Does "Economics" go with "Health?"

The Doctor Won't See You Now

I was reading a story today that was recently broadcast on the US NPR network.  Reprinted was an interview from the show "Fresh Air" with Steven Brill, a lawyer and writer who has recently focused on the impact of health care costs in the US.  

Brill in 2013 wrote a 24,000 word cover article for Time magazine entitled "Bitter Pill: Why Medical Bills Are Killing Us," in which he outlined the ways be which (he sees) hospitals and others in the health care business rig the US health care market to enrich themselves whilst at the same time drive up the costs and reduce the access to medical care.  Brill has recently extended his earlier essay into a full-length book, broadening its targets to include the political battles around the Affordable Care Act ("Obamacare"), including pharmaceutical company lobbyists, 

The interview with Brill is fascinating, and I highly recommend reading it.  It puts the work into a more personal context by framing the book around a recent incident where Brill had been diagnosed with a heart condition that required surgery - expensive surgery - to fix. 

The piece really frames well the essence of the situation - and one that, as a health economist, takes up the lion's share of my waking day.

That issue is, people in general, and Americans in particular, pay an enormous amount of money for "health care" without really understanding what they are paying, what the risks and outcomes are, and how to evaluate them.  Brill, a lawyer and not a doctor, or health economist, or medical ethicist, doesn't really frame it this way, but that's what more or less comes across. 

The quote that took my interest most directly was near the top:

At that moment I wasn't worried about costs; I wasn't worried about a cost benefit analysis of this drug or this medical device; I wasn't worried about health care policy," Brill says. "It drove home to me the reality that in addition to being a tough political issue because of all the money involved, health care is a toxic political issue because of all the fear and the emotion involved."

"A patient in the American health care system has very little leverage, has very little knowledge, has very little power," Brill says. [emphasis mine]

This is really an insoluble issue from my vantage point. 

In my reading, his first point is either vacuously true or vacuously false, depending on how you look at it.  ANY consumer of any product, in deciding whether to purchase the product, empirically, if sub-consciously, is making a cost-benefit analysis.  It doesn't matter whether it's an iPad, a candy bar, "the clapper," or open-heart surgery.  If you decide to buy the iPad, you are implicitly deciding that the value of having the device is more beneficial than the money you are handing over to get it, and thus by extension, the other items you will not be able to afford by making this purchase.  By electing for heart surgery - itself carrying risks of death on the operating table, as well as some costs you will have to bear, even if only in the deductible, co-pay, and other costs you will incur.

In this sense, there is nothing fundamentally different about choices for consuming a "health care service" versus other choices.

On the other hand, there are fundamental flaws as well - if you are insured, then the overwhelming majority of the actual, economic costs of your choice are obscured from view, and most of the health risks of the procedure are poorly (at best) understood, and thus your choice is made in an environment of unequal information.  

Doctors (the providers) will, in almost every case, have an enormously larger reservoir of information than patients (the consumers) on the true risks, benefits, and costs.  This information asymmetry means that, while you surely are making a cost-benefit analysis, that analysis is sufficiently ignorant that typical "market" analytics do not really apply.

Does it Even Make Sense To Talk about the "Health Care Market?"

What comes out in reading Brill's piece to me is multifaceted.

First, his basic argument is freighted with opinions that he would masquerade as fact.  He makes an incredible statement that "(t)he insurance companies are not really the bad actors in this movie."  This is contrary to the back-story that, when he got his bills from United Health Care (his insurer), they were 36 different letters in 36 different envelopes, filled with conflicting, confusing, and contradictory information.  The climax of this thread is reached when Brill, in the course of working on his book, confronts the CEO of UHC with a bill that states that there is $0 billed, $0 paid (by the insurer), and yet $154 owed by the patient.  The CEO has no way to explain - or even understand - this situation.

The insurers, he says, are incompetent and terribly managed, and create and send out bills that they cannot understand, and yet they are "victims" just like everyone else.

I really don't know what more to say about this than the fact that the insurers are, in essence, the real customers of health care in the US.  THEY are what in health economics are called the payers.  They negotiate the prices; they decide what medicines and treatments you as the end consumer will be able to have access to.

It is close to axiomatically true that, in an economic system, where the negotiator is incompetent, terribly managed, disorganised, and ignorant of the costs and benefits, then the price structure is going to be distorted.  Perhaps, terribly distorted.

Brill goes on to make some observations that are, to be kind, wrong.

He makes the following claim that simply isn't so:

But they're (the insurance companies) sort of stuck in the same ditch we're in, which is being forced — unlike the payers for health care in any other developed country on the planet — being forced to pay uncontrolled, exorbitant prices and high profits that are generated by nonprofit hospitals and by drug companies and medical device makers.

