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Is health care becoming cheaper over time?

In yesterday's research desk thread, dt4211 asked:

How much of the cost growth in medical care (if any) is driven by increases in costs for the same services, and how much is the costs associated with new treatments and services that didn't used to exist? To put it another way, is there an increase in doctor productivity, such that the same output becomes cheaper over time?

That's an interesting question, and one I didn't know the answer to. So I wrote to David Cutler, a health economist at Harvard, and asked him. Here's his reply:

This is a simple question with a lengthy answer. A few points:

1. Most (>50%) of cost increases historically are driven by new services and expanded use of existing services. Not all of that is bad; most of my research is about the positive benefits of technological change (see my book, Your Money or Your Life). Put another way, productivity is improving.

2. That said, we spend much more than we need to -- my guess is 40 to 50% more than is needed to get the outcomes we get. Some care is wasted, and there are a ton of administrative inefficiencies (not just insurance, but everywhere). That's why when I talk about reform, I talk about spending the next 20-30 years eliminating waste, not cutting back on valuable services. At that point, we'll see how much we spend and what we need to do about it.

3. In very recent years (e.g., the past decade), I think price increases have mattered more. Most big cities have had a huge consolidation of providers, which has led to higher prices for care. This is true for hospitals and MDs. I think this is underappreciated by most of my profession. This is a pure transfer.

4. It's interesting that technology has been so one-sided. E.g., there is no Sam Walton of health care (though perhaps Tommy Frist Jr. counts) -- someone who revolutionizes health care by making it possible to get more for less. I think that's possible and just wrote an NBER paper on "Where Are the Health Care Entrepreneurs?" The key, in my view, is better information and payment reform. I'm quite taken by this question. I hope the next decade is spent producing billionaires able to give us better health for less.


By Ezra Klein  |  June 22, 2010; 10:05 AM ET
Categories:  Health Economics  
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Comments

I've been pondering the costs of health care myself this past week. We use it so infrequently that I fail to follow what things cost (or rather, what is being charged.) My husband had a bicycling accident and broke a number of bones the other week. We're only beginning to see some of the charges, but one struck me. X-rays and CT scans had been done in the emergency room (at a hospital I sure hope is in our network), with instructions to see both an orthopedic surgeon and a thoracic surgeon in the following days when he returned home. To determine whether surgery was going to be necessary, the ortho surgeon needed a another CT scan (this was reasonable, since the originals didn't show the area in question properly). This was at a large urban medical facility/hospital. The bill for that single scan amounted to $2,599. They do hundreds of these each day, and the process takes about 10 minutes. Even with the cost of equipment and the technologists and receptionist and nurse, can it possibly cost this much? We won't be paying it (I assume), but someone will. Perhaps someone who works in this area can explain to me the pricing.

Posted by: JJenkins2 | June 22, 2010 10:22 AM | Report abuse

I think it's pretty unrealistic to think we could eliminate that 40-50% waste he talks about, so how much of that is really gettable? What's the lowest hanging fruit, the stuff that's a bit more work to get at, and the waste that's more work to eliminate than it's worth? After the first two types of waste are eliminated, where does that leave us relative to other countries vis a vis waste, service provided, and overall cost? Does that leave us in a fiscally sustainable position?

Posted by: MosBen | June 22, 2010 10:22 AM | Report abuse

JJenkins2, I'm certainly no expert, but I do remember reading something, probably here, that like with many other aspects of the medical field, we pay vastly more for CT/X-Ray scans than they do in other countries.

Posted by: MosBen | June 22, 2010 10:27 AM | Report abuse

--"Where Are the Health Care Entrepreneurs?--

Beautiful: "residents of developing countries may download this paper without additional charge"

Another Harvard incompetent sez, "I identify two factors as being particularly important in organizational stagnation: public insurance programs that are oriented to volume of care and not value, and inadequate information about quality of care."

What? Nothing about the barriers to entry erected via the collusion of the AMA and politicians, and the endless regulations imposed on every stratum of the health care world?

Sam Walton had it easy compared to anyone who wants to set up so much as a walk-in clinic to deal with minor ailments.

