Baicker and Chandra go to the Federal Reserve

Today’s Managing Health Care Costs Indicator is $247,000

Katherine Baicker and Amitabh Chandra, both of Harvard, gave a paper to the Federal Reserve meeting in the Rockies last week.  The paper got a reasonable amount of press – but most of the focus was on the two pages where they challenge the conventional wisdom that accountable care organizations will necessarily lower health care costs.    

That coverage was accurate – but the paper was dramatically richer.

The title, “Aspirin, Angioplasty, And Proton Beam Therapy: The Economics Of Smarter Health Care Spending”  is a good place to start. Baicker and Chandra make the important point that we are purchasing high tech expensive medical care (like angioplasty and proton beam therapy), often when they haven’t even been shown to improve care.  On the other hand, it’s hard to get us to embrace inexpensive low technology innovations like aspirin to prevent heart attacks, or handwashing to prevent surgical infections.

They point out graphically that small incremental investments in low technology (aspirin and handwashing) could have huge health care benefits, while large incremental spending on high technology (angioplasty and proton beam therapy) would have only small benefits. A 1990s evaluation suggested that medical advances leave us currently paying about $247,000 per quality adjusted life year saved.

Curve A below represents appropriate productivity efficiency in health care, where investments are first made in low tech high return items like handwashing and aspirin.   This is a conventional economics efficiency frontier – each dollar is promoting further value, but the value declines with more investment as the marginal returns diminish.   Curve B represents an economists nightmare – where investments are prioritized to high technology which itself is either unproven or not shown to be of huge value, and later investments are made for the high value (but inexpensive) interventions like proton beam therapy for prostate cancer.  As you can see, each additional dollar does yield more social benefit – but we end up allocating extra dollars to health care, and we neglect schools or roads or other social needs.

Click image to enlarge.
Other key points from this paper:

  • Expert opinion health care often cites that 30% of health care spending is % waste, but it’s hard to remove that waste
  • The federal government’s tab is $250b annually to provide tax subsidies for employer sponsored insurance
  • Americans have historically had first dollar coverage, which leads to more moral hazard and can lead to overuse of less valuable care.  Of course, we’ll see how this changes with the advance of high deductible health plans.
  • Health insurance is “social insurance” which redistributes from the healthy to the sick.  For all the talk about accountability, we really don’t want to disrupt this redistribution.
  • Income tax rates would have to increase by 70% to fully fund the cost of health care if it continues to increase at a rate 1% greater than overall inflation.  This type of income tax increase could lead to reductions of 3-14% in GDP. I found this number especially sobering.
  • The authors point out that as long as Medicare and the FDA cannot consider cost when they determine coverage and approval, we will purchase lower value health care. 
  • Information is a public good, and will require government investment to subsidize comparative effectiveness research.

Baicker and Chandra conclude that there are a few important steps to take to encourage smarter spending on health care
-        Public payers (Medicare and Medicaid) should bundle provider payments  
-        Patients should have more cost-sharing – but it should be nuanced to encourage more attention to the value of care
-        We should provide patients with far better information about the cost and quality of the care that they could receive.