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A Better Way to Save $1 Trillion

Written by John Goodman

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Health economist Victor Fuchs argues that if we spent the same fraction of national income on health care that other countries spend we could save $1 trillion. How could we do that? By organizing our health care system the way other countries do. That would mean, he tells us:

Fewer visits to specialists and a higher proportion of physician visits to primary care providers.

A sharp reduction in the number of high-tech procedures such as MRI and CT scans.

A reduction in aggressive medical interventions for the very sick elderly.

Longer waits for access to specialized care and high tech interventions except for emergencies.

Less privacy, space and amenities for in-hospital patients.

And he adds: the number of beds per capita would actually increase as would the number of physicians ― which is a hint that there might be something seriously wrong with the whole argument.

While it is true that we spend more than other countries in an accounting sense, we actually use fewer real resources: fewer doctors, fewer nurses, fewer hospital beds, shorter lengths of stay, etc. That means that from an economist’s point of view, we aren’t necessarily spending more than other countries.

Fuchs says that with an extra $1 trillion, we could have more bridges, more highways, more teachers, more R&D, etc. But once again, this confuses money flows with real resource use. We can’t devote more real resources to non-health care unless we use fewer real resources in health care. But if we copy other countries, the resource flow will go in the opposite direction. That is, in order to have more doctors, nurses, hospital beds, etc., we will have to have fewer teachers, fewer roads, less R&D!

I find this same error in some of the writings of Uwe Reinhardt and Sherry Glied and their colleagues. I cannot understand why good economists continue to make this mistake ― especially after I have pointed it out.

That said, I agree with Fuchs’ overall conclusion. I too think we could save $1 trillion in health care, but not by copying what other countries do. We can save that much money by liberating the marketplace.

You can’t always get what you want

There is plenty of evidence that if the U.S. health care system were subjected to market-based rigors, savings would be found in every direction. As I have written previously, Canadians seem to have no difficulty getting a knee replaced in this country for about half of what American patients (and their insurers) typically pay. Similarly, patients who arrange knee replacements through the domestic medical tourism site Medibid also are able to cut the price in half.

But are these special cases, where hospitals are able to charge less by using excess capacity, rather than something that could happen for all patients? WellPoint’s judicious use of reference pricing in California suggests the latter. When the insurer limited the amount it would pay for knee and hip replacements, the average charge by California hospitals fell by about 40 percent for state employees and their families. As I explained previously:

…the cost of care at [out-of-network] hospitals was cut by one-third in the first year and continued heading toward the average “network” price over the next two years. This is dramatic evidence that when patients are responsible for the marginal cost of their care (and therefore, providers have to compete on price) health care markets become competitive very quickly. Remember, the insurer is not bargaining with these out-of-network providers. The patients are.

Notice that these good results came about without any of the costs of bureaucratic rationing implied in the bullets above. To my knowledge, the WellPoint enrollees did not experience long waits to see a specialist or get a scan or have their operation ― the way patients in Britain and Canada do. There was no bureaucratic agency to decide whether they were too old to benefit enough from a new knee. And during recovery, they didn’t have to share a ward with four, six or eight other patients.

Again and again we find that when patients are spending their own money, providers systematically compete on price and quality. And when that happens, real prices tend to fall and quality rises. Some examples:

Over the past two decades the real price of cosmetic surgery has gone down dramatically ― even in the face of soaring demand and technological innovation of the type that we are told increases costs for every other type of surgery.

Over the past decade the real price of Lasik surgery has declined by 30 percent ― again with soaring demand and technological innovation, a satisfaction rate of 93 percent, and quality competition reflected in deferential prices. (So much for the problem of transparency!)

Free standing emergency rooms are competing with hospitals on price and quality.

Mail order pharmacies compete on price with local pharmacies and have a lower error rate.

Legal, laboratory and diagnosing testing services available to patients directly cut the price in half and deliver results much more promptly.

Walk-in clinics substantially reduce the cost of primary care, do so while following best practices more often than traditional primary care physicians, and probably would be connected with physicians’ offices and might even have physician franchise owners were it not for the silly restrictions of the Stark law.

In short, the only thing standing between where we are now and an extra trillion in patients’ bank accounts is a bureaucratic morass enabled by unwise public polices and…

Oops. Did I say patients’ bank accounts? That’s a term Fuchs never uses. In fact, going back over his list of ways to spend the $1 trillion I see that all his examples are public expenditures. Which is to say that he is envisioning government capturing all the savings. And in other countries, this is indeed what happens. Government artificially suppresses provider fees and keeps the saving for itself.

In a market, of course, the savings go to the consumers. Which in this case are patients…Ah, yes…patients. On second reading, I did find a reference to them, where Fuchs is describing the impact of the Europeanization of the U.S. health care system that he envisions:

The loss of prompt access to specialists and high-tech diagnostic and therapeutic interventions and the reduction in privacy and amenities in hospitals might be particularly missed by higher income patients. Only high income patients?

I think these things might be missed by everyone.

 SOURCE: NCPA

John C. GoodmanJohn C. Goodman is President of the National Center for Policy Analysis, Research Fellow at the Independent Institute, and author of the book Priceless: Curing the Healthcare Crisis.

The Wall Street Journal and the National Journal, among other media, have called him the "Father of Health Savings Accounts." Dr. Goodman's health policy blog is the premier right-of-center health care blog on the Internet.

It is the only place where pro-free enterprise, private sector solutions to health care problems are routinely examined and debated by top health policy experts across the ideological spectrum.

 

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