Thursday, September 11, 2014

Interesting Paper on Health Costs

This paper from NBER finds cost savings from limited provider network plans. (HT: MR)  From the abstract:
...spending on primary care actually rose for switchers; the reduction in spending came entirely from spending on specialists and on hospital care, including emergency rooms. We find that distance traveled falls for primary care and rises for tertiary care, although there is no evidence of a decrease in the quality of hospitals used by patients. The basic results hold even for the sickest patients, suggesting that limited network plans are saving money by directing care towards primary care and away from downstream spending.
To me, the take-away here is that these plans are sneaking in a sort of first-person cost sensitivity in the form of a convenience premium.  Plans that have convenient primary care but less convenient specialized care end up having somewhat higher primary care expenses, but much lower downstream expenses.  Even though the patients have little monetary exposure to their health care consumption, these plans create non-monetary expenses by increasing the inconvenience of using those services.  This lowers patient demand for the services.

Because the current system has removed expenses so far from the user, we almost all use thousands of dollars of health care services every year that are almost wholly unnecessary.  We frequently engage in testing that costs thousands of dollars, on the advice of doctors, that they would never suggest and we would never agree to if we were expected to pay for a meaningful portion of the cost.  And, this is a subtle issue.  Some readers probably naturally read this paragraph and have a Dorothea Lange picture in their head about a destitute mother deciding whether to treat her son's staph infection or to feed the other three kids for a month.  We need to be careful not to smuggle in other problems here.  We literally spend billions - trillions - of dollars on useless services in this country every year.  Those are trillions of dollars worth of resources that could be used to feed those kids.  There is absolutely no point in building outrageous levels of waste into a system in the name of helping the least fortunate.  Dysfunctional markets for essential services hurt, first and foremost, the most marginal families.  A system that spends thousands of dollars on the most basic health issues, mostly in waste, is not helping, and insisting on a system that tends toward that end, in the name of marginal families, is not responsible.

...Anyway, the subtle issue here is a fundamental driver of how functional markets create dynamic, moral societies with abundance.  This is basic Hayek.  Those prices are information.  Being confronted with the cost of health services, at a first-person level, is a necessary ingredient for us to make moral, responsible decisions about our healthcare.  We simply can't do it without them.  When our doctor gives us an order for thousands of dollars of tests because our kid has a stomache ache that might go away in a few weeks with some basic home remedies, she is partly covering her ass, she is partly helping us cover our ass, she is providing us with the only solace she has available for the dilemma of dealing with an ailment that is overwhelmingly likely to be benign, but has horrendous outcomes way out on the very long end of the tail of the distribution of possible outcomes.  It is immoral for us to fill that order.*  But, without the price signal, all of these other forces - forces in defense of the doctor, ourselves, and our children or elderly parents - all of these other forces win out.  So, we go do the immoral, and we don't think about it for a minute.  We waste enough medical resources to provide for that poor mother a thousand times over.

This is a core, fundamental, moral problem.  Prices are necessary for a moral usage of resources.  And, damned if they are ever allowed to help us create a moral health care system.  Note, I'm not saying it would be easy to balance all the other factors we would need to create a just health care system.  Prices are a necessary ingredient in a just health care system, and the other details won't be easy.  But, without step one - first-person prices - we're just pissing in the wind.

I think that partly what is going on in this study is that having to deal with scheduling or having to drive an hour across town to go to a specialist's office is bringing in enough first-person cost to trigger some minimal level of demand constraint for the doctor and the patient.

This just shows how much low hanging fruit is available in the health care sector simply by getting rid of some of the 3rd and 4th party payment structures.  It might be the case that limited access networks are the closest we can get to this low hanging fruit on a national scale.  We would probably be able to learn a thing or two about these possibilities if there were more options at the state level for health care reform.

* Imagine your reaction to finding out that a trust-fund college student threw himself a birthday party and spent $3,000 just on some ice sculptures for the party.  It would leave a bad taste in your mouth, I suspect.  Our hypothetical student probably had just as much of a disconnection from the costs and received just as much benefit from the sculptures as you likely did from the some recent diagnostics you or your family have undergone.  Defending a system without first-person price signals is the moral equivalent of defending trust-fund ice sculptures.  Creating a national public program to specify and fund unnecessary birthday ice sculptures for 90% of the population probably isn't much of a moral victory.

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