Don’t Pretend It’s Easy

Per capita income in the United States is 30 percent higher than in Sweden, and yet Americans are no happier than Swedes; indeed, Swedes report greater levels of happiness. Based on these data, can one conclude that cutting income in the United States by 30 percent across the board would leave Americans unaffected? Of course, this is folly. It cannot be the case that 30 percent of U.S. GDP is not contributing to material improvement. Rather, Sweden makes up for lower average incomes with a more equal income distribution and with the provision of more social goods. The net effect on happiness is a wash.

Let me translate the analogy to medical spending. We observe that areas that spend 30 percent more than other areas do not get better outcomes. It is possible that randomly cutting 30 percent of spending in high spending areas would not affect outcomes. But this is not likely. Cutting spending by 30 percent would almost surely eliminate some valuable services as well as some less valuable ones. One could make up for the loss of valuable services by providing other services that are low cost but not currently provided. Overall health might not be affected, but money would be saved. Better still would be to selectively eliminate the care that has little value and provide the other services that are valuable but are not currently provided. This would leave us spending less and with better health. I believe we can do this, but the task is harder than it seems at first pass. We don’t do ourselves any favors by pretending it is easy.

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.