It's wrong on two counts.  The first is that foreign payers - in this sense, he is talking about single payer systems like the UK or France, "control" prices in a way that American ones cannot.  In fact, prices are negotiated in most single payer systems in ways that are not fundamentally different from the way that they are in the US with large payers like UHC.  France, which is often cited as offering a model for high-quality care at lower cost, goes through a quite complex system of cost-benefit analysis wherein the medical value and innovation are evaluated, and then price negotiations, based on the level of need, benefit, and innovation established - occurs.   

The drug companies are not forced to accept the prices negotiated; if they do not, they simply do not make the products available in France.  Similar systems exists in the other markets. Different countries assess value differently, and hence, prices are not uniform across Europe, nor is access to treatments.  For example, I would far prefer to get a highly aggressive form of cancer in Germany than in the UK.

In the US, large payers have a similar tool available - UHC can easily decide that the value offered by a treatment is not sufficient for the price at which it is offered, and thus decide not to re-imburse it.

The difference is, in France, there is a single payer, so it has larger influence on the price.  In the US, if UHC does not choose to re-imburse a product, one of its rivals - perhaps Aetna or Kaiser - will. One presumes that an insurer that provided access to more and more expensive treatments would likely have higher premiums and higher deductibles. Consumers could then, hypothetically make a choice on whether the additional cost is worth the additional coverage.

In short, US healthcare payers have precisely the same tools to control costs at their disposal as their European peers.  They choose not to deploy them precisely because they know their customers - people who are ready to demand Cadillac service at a Chevy price.

This is where the problem of information asymmetry comes in, and where something like comparative effectiveness could be a big help.  Other countries with 'health care technology assessment" systems (HTA) in place - like France, Canada, or the UK - make data-driven analyses of the costs and benefits of competing treatments.  The process is not perfect, and it is not entirely "transparent," but it provides a somewhat information-based way to assess what to re-imburse and what not to.  

When such a system was discussed as part of the ACA in the US, it was quickly shot down under a fusillade of remarks about "death panels."

Worse still, Brill talks about "exorbitant" prices and "exorbitant" profits.  Indeed, the prices of some treatments are eye-popping.  The current enfant terrible is Gilead Sciences, which recently launched a treatment called "Harvoni" that provides a near 100 per cent cure rate for chronic hepatitis type C (hep-c).  The price tag is close to $100,000.

Is that, however, "exorbitant?"  Are Gilead's profits "humongous?" 

These are intrinsically subjective questions.  $100,000 is a lot of money.  I would bet that the house Brill lives in (he made $45 million selling one of his companies), if offered at $100,000 would not be called an "exorbitant" price.  

In a sentence, "price" and "value" are not the same thing.  They're related, but the relationship is not necessarily a strong one.

This is the sort of question that economics is set up to answer, and why health economics exists.  But given Brill's thought exercise, the price of health care and if it's "reasonable:"

The first way to look at it, which is certainly the way I was looking at it the morning after my surgery and ... eight days later when I walked out of that place a healthy person, is that those people saved my life. So in that sense, would I beg, borrow and steal or insist that my insurance company beg, borrow and steal to pay for all that? Yes. Were the people there highly professional, highly skilled? Did they care a lot about me? Yes. So in that sense, it's reasonable.

your ability to live - the most basic urge of any living thing - is directly related to the care you get when you are sick.  And given that Brill would "beg, borrow, and steal" to be able to access care that he admits "saved (his) life," is economics really an appropriate tool?  Is it a useful one?

In classical economic theory, you have costs that are either partially or completely elastic (the more cost there is a for a product, the lower the deman) or partially or completely inelastic (demand is constant irrespective or price).  Health care price/demand are highly inelastic.  If you *need* something to live, you are not going to reduce your demand for it unless price distortions become extreme.

In this sense then, the most basic law of economics does not apply to medical care.  Precisely because the products have value, their prices cannot follow a free market scheme.  

This turns the price/value relationship on its head.  Unlike say, an iPod or a CD or a type of automobile, value is decoupled from the argument of cost.  THIS has distortive effects on policy and on the language of the discussion.

If one steps back from the heat of the argument, this is obvious - Harvoni costs $100,000, an "exorbitant" price.  Recently, a cel from an earlier Tintin cartoon sold for many times that price.  The first has the power to save lives, while the second (as much as I like Tintin comics) has absolutely no intrinsic value.

The standard argument companies make for their high prices is that these are needed to finance R&D (itself a not completely honest answer); seldom does a company like Gilead respond that the price is high because the value of what they offer is high, which is the more honest answer.

But it is an unpalatable one because we claim that we cannot place a value on life.  This itself is plainly false (cf: arguments by Princeton bio-ethicist Peter Singer), but it is instructive.  However, since the absolute value of medical interventions is so high, price must be decoupled from the price means that economic analyses of an economic question are inappropriate.

Unfortunately, we live in a world where we measure what we value, and we act on what we measure.  And thus, healthcare systems - even in European social democracies - have no alternative but to turn to cost-benefit analyses when assessing how to allocate their resources.