Premium medicine in action

The thesis of Arnold Kling's Crisis of Abundance is that America's taste for "premium medicine" is the key to the rise in health-care costs. When I started reading the book, I laid out my own guesses as to the cause. One of them was a tendency to demand the latest, most expensive technology for health care. A Wall Street Journal story today ($link) shows these theories work together.

The story says that demand is so strong for the newest mammography technology, digital screening, that some patients are foregoing the old-fashioned kind even when digital is unavailable:

Interest is growing in the digital version of the breast-cancer screening test, driven in part by a study last fall in the New England Journal of Medicine that said digital was better for some women. The findings quickly became a marketing tool for makers of digital-mammography machines and hospitals that have them. Sales of the machines have been rising, with one major manufacturer citing digital equipment as the driving force behind record second-quarter revenue.

But some hospitals and doctors are concerned that the advantages of digital are being overestimated and may be causing women to delay getting a mammogram until digital machines arrive in their area. Still only about 11% of the 8,800 U.S. mammography facilities are estimated to have digital.

The story says:

The advice from doctors: Don't wait, especially if you are in one of the groups for whom digital has no demonstrated advantages. The study found that digital was better at detecting cancer only for premenopausal women, those under 50 years old, or those who have dense breasts. The majority of women who get mammograms are over 50, and looking at the 40,000 women in the study as a whole, the new technology was found to be no better than film overall.

Crisis of Abundance says

"An important characteristic of premium medicine is that many procedures have a low probability of affecting the outcome. In fact, often the procedures do not even affect the treatment plan."

Digital mammography seems an apt illustration of this point. It is more effective for only a minority of patients, and the treatment for a cancer discovered digitally doesn't differ from that discovered on film. Yet as it is the latest technology, and in short supply, the digital technology will cost more. It's an illustration of "premium medicine" that could have come right out of C of A. And, as C of A notes, spending on imaging services is growing twice as fast as health spending as a whole.

Maybe somebody will disprove the premium medicine explanation for high health costs, but it sure seems to me to explain a lot.

C of A: "Three Health Care Narratives"

Arnold Kling's "Crisis of Abundance" reads much faster than I am blogging it. Books continue to have a few clear advantage over newer technologies - portability and no bootup time. I read most of the second chapter during a half-hour piano lesson (the 2nd-graders, not mine). But setting my thoughts down on computer - that's harder to squeeze in.

Mr. Kling's first chapter talks about "premium medicine," the expensive tendency to use more specialists and more technology in healthcare. The second chapter stacks up the "premium medicine" theory of the rise of health care against what he considers the two other prominent explanations:

-a failure of private health insurance, and
-price gouging.

It's sad that anybody would take the idea of "price gouging" seriously anymore, but there it is. I won't spend any time on Mr. Kling's concise debunking of that nonsense.

The theory that private health insurance doesn't work is a more serious possibility. Mr. Kling summarizes it:

This narrative suggests that the main reason there are people without health insurance is that the risk pool has broken down. People who believe that they are healthy will opt out of insurance. People who are particularly sick will be rejected by insurance companies."

The theory of insurance failure does make sense, unlike the price-gouging narrative. As insurance companies exist to make money, why wouldn't they try to eliminate high-risk customers?

C of A addresses this by looking at data. The U.S. really has two parallel health insurance systems: private insurance for those under 65 and Medicare for the old folks. If private health insurance was the cause of high health costs, one would expect that health costs for Medicare receipients would reflect this, adjusted for the age of the receipient base. Mr. Kling concludes that Medicare doesn't work any better than private insurance at keeping costs down. He supports this by comparing U.S. costs and practices with countries with national heath insurance for all ages.

This makes sense, but it glosses over some issues with private insurance - it can be difficult to buy outside of a group, and there is adverse selection caused by healthy young people who save money by going without. I think regulations that prevent a free national market for health insurance are largely responsible for the problems of buying individual policies, but I am at a loss as to how to deal with those who voluntarily go uninsured. Is it a widespread problem? Does it really affect insurance prices? And how many people who say they "can't" get insurance really mean they "can't" get it at the price that they want to pay?

