“Paying for health care” by John Edward

John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.

We spend way too much for health care in the United States. In 2009, total expenditures on health were 17.4 percent of GDP – almost twice as much as other major countries. We spent 8 thousand dollars per person – almost two and one half times as much as other countries.

The problem is we are not paying for health care.

More than any other country, the United States relies on free-market economics in the health industry. Markets can work well when proper incentives are in place. For most products we buy in a marketplace we willingly pay more for better quality. With the incentives currently in place in the U.S. health-care system, the market cannot work well, and we pay more for lower quality.

Whether you are paying for health insurance, or paying for uncovered medical expenses, you are paying for drugs and procedures. You are not paying for health. A recent Boston Globe article explored how companies are reducing health insurance costs by offering “wellness programs.” The product that health-care providers sell should be a wellness program.

Since incentives for preventative care are not emphasized, we pay more for treatment of conditions we might have avoided. We do not pay based on how well our doctors treat the condition, but rather for the procedures they order. If one of the procedures is botched we pay for even more procedures. Since procedures do get botched, the doctor may order unnecessary tests to avoid a law suit. We may pay for a prescription because of a television commercial we see every night during the news, or because the doctor has incentives to promote certain drugs.

My students should not have to pay me for extra tutoring or be required to buy a book for which I receive royalties. Yet, the current system rewards doctors in similar situations.

There is something wrong with the incentive system when drug companies spend more on advertising than research and development. A New York University study estimated pharmaceutical companies spend twice as much on promotion as R&D. In the U.S. medical-industrial complex, much of what we call health care is not market driven but rather marketing driven.

In the market for health care there is also a severe lack of information for consumers. If you go shopping for back-to-school supplies, you know what you are paying for: a pen that writes, a laptop that has the features you need. You also know how much you are paying. Comparison shopping is easy.

If you have health insurance, you seldom know how much a procedure costs. Most people do not really know how much their insurance costs.

The result of a market with the wrong incentives and poor information is we pay too much for mediocre results. An Institute of Medicine study estimated that one-third of the money we spend on health care is for unnecessary procedures. We lead the world, by far, in spending on medical procedures and drugs. However, despite what some politicians tell you, we do not have “the best health-care system in the world.”

Life expectancy in the U.S. is lower than many other countries. We rank 45th in infant mortality, with rates over twice as high as Japan and Sweden. We have high rates of obesity, diabetes, and strokes. The last time the World Health Organization ranked countries on health-care performance, we were 37th out of 191.

To be fair, the U.S. does rank number 1 on one metric. The Organisation for Economic Co-operation and Development (OECD) says we are the best at providing health care to the top income quintile – households with 6-figure incomes. We ration our health care, and among wealthy nations, we treat our wealthiest the best.

If we are to get health-care spending under control we need to change the incentives so we pay for what we want – good health:

• Caregivers should be compensated based on how well they provide wellness not based on the procedures they order and the drugs they prescribe.
• Health-care providers should work as teams and be paid per-condition rather than per-procedure.
• When medical mistakes occur the responsible party should pay for remedial treatment, not the patient or their insurance provider.
• There must be more transparency with respect to the cost of health care, and the cost of health insurance.
• Medical records must be readily accessible to authorized members of the patient’s health team.
• Patients should have the right to choose their health-care provider, regardless of what health insurance plan they have access to.
• Under “managed health care,” providers must take more responsibility for managing their patient’s health, and they should make more tools available to patients who want to manage their own care.

The federal government is taking modest steps in these directions in the Medicare system under the Federal Patient Protection and Affordable Care Act passed in 2010. Medicare is already the most efficient insurance program in the U.S. as measured by administrative costs as a percentage of total spending. With the federal deficit as large as it is, there is a strong incentive to get even more efficient.

There is nothing about “Obamacare” that could rightly be characterized as socialism. Moreover, market failures in the health industry dictate we need comprehensive reform of how we pay for health care.

We also need to reform how we pay for health insurance. That sounds like an incentive for another column on a single-payer option and non-profit insurers.

One Response to “Paying for health care” by John Edward

  1. DickH says:

    Thanks for this column, John. We need a national conversation along these lines. Unfortunately, every time one begins, those in the employ of the health care industry wheel out the “who do you want in charge of your care: your doctor or a Washington bureaucrat?” (Any time you hear that line, know that the speaker is in the tank).

    Part of me hopes that the Supreme Court strikes down the individual mandate of the 2010 health care reform as unconstitutional. That way, we’ll stop the charade of “letting the market” sort this out and just expand Medicare to cover everyone who needs it.