Yesterday I had the privilege of meeting David Cutler—Harvard health economist, advisor to President Obama, and co-author of much of the health reform legislation currently moving through Congress. While I am very skeptical of some of Professor Cutler’s policy goals, I was reminded once again that, for all our bickering around the edges, nearly all economists of all political stripes have a shared and useful way of thinking about the world.
I took the opportunity to ask Professor Cutler about a question that arose on this blog last week. I had posted about my fear that a public health insurance option would be manipulated by politicians intervening to get better coverage for their contributors and constituents, while passing the costs off to less well-connected groups. Some of the commenters—notably Cos and Sierra Black—asked whether this has been a problem in other countries. I had to admit that I had no idea, so I put the question to Professor Cutler. Here is what he said:
- It’s been a problem in Italy, where the north is more politically powerful and therefore gets better medical care than the south, at the south’s expense.
- It hasn’t been much of a problem in Canada, France or the UK. Professor Cutler’s guess is that this is largely because those countries have entrenched civil services that check the power of the politicians.
- Although the U.S. does not have that sort of entrenched civil service, Professor Cutler (unlike me) suspects it wouldn’t be much of a problem here either. I quite disagree, based on the U.S. experience of politicians manipulating other government-run enterprises, most recently General Motors.
- In any event, he doesn’t think the public option matters much one way or the other. If insurance is easily available at the right price, people will buy it quite independent of whether it’s offered by the government.
None of that was what Professor Cutler actually wanted to talk about. He had come to Rochester to give our annual Gilbert Lecture. This puts him in quite distinguished company; of our 47 past Gilbert lecturers, 15 have gone on to win Nobel prizes. His talk was about getting better value out of our health care system—more bang for the buck. And, like any good economist, he focused on getting the incentives right.
First, he talked about the explosion in administrative costs in American hospitals. Duke University Hospital, for example—one of the finest hospitals in the nation—has 900 beds and 1300 billing clerks. We have to give them an incentive to do better, he said. When I asked why they don’t already have all the incentive they need to save money, his first response was that “hospitals are mostly non-profits”. That’s of course an economist’s answer, but I found it deeply unsatisfying—even at a non-profit, there’s always some alternative use for funds, and usually someone with an incentive to economize in favor of that alternative use. So more than Professor Cutler, I am inclined to suspect that those 1300 billing clerks might actually be doing something useful. (My boon companion Lisa Talpey points out, for example, that they are almost surely handling the billing for hundreds of doctors’ private practices, not just for 900 hospital beds.)
His next point was that we have too much costly acute care. An American with an acute myocardial infarction has a 35% chance of undergoing a complicated and expensive cardiac cathetrization; his Canadian counterpart has a 7% chance—and yet both have the same 30-day and 1-year survival rates, partly because the Canadian is far more likely to receive useful medications. What about the quality of life for those patients? Professor Cutler says the evidence is mixed, with some studies finding that it’s better in the U.S. and others finding that it’s better in Canada. What about 5-year survival rates, as opposed to 1-year? He didn’t know.
I am inclined to believe that Professor Cutler is correct that we have too many of these elaborate expensive procedures, largely because we are overinsured. On the other hand, my colleague Mark Bils points out that an elaborate expensive procedure, even if has no direct impact on survival rates or quality of life or anything else we care about, can still be an extremely valuable innovation if it’s a necessary step toward the development of the next elaborate procedure that does improve health care outcomes. And insofar as that’s true, Canada and the rest of the world are currently free riding on American innovation.
Information technology, says Professor Cutler, is badly underused in the medical industry (which is part of why Duke employs those 1300 billing clerks). This impacts the quality of doctor/patient interactions (when your doctor doesn’t have your entire history at his fingertips), it impacts our ability to do cost-effectiveness analysis, and it makes it hard to determine which providers do the best jobs. Why don’t hospitals have an incentive to adopt cost-saving IT? His answer was complicated, but part of it came down to this: Hospitals don’t care because they pass the costs on to the insurance companies and no single insurance company will pay for an innovation that mostly benefits its competitors. Once again, I feel like I’m not getting the entire story—if the potential cost savings are so massive, I want to know why creative people haven’t found ways to realize them. But I am certainly sympathetic to the idea that bad incentives mean bad outcomes.
There are also bad incentives when it comes to curing people. If you get sent home from the hospital and come back three weeks later with a relapse, the hospital gets paid again. During that intervening three weeks, they have no incentive to keep in touch, make sure you’re taking your meds, and so forth. Professor Cutler’s solution: A system where you pay the hospital not to admit you but to cure you. If you have to come back, that’s included in your one-time payment. Physicians’ fees, medications, and so on would all be included in the one bundled payment.
I agree with Professor Cutler about the problem, but I am extremely skeptical of his solution: Wouldn’t hospitals be tempted to cherry pick their patients, turning away the sickest (i.e. the ones who are most expensive to treat)? Professor Cutler had some thoughts on how to ameliorate this problem, but nothing that struck me as terribly promising.
I do agree with him that it would be good to have more pay for performance. As it is now, among cardiac surgeons, some consistently have 1 to 2 percent of their patients dying on the operating table while others have 8 times as many; all these surgeons get paid the same amount. That’s a huge problem and we ought to face it squarely. But devising a solution is no easy business. Pay for performance raises the same issue as bundling: Surgeons would try to avoid taking the hardest cases. So while I quite agree with Professor Cutler that this is a problem worth tackling, I am less optimistic that there’s an easy solution.
Finally we came back to the question of how things work out in other countries: Is the health care industry more productive elsewhere than it is in the United States? Professor Cutler’s answer: Who knows? European countries ration health care in the sense that the government decides how much of each treatment will be available, and then doctors decide how to allocate those treatments among their patients. The U.S. system delivers very different quantities of care at a very different cost; it’s tough to guess what it would cost to deliver American quantities under the European system, or European quantities under the American system—so it’s tough to know who’s getting more bang for the buck.
In Professor Cutler’s view, there are three ways to fix things: First, European style rationing, which almost no economist favors (largely because there’s no way to tell whether the government is getting the quantities right). The second option, which Professor Cutler prefers, is revising the payment system to create better incentives . I agree that this would be a very good option if you could figure out how to accomplish it, and I agree that there might be a way to make it work, but I’m not convinced that Professor Cutler (or anyone else) has yet figured out how to do it. The third option is the one I tend to favor—more patient autonomy. I’ve indicated some ways this might work in an earlier post. Professor Cutler is skeptical of this third option on the grounds that—well, he didn’t put it quite this way, but essentially his argument was that a lot of patients are stupid. That’s probably true, and it means that this option is imperfect also.
My gut instincts point me in a different direction that Professor Cutler’s do, but I think we agree on what the big problems are and on what would count as solutions. I think almost all economists would agree on that much, and that’s a lot.