Handy C of A statistic:

As a line item of our national health care accounts, health insurane administration accounts for about 1 percent of GDP, out of total health care spending of 15 percent of GDP.

Crisis of Abundance: "Premium Medicine"

As a fitting sideline of my glamorous and thrill-filled life as a tax accountant, I am blogging my reading of "Crisis of Abundance," Arnold Kling's new book on health care economics.

Mr. Kling identifies "premium medicine" as the culprit for the continuing increase in healthcare costs. "Premium" medicine describes the routine use of high-tech diagnostic tools and specialists in everyday health care. While the book lays out statistics on this, it hit home best for me when he explained it in terms of one patient's odyssey in dealing with an eye inflammation. He discusses how the "Quixote's" inflammation would have probably been treated 30 years ago:

In this case, the patient might have been sent home with an antibiotic and perhaps a prescription for Prednisone, a steroid used to reduce inflammation. There would have been nothing else to do. In 1975, computerized medical imaging technology was new and exotic, with limited applications.

In contrast, in 2005, over the course of a few days Quixote was given a computed tomography scan, referred to a specialist, sent to a different hospital, referred to a specialty clinic, seen by a battery of specialists there, and given yet another CT scan. Ultimately, however, she was sent home, as she might have been 30 years ago, with an antibiotic, Prednisone, and no firm diagnosis.

I hadn't given much thought to this aspect of health costs - the way that even relatively routine health problems are made more expensive by the application of specialists and technology. I had always thought that was more of an issue for emergencies and life-threatening illnesses. Doctors aren't cheap to start with, and specialists probably tend to cost more. Add two CT scans, "a battery of specialists," a second hospital and a special clinic, and you've got one expensive eye inflammation.

It's an interesting problem. This shows that the application of expertise and technology doesn't necessarily change the treatment or the result. Yet in some cases it does - the MRI for the backache patient that identifies an unsuspected cancer in time, for example. I look forward to seeing what suggestions. Mr. Kling has for this.

Prior bookblogging of Crisis of Abundance:

May 20, 2006
May 16, 2006

Bookblogging "Crisis of Abundance"

I see Arnold Kling has somehow noticed that I am reading his book. Ok, no pressure!

In my ideal world, I would be able to linger over books in a comfy chair at a coffeeshop with a good free wifi connection. In real life I read in stolen snatches of five or ten minutes between helping with dinner, helping with (or "encouraging") homework, rebuilding the home computer network after the catastrophic server failure, herding the boys (8 and 14) to bed, or conspiring with my wife against the boys. I squeeze in bookblogging where I can. So, I apologize to Mr. Kling and any other readers for my posts being so sporadic.

Fortunately "Crisis of Abundance" is written in the much same lucid prose style as Mr. Kling's Econlog, so reading it in snatches works.

The introductory chapter is a roadmap to the rest of the book. I find it helpful to see where the book is going and what the themes will be. The overview begins:

Chapter 1, "The Rise of Premium Medicine," shows that the primary driver of the crisis in health care finance is the evoloution of the practice of medicine. Over the past few decades, medical care has become more specialized and capital intensive.

Premium medicine consists of

• Frequent referrals to specialists
• Extensive use of high-tech diagnostic procedures
• increased number and variety of surgeries

In my initial post on this bookblogging project I laid out my thoughts and prejudices on healthcare economics so I could see how they were confirmed or challenged by this book. As I identify heavy use of "the latest technology" as one of the drivers of health costs, I feel smug. I read a little further, though, and the smugness goes away. My opening thoughts leave out a huge factor old folks. That should have been obvious to me, having seen end-of-life chronic health issues with my father-in-law's long decline with Parkinsons and health problems.

I'm now into the chapter on premium medicine, which I will cover more in my next post. I like the book. As strange as it sounds to say this about a book on health care economics, it's a quick read, so far.

LOCATIONS FOR EARTHPARK NARROWED DOWN

Des Moines: May 17, 2008. At a press conference on the south bank of the Raccoon River, David Oman today announced that the EarthPark project will be located in one of four Iowa Communities: River City, Buxton, Sevastopol or Lithograph City.

