The High Cost of Healthcare: Is it Really Just the Prices?

Uwe Reinhardt, the eminent health care economist, who died last week, spent his career diagnosing the ills of the U.S. medical system and suggesting remedies. One of his most famous articles, written with colleagues Gerard F. Anderson, Peter S. Hussey, and Varduhi Petrosyan, bore the trenchant title, “It’s the Prices, Stupid.” In it, Renhardt and his co-authors concluded,

In 2000 the United States spent considerably more on health care than any other country, whether measured per capita or as a percentage of GDP. At the same time, most measures of aggregate utilization such as physician visits per capita and hospital days per capita were below the OECD median. Since spending is a product of both the goods and services used and their prices, this implies that much higher prices are paid in the United States than in other countries. But U.S. policymakers need to reflect on what Americans are getting for their greater health spending. They could conclude: It’s the prices, stupid.

Yes, our health care is plagued by high prices, with the cost of some new cancer treatments approaching a million dollars. However, as an article by Katie Hafner and Griffin Palmer in Tuesday’s New York Times details, it is not always just the prices.

Hafner and Palmer explore the rapid increase in the treatment of older Americans for skin cancer. To some extent, the increase can be explained by demographics—the aging of a generation that grew up with no clue that exposure to the sun’s rays could be anything but beneficial. However, demographics alone cannot explain why the number of biopsies for skin cancer that were billed to traditional Medicare Part B has risen 55 percent over the past decade, despite a small drop in that program’s enrollment.

The article zeros in on the role of private dermatology clinics, the largest of which is Advanced Dermatology and Cosmetic Surgery. The growth of ADCS has been fueled, in part, by an investment of $600 million by Harvest Partners, a private equity firm. ADCS makes heavy use of physician assistants to perform thousands of biopsies and treatments. The authors question the adequacy of supervision of the assistants by qualified MDs (as required by law). They report the opinion of independent specialists who characterize ADCS treatments as far too aggressive, especially for cancers that are unlikely to be fatal, and for patients who are near the end of their lives from other causes.

This examination of a single specialty raises the obvious question: Is it still just the prices, stupid, or are other factors also at work?

Although the New York Times story on dermatology is largely anecdotal, it fits in with another line of evidence that suggests that high U.S. healthcare expenditures are driven by demand, not just by higher prices per quantity supplied. Some of that evidence in question is laid out in a long, data-packed post by the anonymous author of the blog Random Critical Analysis (RCA). (If you don’t want to spend an hour working through RCA’s original post, Tyler Cohen has a brisk summary here.)

RCA maintains that although U.S. healthcare spending seems way out of line with that of its OECD peers when stated relative to GDP, it is not nearly so far out of line when compared to consumption. After all, as RCA points out, health care is a “superior good” with high income elasticity. In plain Englsih, that means Americans, like people all over the world, tend to devote a higher percentage of their total consumption spending to health care as their standard of living rises.

Although there are a few countries that have higher per capita GDP than the United States, there are none that have higher per capita consumption. Part of the reason is that Americans don’t save much. Another reason is that the United States runs a trade deficit, which makes its consumption larger as a share of GDP compared to countries that export a lot, like Germany or Norway. RCA also adjusts consumption data to reflect cross-national differences in the share of goods and services that are paid for by government but consumed by individuals.

As John Cochrane points out in a comment on his own blog, the scandal is not that we spend so much on healthcare, but that we don’t get more for our money. Our high propensity to consume health care should not curb, but rather, should spur our search for reforms that could increase the efficiency of our healthcare system.

Based on notes previously posted at NiskanenCenter.com.

Global Carbon Emissions Will Rise in 2017, but Not All the News is Bad

The Global Carbon Project (GPC) has just released a report on carbon emissions for 2017. The GPC was formed to assist the international science community to establish a common, mutually agreed knowledge base supporting policy debate and action to slow the rate of increase of greenhouse gases in the atmosphere.
The headline number in the GPC report is disconcerting. After staying flat for 2014 through 2016, total carbon emissions are expected to resume their upward trend in 2017.

Not all the news is bad, however. The trend of CO2 output is downward in the three countries with the highest emissions, China, the United States, and the European Union. It is still steadily upward in India, the fourth-largest emitter.

The next chart shows emissions in two ways, one of which attributes emissions to the countries where goods are produced and the other to the countries where they are consumed. Since many goods that are produced in China are consumed elsewhere, its consumption emissions are lower than its production emissions. That pattern is reversed in the US and the EU, which import many goods from China and elsewhere.

The biggest factor behind falling emissions in the top three source countries is a decrease in carbon intensity, that is, in carbon emissions per dollar of GDP. Decreased carbon intensity is in part due to cleaner technologies and in part to steady shift away from goods and toward services.