Why am I not surprised that the propagandist Klein picked this guy to shovel the anti-public insurance meme?

Posted by: msoja | June 22, 2010 10:42 AM | Report abuse

ps. If some Sam Walton of health care *did* show up, he'd be as vilified by the left as the original Sam Walton was and is.

Posted by: msoja | June 22, 2010 11:26 AM | Report abuse

So the answer to the question asked was "Most (>50%) of cost increases historically are driven by new services and expanded use of existing services." Since that answer in many ways undermines the basis of the PPACA, a propaganda addendum was needed as a smokescreen.

Posted by: rmgregory | June 22, 2010 11:27 AM | Report abuse

JJenkins,

Oh no you DO pay it. You may not pay it directly but you absolutely pay it indirectly. Don't feel bad. Most don't have a clue what healthcare actually COSTS.

One thing I'll note on a personal level. A good friend of mine/client had to have a CT scan done last year to rule out a potential problem. She's set to have another one this year (and every year thereafter) to ensure there is no issue. Is that really necessary? Sure if someone else is paying for it who cares but in the end is that ever the case?

Oh and I'd submit Dr Gawande is the Sam Walton of healthcare. Wasn't he the one that gave the idea of a doctor's checklist? With that checklist done many hospitals have reduced their infection rates and readmission rates dramatically. Something simple that costs nothing but a little time and could save millions. I'd say its a good start.

Posted by: visionbrkr | June 22, 2010 11:51 AM | Report abuse

I find it hard to believe the premise of this post. I've had high-deductible health plans for a long time so I've actually paid the bills for many routine procedures and they have just skyrocketed in cost. A yearly physical is more than twice the cost of just a few years ago, a dental cleaning same thing (at least double in the last 10 years), mammograms same, etc. etc. Routine costs have more than doubled during a period where my income has barely changed.

Posted by: AuthorEditor | June 22, 2010 12:31 PM | Report abuse

If healtcare is about $2.0--$2.5 trillion in our economy then cost savings from greater efficiencies for instance electronic medical records, would add up quickly and render huge benefits. If costs savings were 10% of the total that along would be $200 billion, a nice chunk of change even in the US.

It is interesting why a Sam Walton hasn't emerged. Is it worth considering how much medical care could be provided by people with substantially less expensive training than an MD? For instance, clinical psychologists make less than psychiatrists. Maybe large amounts of routine care could be done by nurse practitioners. Loads and loads of medical care require very small interventions and very cheap medicine.

We should probably do more to erode the monopoly control the AMA has over health care.

Posted by: etfmaven | June 22, 2010 12:35 PM | Report abuse

--"Is it worth considering how much medical care could be provided by people with substantially less expensive training than an MD?"--

That's another part of it, for sure, and it's another aspect of the dislocations caused by government interference in markets. The rapid rise in education costs can be traced to various subsidies and regulations (in much the same way the same things distort the health care market, too), which makes learning about doctoring expensive in itself, but then there are all the regulatory barriers to acquiring that MD. And isn't the Medicare bureaucracy in charge of shaping and preparing the MD workforce? That's a pile of nonsense, right there, that ought to be shown the door.

Then consider the FDA and the huge costs imposed on those trying to develop new drugs, devices, and treatments.

It's a testament to human ingenuity that the government hasn't completely killed the health care industry.

Posted by: msoja | June 22, 2010 1:04 PM | Report abuse

Please note the implications of Cutler's points nos. 1 and 2 for the so-called deficit debate:

If 40% to 50% of health care spending is wasted, meaning that we could spend 40% to 50% less and get the same outcomes (a point entirely consistent, btw, with cross-country comparisons using OECD data), and if the huge sectoral inflation has been driven, in the last decade, primarily by price increases that constitute a "pure transfer" (i.e., provider rents), then it follows that:

We do not have a long-term budget deficit problem at all. None.

What we have, is a problem with one sector of the economy (health care) where provider rents are driving massive sectoral inflation and, together with massive built-up inefficiencies, are keeping costs 40% to 50% higher than they should be, and rising.