The project was forced to find a new home when four towns dropped out of the race for the $180 million project. Grinnell dropped out when Grinnell College refused to allocate $25 million of its $1 billion endowment to finance the project, or to buy a letter of credit for the remaining $975 million to cover projected operational losses. Riverside was disqualified when Captain Kirk was unable to attend a fundraiser. Tiffin said its reported involvement was a typographical error, and Pella officials said that the inability to combine the project with the Bos Landen golf course and a space elevator made it impractical. Another candidate town, Kendallville, rejected a $25 million bond issue for the project in a citywide referendum, 12-5.

The project was earlier rejected by larger communities, including Des Moines, Coralville and Dubuque.

Reporters asked David Oman whether the fact that none of the towns still in the running for the project actually exist might hamper the project.

"I resent the implications of that question," retorted Oman. "River City is one of the finest Iowa towns ever used in a work of fiction. If you don't love Music Man, you don't love Iowa."

One reporter noted that two of the towns on the list, Buxton and Lithograph City, are ghost towns that have had no residents for at least 50 years. Oman said "that shows how important the EarthPark is to the economic development of these fine communities." Project boosters say the $155 million project will draw a million visitors a year and generate $131 million in economic activity in any community, no matter how desolate, godforsaken, or imaginary.

One reporter noted that Sevastopol is a defunct town on the south bank of the Raccoon River that was incorporated into Des Moines over 100 years ago. The state legislature would have to approve the separation of Sevastopol from Des Moines, and, said the reporter, "monkeys will fly out of my butt first."

Oman replied that EarthPark booster Ted Townsend has connections with the Iowa Great Ape Trust, and that work on the flying monkeys is expected to be completed by Earth Day, 2010.

A legislative change has made it possible to move the project into these communities, according to Oman. "Senator Grassley inserted the words 'real or imagined' into last year's budget reconciliation bill authorizing additional funds for EarthPark. This gives us much-needed flexibility to get this project underway."

BOOKBLOGGING: "CRISIS OF ABUNDANCE"

I'm going to try to "liveblog" Arnold Kling's new book "Crisis of Abundance: Rethinking How We Pay For Health Care." Dr. Kling is the scary-smart co-proprietor of the Econlog blog and a former Federal Reserve Economist.

In my prior experiment in bookblogging I read "Chasing Daylight," a memoir of a prominent accountant's battle with terminal brain cancer. I just read and blogged my impressions as I went.

I'm going to do this a little differently. I will write down my current views of the U.S. healthcare system before I start. As I read I will try to note items that confirm or contradict my current opinions, and whether and how my views change.

WHERE I START: MY CURRENT VIEWS ON THE U.S. HEALTH SYSTEM

I am perplexed by the rising cost of health insurance and health care, yet I am aware that the health care we get is better than it ever has been. I see several big, related issues in health care:

1. Why is health care so expensive, and why does the cost go up so fast?

I think this comes from a combination of causes. The tax-favored status of health insurance is part of the problem. The tax law encourages employers to compensate workers in health care instead of cash. This has led to systems where employees are largely insulated from the costs of their health care. An 300-lb employee who goes home and eats Cheetos, drinks beer and smokes cigarettes in front of the television pays the same for health insurance as a 160-lb marathoner in the next cubicle.

The prevalence of low insurance deductibles and co-pays also makes it easy to run up larger bills. Why not, if the insurance company covers it? If people were spending their own money, they'd likely spend less of it.

The medical malpractice legal system increases health care costs, both directly by siphoning cash off to second-guessing plaintiffs lawyers and by encouraging doctors to run extra tests to cover their butts.

Finally, health care is about life and death. If spending a few more bucks will extend life, ease pain, or improve quality of life, people will spend them. If it's the insurance company paying the bills, they'll spend quicker. They will also opt for expensive new technology. The latest technology is often the most expensive. That's why the fancy stereo stores will have $10,000 home theater systems that will be available at Best Buy in five years for maybe $800. Most people sensibly opt for Best Buy. But when the latest technology gives you continued existence, rather than higher fidelity sound reproduction, everybody wants the high-end product.