Wider adoption of carbon pricing, whether in the form of taxes or cap-and-trade, would accelerate the downward trend in carbon emissions per dollar of GDP. As the charts show, it would take only a modest additional push to achieve a global peak in carbon emissions, once and for all. Peak carbon would not mean an end to global warming, but it would be an important milestone.
Reposted from Niskanen Center. View many more great charts here: http://folk.uio.no/roberan/GCP2017.shtml

Why Does the US Spend So Much on Healthcare? The Case of Urine Drug Testing

U.S. health care reformers face a daunting task. Our country spends more on healthcare than any of its wealthy peers but lags in terms of health outcomes. Just why do we spend so much and get so little for it?

Not because Americans visit the doctor more or spend more days in the hospital. In both categories, according to a report from the Commonwealth Fund, the U.S. ranks below the OECD median. Instead, the excess spending

is likely driven by greater utilization of medical technology and higher prices, rather than use of routine services, such as more frequent visits to physicians and hospitals.

A new study from Kaiser Health News provides a thought-provoking case study that focuses on the high cost of urine drug testing (UDT). Doctors who prescribe opioids for pain management order UDTs monitor compliance with recommended treatments and check for illegal substances that might interfere with health. Up to a point, such tests improve outcomes, but evidently, some practitioners go far beyond that in pursuit of revenue. According to the study, some practitioners receive more than 80 percent of their income not from treatment, but from testing.

 “We’re focused on the fact that many physicians are making more money on testing than treating patients,” said Jason Mehta, an assistant U.S. attorney in Jacksonville, Fla. “It is troubling to see providers test everyone for every class of drugs every time they come in.”

What is more, as the report explains, attempts at cost control have sometimes had perverse results:

Tests to detect drugs in urine can be basic and cheap. Doctors have long used testing cups with strips that change color when drugs are present. The cups cost less than $10 each, and a strip can detect 10 types of drugs or more at once and display the results in minutes.

After noticing that some labs were levying huge charges for these simple urine screens, the Centers for Medicare & Medicaid Services moved in April 2010 to limit these billings. To circumvent the new rules, some doctors scrapped cup testing in favor of specialized — and much costlier — tests performed on machines they installed in their facilities. These machines had one major advantage over the cups: Each test for each drug could be billed individually under Medicare rules.

“It was almost a license to steal. You had such a lucrative possibility, it was very tempting to sell as many [tests] as you can,” said Charles Root, a longtime lab industry consultant whose company, CodeMap, has tracked the rise of testing labs in doctors’ offices.

The Kaiser report focuses on the cost of excess testing to Medicare, which by 2014 reached $8.5 billion per year, more than the entire budget of the Environmental Protection Agency. But private insurers, too, are struggling to cope with the same problem. In a separate discussion, Dr. Anthony Guarino, a clinician and expert witness in pain management cases, offers some common-sense guidelines for distinguishing excess from medically necessary testing. In his view,

Excessive and unnecessary UDTs cost patients, insurance companies and the government hundreds of millions of dollars per year. There are no guidelines from any medical society that justifies this form of testing.  When testing occurs repeatedly for a question that has already been asked and answered (i.e. Is the patient reliable and forthcoming), this testing is unnecessary and not medically justified.

The case of overuse of UDT illustrates one of the most formidable barriers facing would-be healthcare reformers: Every dollar of excess healthcare spending is a dollar of revenue for some healthcare provider—a revenue stream that the providers will fight doggedly to protect.

Previously posted on Niskanen Notes

Note to Tax Reformers: Consider Fixing the Formula for Taxing Social Security Benefits

While public attention is focused on big issues like corporate and inheritance taxes, many smaller but sensible opportunities to improve tax fairness and efficiency are being overlooked. A new Economic Brief from the Richmond Fed discusses one such example—taxation of social security benefits.

Currently, seniors pay income tax on a portion of their social security benefits that rises with increases in their total income, including earned income and other pension income. The formula is complex, but, as the brief explains, its effect is to expose seniors with even modest incomes to surprisingly high effective marginal tax rates—higher than younger workers who earn similar incomes from their jobs alone. For example, a senior with $16,000 in yearly Social Security benefits and $32,000 of income from other sources pays an effective marginal tax rate of 27.5 percent–much higher than the 15 percent marginal rate for a younger worker with wage income of $32,000.

According to the research on which the brief is based, the higher marginal rate discourages seniors from continuing to work. A part-time job that might look attractive at a 15 percent tax rate looks less attractive at 27.5 percent. If the seniors in question worked more, they would contribute more to the Social Security system in payroll taxes.

The brief discusses two possible reforms that would lower marginal tax rates and increase labor force participation of seniors while maintaining revenue neutrality. One would be to tax all Social Security benefits as ordinary income, rather than a portion that rises with income. Doing so would lower effective marginal tax rates and induce more work, thereby generating more revenue both through payroll taxes and taxes on benefits. Payroll tax rates could then be decreased to maintain revenue neutrality. Alternatively, all benefits could be made nontaxable, as they were before 1983.

Surprisingly, this change would result in no lost revenue, since greater payroll tax revenue would roughly equal the loss of revenue from benefit taxes.

Why not give it a try?

Reposted from Niskanen Notes