Reducing Health Care Costs

David Leonhardt says that reducing health care costs will require the U.S. to make difficult decisions regarding the types of medical procedures insurance should cover:

A Lesson From Europe on Health Care, by David Leonhardt, NY Times: Shortly before he moved to Greece last year, an American named John Econopouly received the unpleasant news that he needed a hernia operation. He had the surgery done in Northern California, and it didn’t go so well.

After spending less than a day in the hospital as an outpatient, Mr. Econopouly went to a friend’s house to sleep off the surgery and found that his wound had reopened... “Basically, I didn’t feel cared for.” For this, he paid more than $2,000 over and above the thousands of dollars that his insurance policy paid.

A few months later, once he had moved to Greece, he found out that he needed a separate operation for another hernia, giving him a chance ... to do his own little comparative study... The Greek hospital was much dirtier than the one in California ... and he was put in a room with a handful of other patients. The stench was brutal. ... But the care itself was another story. It seemed much more thorough than it had been in the United States. He spent the day before the operation undergoing tests, including one that discovered a heart murmur, and the day after the operation in the hospital being observed. Although he didn’t have Greek health insurance, his final bill was only $700.

A few weeks ago, I wrote a column arguing that this country’s increased medical spending over the last half-century has, on the whole, been overwhelmingly worth it. Thanks to new treatments for everything from premature births to heart attacks, human life has continued to lengthen...

In Greece, the government and individuals combine to spend about $2,300 per capita on health care each year, and the average life expectancy is 79 years. Canada, where the hospitals are probably cleaner, spends about $3,300, and people live to about 80. Here in the United States, we spend more than $6,000, yet life expectancy is just below 78.

The answer to this riddle turns out to be fantastically complicated —but also fantastically important. Health care costs are already rising at an unsustainable rate... So if the rest of the world has something to teach us, we should be taking it seriously.

The most obvious difference between their health care systems and ours — that their governments provide universal insurance — certainly plays a big role in the cost differences. Look behind the receptionist at your doctor’s office, and you will very likely see a staff of people filing claims to different insurance companies. The insurance companies, meanwhile, employ a small army charged with figuring out how to avoid covering the unhealthy.

The administrative costs of our patchwork bureaucracy eat up about 25 percent of health spending, which is why would-be reformers have long focused on these costs. But... Even in Europe’s single-payer systems, administrative costs account for about 15 percent of health spending...

So something beside administrative costs is at work here, and it involves a basic cultural difference. Americans seem to be less willing to take no for an answer and more willing to try almost anything, no matter how expensive or how slim the odds, to prolong life. ...

There are enormous benefits to the American refusal to go gently into that good night. It has made us obsessed with medical advances and turned this country into the world’s research laboratory...

But much of it is simply wasteful. ... This, I think, is the main lesson that we could stand to learn from Europe and Canada. We Americans tend to treat any rejection of a health claim as some conspiracy by insurance companies, the government, doctors and the pharmaceutical industry. In other countries, people have arrived at a better understanding that health care necessarily involves economic triage...

Fortunately, there are some causes for optimism. ... Eventually, you could imagine a set of scientific standards to determine which care would be covered by Medicare... The important thing to remember is that we can’t simply avoid these decisions. One way or the other — wisely or capriciously — we will end up restraining health care spending...

Where is most of the money spent? It's not as simple as cutting back spending a little bit for everyone. Here are some statistics from Finkelstein and McKnight (2006). This table shows that medical spending is very skewed: If you order people according to their spending on health care, the top 10% of spenders account for 72% of all spending and the top 1% of spenders account for 30% of all spending. 

Share of health care spenders	Cumulative share of US medical spending
Top 1%	30%
Top 5%	58%
Top 10%	72%
Top 30%	90%
Total population	100%

Source: Berk & Monheit (1992)

So limiting spending means limiting care for people in the tail of the distribution, often people in need of life-saving or life-prolonging care. Here's an example from the conference I attended last week of the kind of decisions we must face:

Eileen Drake, whose duties with PCC Structurals includes the job of human resources director for 7,000 employees in 11 states and China, said medicine can do more than some companies can afford to pay for. She recalled an employee at a plant that was self-insured who came down with an illness that required lifesaving drugs costing $26,000 a month. The employee came to the company for help.

The question was, she said, “Are we going to pay for the drugs or let him die...?”

She didn't say how she answered the question. But her point was that to limit spending, somehow we must decide who lives and who dies. That won't be easy.