So please explain to me why liberal/progressive deficit doves (Klein, Yglesias, Drum, De Long and, yes, even the otherwise-indispensable Krugman) insist on prefacing every defense of or call for further deficit spending now, with the caveat that "of course we have a long-run deficit problem?"

Actually, it seems that we do not. Why not just say so?

Posted by: amileoj | June 22, 2010 1:55 PM | Report abuse

--"We do not have a long-term budget deficit problem at all."--

But only *if* your named imbalances and others are rectified, and no new ones are introduced. And then you're still stuck will all the perverse incentives of a system that taxes one group of citizens to subsidize others, along with all the stupid regulations prohibiting the free interchange of people and endeavor.

How much has the administration pledged to weed out in fraud alone? And how much has it actually found to weed out? When is it going to get started?

Posted by: msoja | June 22, 2010 3:17 PM | Report abuse

and as far as your question as to "Where are the Healthcare Entrepreneurs" they're doing what entrepreneurs do, they're making THEMSELVES rich, not the system. They're buying hospitals as Private Equity firms and turning them from $10 million a year losses to $15-$20 million a year gains. Do you know who pays that?

Ya, you and me.

Posted by: visionbrkr | June 22, 2010 3:37 PM | Report abuse

I went with my teenaged son for a physical the other day. The doctor checked him over, then painstakingly wrote down all the information on a cardboard chart for the file. If my son falls ill some evening and is rushed to the emergency room, NONE of that information will be immediately available. Is he allergic to anything? Has he had any surgery? Any problems with his kidneys? What's his normal blood pressure?

What the hell is wrong with these people? Haven't they heard of the internet? I say, put Tony Hsieh in charge of US health care and we'll see costs tumble and results jump.

Posted by: Bloix | June 22, 2010 4:15 PM | Report abuse

"Is it worth considering how much medical care could be provided by people with substantially less expensive training than an MD...Maybe large amounts of routine care could be done by nurse practitioners"

As someone whose seen my share of medical care the past few years, I can tell you a lot of this is done already. Also, Physicians Assistants perform a lot of routine follow-up duties; the two I've dealt with at my cardiologist are frankly as professional and knowledgeable within their realm of responsibilty as any doctor I've worked with.

Posted by: tomjf | June 22, 2010 6:03 PM | Report abuse

I'm so sick of the novices around here claiming that there are huge savings to be made by having PAs and NPs take over. You guys obviously dont understand how Medicare/Medicaid works.

NPs and PAs bill at 85% Medicare rates for services under their NPI, they bill at 100% for services "incident to" a doctor's supervision.

Therefore, they wont save any money -- clinics are set up so that they almost always bill "incident to" and therefore get a lot more money for services rendered. If I'm starting up a clinic, why would I hire only NPs and PAs and take an automatic 15% revenue stream cut? It doesnt make any sense. Even if I'm a PA or NP looking to open up a "solo" clinic it pays a lot more to have a supervising MD on board so I can claim that extra 15%.

NPs can already practice independently in 25 states without any MD oversight, yet healthcare costs are the same regardless. Even in those states where NPs can operate independently, less than 1% choose to do so. Why? Because they are throwing away 15% of their revenue stream by going independent. They are just as money motivated as all the MDs are.

So what you'd have to do is create a system where not only are PAs/NPs allowed to work independently of MDs, you would have to MANDATE IT. Otherwise, they are always going to choose to work with MDs and get that extra 15%. It would be financial idiocy not to do so.

Minute Clinics staffed by NPs and PAs with no doctors on site have opened up thousands of shopfronts nationwide, yet healthcare costs show no change in pace. Total healthcare expenditures are equal regardless of whether you see an MD or an NP/PA.

Healthcare costs are a function of the number of providers in a given market region. More healthcare providers = higher per capita costs period. It doesnt matter whether the "providers" are MDs or NPs.

The USA has the highest number of "medical providers" per capita in the world. Throwing more MDs, PAs, and NPs into the mix will make things worse, not better.

Posted by: platon201 | June 22, 2010 8:31 PM | Report abuse

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Posted by: lisasusan23 | June 23, 2010 4:52 AM | Report abuse

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