Human Limits

Exploring performance and health with Michael J. Joyner, M.D.

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Health Care Costs:

It has been a while since I did a post on big picture issues related to health care in the U.S. In the last couple of months several ideas or perhaps rescue fantasies have emerged or perhaps re-emerged and I want to go over them.


1)  Lack of Price Transparency

In the U.S. prices for various medical procedures are convoluted, idiosyncratic and extremely hard for even the experts to understand.   A recent NY Times article on the costs of having a baby in the U.S. highlights many of these issues.   Because there is no obvious rack rate and prices are not posted by most medical providers, some employers are essentially capping what they will pay for a given procedure or service.   Along these lines, my bet is that there is going to be a big price transparency movement, more so-called bundled payments, and that the regulators will play a role in this.   The important thing to remember is that what people and insurance plans actually pay typically has little relationship to what the list price is if you can find it.   The other point here is that even if prices are more transparent it might not do that much to lower overall medical care costs which are driven in large part by utilization of services.  I am all for more transparency, but it is not going to solve the cost problem.  It is also interesting to note the late physician turned science fiction writer Michael Crichton raised many of these issues in a long article in the Atlantic published in 1970!


2)  Rising Costs: a Problem Everywhere

The next point I want to make is that rising prices are a problem in almost all rich countries and a number of developing countries.   Many of these countries have strict price controls and essentially government run programs.  So thinking that there is some magical intervention “the government” can or should do to fix the problem is simplistic at best.  My bet is that Obamacare will struggle to contain costs.  The real drivers of rising costs are likely the aging population and advances in technology.


3)  The Recent Slowing of Health Care Spending Growth

The rate of growth of health care spending has slowed recently.   If this trend continues it has all sorts of implications for things like the U.S. Federal budget.  However, I would urge caution in assuming that this trend will last forever.   In past economic slowdowns there has also been a slowing of medical care spending growth followed by a rebound when the economy picked up.  As I pointed out above no government in the developed world has effectively dealt with this issue over the long run, the population is still aging, and technology marches on.


4)  Denial & Practice Variation

The current focus on price transparency and the recent slowing of spending growth are major distractions away from at least one major issue that might tend to reduce the rise in spending over time.  That issue is the tremendous regional variation in the use of health care services in the U.S. and the lack of relationship between a number of markers of utilization and outcomes.  Some argue that 30% of Medicare spending does not contribute to improved patient outcomes and is thus “wasted”.  The figure below is a bit dated but still relevant and generally accurate.  It shows a range of estimated savings for Medicare if all 50 States had utilization rates and practice patterns similar to the five most efficient States.  Numbers in these general ranges likely apply to health care spending as a whole.




There are a number of ideas out there about how to deal with this issue, but they are likely to be challenging to implement.


5)  Rent Seeking & Why This is Hard to Fix

Almost 18% percent of the GDP is spent on health care in the U.S.  Almost 50% of this spending comes from the government in terms of either programs like Medicare or Medicaid, the VA, or Indian Health Service.  Additional government spending is due to insurance provided to government workers at the Federal, State, and Local levels.   There are also significant government subsidies for health care spending via the tax code.  So, in one form or another “the government” probably covers 60-70% of medical costs in the U.S.  As a result there is a huge and diverse group of vested interests angling for either maintaining or expanding their piece of this economic pie via what might be characterized as ‘rent seeking’ behavior:


“… is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur……”



Dealing with the high cost of health care in the U.S. is going to take more than price transparency and don’t bet the farm that current moderation of rising costs is going to last forever.   The 800 pound Gorilla in the basement is utilization which, given the aging population, ever more technology, and economic incentives to over utilize, will be very difficult to contain. 


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