An Example and a Question

Robin Hanson asks David Cutler what is missing from aggregate studies. I can’t help but provide just one example. Suppose some physicians in Region A are better at surgery, while those in Region B do a better job with medical management of heart attacks. And further assume that surgery is more expensive — hardly a stretch. Health outcomes may be very similar across the areas, but costs are higher in Region A because they tend to use more surgery. If we forced physicians in Region A to practice medical management instead of surgery, we might save some money, but we would adversely impact patient health because the doctors in Region A aren’t as good at medically managing patients as those in Region B.

Now, I am not arguing that differential practice styles explains all — or even much — of the geographic variation we see. But this example points out that there is much that we need to understand before we take the scalpel to health care spending. The effort to better assess outcomes is a necessary first step in that direction.

Let me ask the following of Robin Hanson. Suppose we could design a catastrophic health plan, with first dollar coverage exceptions for those therapies that can be shown to be clinically efficacious and reduce total health care spending. (I am thinking of exceptions like free anti-hypertensives which prevent heart disease, but not services like “well-baby” care, which — while very popular with young families — are hardly cost-saving.) Would you be in favor of subsidizing this coverage for the low-income uninsured, with the subsidies paid for by eliminating the tax exclusion for health insurance premiums above the cost of this limited plan?

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.