2. What, if anything, should be done to moderate health costs?

If I were the Tax King, I would strike all health care benefits from the tax law, and I would persuade the Health King to eliminate all coverage mandates and allow insurance companies to market whatever policies they care to offer nationwide on the internet. As the job doesn't seem to be open, I have to accept that the tax law is likely to be involved. I would limit tax benefits to high-deductible plans and expand health savings accounts to allow people to build a nest egg to fund health insurance reserves. I might even have a refundable credit for contributions to HSAs by low-income taxpayers, if we get rid of all other personal credits.

It seems clear that additional government involvement isn't the answer. Canada, with its waiting lists, substandard facilities and doctor shortages, testifies to that.

3. How does health insurance fit into the health care system?

Beats me. One possibility is to require everyone to buy health insurance, just like they do with car insurance. This bothers me; I could be damaged financially if somebody hits my car, but it's no money out of my pocket if somebody else needs back surgery. Should he be required to be prudent and buy insurance anyway?

In any case, "insurance" doesn't mean that Blue Cross pays all your health bills, to me. It means a plan that covers unexpected big bills that would otherwise be financially painful or ruinous. Ruin means different things for different people, but few will be ruined by going out of pocket for $1,000 per year, and many find even $5,000 per year to be about the difference between trim package for their new SUV. Also, a larger deductible will largely come back to the insured through lower premiums.

I think the the real issue with health insurance is...

4. How should we deal with health care for the poor?

If a middle-income person chooses not to buy health insurance and gets hammered with big bills, he pays the consequences of taking a risk with his eyes open; that's his problem. If a poor person is bankrupted by health costs because there was no affordable insurance available, that seems like a different matter. But what is "affordable," and how much should people be expected to pay? And if they can't pay, who picks up the tab? It doesn't grow on trees. Maybe the current system, where it gets picked up indirectly through higher costs on those who can pay, is the worst system except for all the others.

My opinions come from my experience as an employer, a tax practitioner, and a heath care buyer. Many smart people know a lot more about health economics than I do, and I'm sure Arnold Kling is one of them. I look forward to seeing what he has to say.

MAYTAG, RIP

To nobody's surprise, Whirlpool announced yesterday that the Maytag production plant and headquarters in Newton will be closing. A sad story.

Whirlpool left in spite of the Governor's best efforts to bribe them to stay:

An incentives package, including state money for job training, tax incentives and the promise of a new state-of-the-art factory, couldn't sway company officials from announcing it would shut down operations in Newton beginning this year.

Gov. Tom Vilsack called the state's offer the largest incentives package offered in Iowa. Details of that plan, which could have cost Iowa as much as $95 million, included:

- Building the company a high-tech factory at a cost of $50 million to $75 million. The state would have leased it to the company.

- More than $20 million to retrain Maytag employees to work for Whirlpool.

- Tax and energy incentives that were being ironed out.

The governor's office and state Department of Economic Development declined to provide specific details, saying state officials remained in negotiations with Whirlpool in hopes of keeping other Iowa Maytag facilities open.

"He all but gave them the keys to the state," said Rep. Paul Bell, a Democrat from Newton.

Why? Because they still couldn't make money:

It was (Maytag's) inability to keep up with the times, to renovate, to update, to keep up with the updated equipment," Bell said, noting that a Whirlpool plant in Ohio could churn out five machines in the time it took Newton to make one.

I saw comments on one blog saying that the closing showed the wisdom of Senator Harkin and Rep. Boswell's attempt to block the deal via antitrust law. This, of course, is nonsense. The most that the politicians would have accomplished is to destroy millions of dollars of Maytag shareholder value by blocking the sale to the high bidder. Politicians couldn't have made the plant five times more efficient. The inefficiency - not the Whirlpool purchase - doomed the plant.

Bribes and ethanol pipe dreams won't build Iowa's economy. A low-rate, simple tax system won't do it by itself, but it is a necessary first step. Unfortunately, nobody running for governor seems interested in that.

Separated at birth?

State 29 posted a picture of presidential candidate Mitt Romney.



He reminds me of someone, somehow...



Mitt Romney is Ranger Gord!