costs/prices by trying to insert more market-oriented decisions into the system. It should be noted that the second bullet has been a longstanding element of US health care financing – an innovation developed decades ago (I think it has some Minnesota roots – specifically Paul Ellwood‘s ideas of managed competition) and is now widely adopted. It obviously has not worked to hold down prices. High deductible plans – pushed by Republicans in Congress more recently – have become common both in private employer provided coverage and in many ACA policies. What effect they have on consumption of health care or on prices is unclear.

In any case, Reinhardt dismisses the high deductible approach in a few paragraphs as “faith-based, resting on data free analysis” and “a cruel hoax” (pp. 51- 53). As support, he cites a 2015 Vox article that reported on an academic article that was later published (Zarek C. Brot-Goldberg, Amitabh Chandra, Benjamin R. Handel, and Jonathon T. Kohlstad, “What Does a Deductible Do? The Impact of Cost-Sharing on Health Prices, Quantities, and Spending Dynamics,” Quarterly Journal of Economics, pp. 1261 – 1318 (vol. 132, issue 3, August 2017). I read the article when it was posted on SSRN in 2015 and thought it was good evidence for his conclusion (of course, it simply confirmed my previous intuition, so you can’t trust my amateur evaluation of it; it’s likely just a case of confirmation bias; I plan to reread it at some point). In any case, I was hoping for more discussion of high deductible plans, since I perceive that they are still the conservative go-to option and more thorough research and vetting (or debunking) of them is needed. I suspect they have little effect beyond modest curtailing of the consumption of basic services, deterring some beneficial use of services, and yielding higher levels of medical debt. But that’s just my instinct, supported by the Brot-Goldberg et al research.

SALT connection

The SALT connection to the health care debate is obvious. State and local governments spend a large and rapidly rising amount of money delivering health care services to the poor (by paying the state share for their Medicaid programs) and providing benefits to their employees. In the latter case, they are little different than private businesses. But their workers are typically unionized and, as a result, it is difficult to get by with the skimpy coverage many private employers offer. Also, the health care sector is more lightly taxed than virtually any other. As a result, its inexorable growth makes it more difficult for state and local governments to meet service demands (not just health care services) without increasing tax rates and bases. Put another way, the disproportionate growth of the health sector puts a pinch on state and local revenues, while driving up service delivery costs. In a “no-new-taxes world” that makes their jobs extraordinarily difficult.

Bottom line: The book is well worth reading for a clear and accessible description of the basic economics and mechanics of the US health care system. It is an advocacy piece that is likely to turn off conservative, small government types. But it should challenge them to come up with answers to Reinhardt’s basic social policy or ethics challenge. Should a wealthy nation like the US really have a two or three tiered health care system, where many people only have access to substandard care and often will end up being bankrupted by getting sick? If not, how should that be fixed? It’s the question that Reinhardt is convinced the American political system refuses to directly engage with. I tend to think he is correct.

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