No Grand Conspiracy

My head is dizzy from all the metaphors! What was the monkey doing working in a software company anyway?

There is a very simple identification problem. We know that on average our medical care is worth it — as David Cutler and others have shown. If we cut half — without knowing what to cut — we will likely cut half the value. Yes, we will eliminate some waste, but we also will eliminate some valuable care.

Raising prices does not solve the problem. It is true that the lesson of the Health Insurance Experiment was that we could reduce spending about 30% with minimal loss of health for those with generous coverage. But that was only for those with generous insurance, and it only applied to late 1970’s medical care. We know patients will reduce use of very efficacious care when you raise prices—even care that will save the patient money down the road.

So where do I think Robin Hanson goes astray? He asks:

Do you claim the existence of identifiable treatments with positive benefits, which are cut when spending is cut, shows that aggregate spending variations do give substantial aggregate health gains?

My response is yes. The research on the use of ACE inhibitors by diabetics is a good place to start, but there are many more drug therapies that qualify. And the reason the variations literature ignores it is because they look at treatment after a serious event occurred — when many of the dollars are spent. Heart attacks are the canonical example. And price sensitivity is non-existent once you have had a heart attack. Raising patient cost-sharing will not affect whether the doctor does angioplasty or not, because any reasonable effort to apply prices will have a marginal cost of zero once a catastrophic cap is met.

The irony, though, is that some of these heart attacks could have been prevented if patients took their prescriptions, and here is where aggregate spending variation gives substantial gains. We know patients under-use many medications for primary and secondary prevention.

So I really question whether higher prices will trim the right kind of care. Furthermore, doctors do not behave in a vacuum. We know from studies of C-sections, for example, that when doctors are faced with a loss of income — perhaps due to a decline in fertility rates — they respond by doing more of these expensive procedures. So there is a supply response that we need to consider as well.

Robin Hanson also asks:

Do you argue that savings from medicine cuts would in fact be spent on general utility gains, instead of health gains, which matter little relative to health gains?

If medicine — and insurance against its costs — have no value, why does everyone purchase so much? In our voluntary system, people have the option of avoiding health care except in extreme emergency situations. They can work for an employer who doesn’t provide insurance, and they can choose as much or as little care as they like. Why is this rare? It is precisely because medicine — and insurance against its financial risk — is so valuable. There is no grand conspiracy that has deluded 250 million people into thinking that health care has value, when in fact it does nothing. Clearly there is a lot of value overall; the issue is how we trim the fat, as David Cutler and Alan Garber point out.

Also from this issue

Lead Essay

  • Cut Medicine in Half by Robin Hanson

    In this month’s lead essay, the iconoclastic George Mason economist Robin Hanson argues that “our main problem in health policy is a huge overemphasis on medicine.” Hanson points to a spate of studies — especially the huge RAND health insurance experiment — to show that “in the aggregate, variations in medical spending usually show no statistically significant medical effect on health.” Hanson lays down the gauntlet and “dares” other health policy experts to publicly agree or disagree with this seemingly well-confirmed claim and its implications for policy. For Hanson, those implications are clear: “Cutting half of medical spending would seem to cost little in health, and yet would free up vast resources for other health and utility gains.”

Response Essays

  • Use a Scalpel, Not a Meat Cleaver by David M. Cutler

    Harvard’s David M. Cutler agrees with Robin Hanson’s claim that “a lot of medical spending doesn’t add much value.” However, he is “surprised by Hanson’s argument that this hasn’t been much noted,” pointing to major media coverage of this point and to his own work. According to Cutler, Hanson’s argument is “too simplistic,” suggesting that people in 1975 were better off with half today’s average medical spending. New technologies are both very successful and very expensive, and Cutler argues this extra cost is worth it. Citing research that demand-side approaches to cutting wasteful spending, such as raising consumer prices, are ineffective, Cutler plumps for a supply-side approach: “invest in information technology, monitor what physicians do, and pay providers more for better care than for less good care.”

  • Half Right by Dana Goldman

    Robin Hanson is half right, says Dana Goldman, the RAND Chair of Health Economics and Founding Director of RAND’s Bing Center for Health Economics. Medicine can only do so much, and most recent increases in longevity are the effect of healthier habits and living conditions, Goldman says. However, Goldman notes, the RAND Health Insurance Experiment, which Hanson leans on, is more than thirty years old, and many new therapies have emerged since then. In particular, new drugs have been shown to have a large impact on health. Patients required to pay for more of their care often cut out what they neeed, not what they don’t. Improved living conditions may do more for future health than more medicine, Goldman suspects. “But it may also turn out society should be spending more, not less, on medical care — just doing so in a more prudent manner.”

  • Watch Where You Cut by Alan Garber

    According to Alan Garber, the Henry J. Kaiser, Jr. Professor at Stanford, “Hanson’s diagnosis … is not particularly controversial. His solution is.” Efforts to trim excess medical spending must confront the highly variable benefits of certain medical treatments. Garber argues that Hanson’s eagerness to implement cuts, largely regardless of the details, risks cutting high-value treatments along with lower-value ones. According to Garber, what we need, first, is more and better information about the value of particular interventions. Second, we need incentives not to guide people away from overconsumption generally, but to guide them away from low-value care. Third, we need to increase the sensitivity of consumers to the costs of their health care by exposing them more to prices. Improved information and education, Garber says, will help consumers choose wisely.

Essays