On the health--and wealth--of the nation
As I read David Cutler's important new book on how to deal with the nation's most challenging social problem, I kept wanting more. Cutler, professor of economics, provides a needed corrective to misleading ideas about how intractable the nation's healthcare problems are. He is determined to show that practical solutions exist to pay for the healthcare we want. But in seeking to write an accessible book, one of America's leading healthcare scholars may have left too much of the detail out to win us over. Your Money or Your Life will serve, nevertheless, as the standard representation of what I think is fast becoming an accepted academic view.
The problem in a nutshell is that America's healthcare costs are rising much faster than its national income. The United States now spends well more than 14 percent of gross domestic product (GDP) on healthcare—far more than other developed nations, whose average is closer to 8 percent. According to current estimates, the public portion of healthcare, largely Medicare and Medicaid, equal a little more than 4 percent of GDP today. By 2040, they are projected to reach nearly 10.5 percent of GDP and by 2060, 13.3 percent. To put it in perspective, the United States spent a total of only 5 percent or so of GDP on healthcare in 1960.
Can we afford this pace of growth? Only if we are willing to give up something else.
Meantime, the widely heralded arrival of managed care, led by the rise of HMOs, helped slow the growth of medical costs for a time, but failed to reform all manner of misuse, overuse, and underuse of medical procedures. In addition, enormous pockets of Americans—some 40 million in total—remain uninsured. A significantly higher number go without insurance coverage at some point in their lives. There is also ample evidence, despite the nation's network of emergency public hospitals, that the uninsured receive poor healthcare. Some 20,000 non-elderly adult Americans die each year because they have no insurance, according to one trusted estimate.
Many believe the only answer is to cut medical spending back sharply. Traditional scapegoats include expensive high-technology equipment, costly drugs, fancy diagnostic procedures, and errors made by hospitals with little experience in certain procedures. And, surely, people generally have too many angioplasties, undergo too many MRIs, and take too many drugs.
Cutler readily recognizes that there is waste and misuse of services. But even so, he argues, American medical spending, including research in high technology and pharmaceuticals, is worth it. How do you go about analyzing this assertion? Cutler's research is at the leading edge of such work, and it is the most interesting contribution of his book.
The first step in assessing the worth of medical spending is to estimate the financial value of human life. How do you do that? Many economists have faith that the market itself can provide the answer. A good indication of the value of human life is how much money consumers are willing to pay to extend their own.
Consider the cost of an air bag. It is estimated that air bags save on average one life in 10,000. Thus, at a rough cost of $300 an air bag, we spend $3 million to save that life. If the saved person lived, on average, 30 years more, the market is roughly valuing one year of additional life, as ghoulish as it seems, at $100,000.
Similar analyses are made of how much people are willing to spend on home fire alarms, or how much more a dangerous job must pay to attract workers than a safe job. Cutler writes that such analyses suggest that consumers value a year of life somewhere between $75,000 and $150,000. Choosing $100,000 as a standard, he then measures how much we spend on new procedures and therapies to extend life to determine a return on investment of sorts.
Cutler figures, for example, that the nation now spends about $70,000 more than in 1950 to save a single low-birth-weight infant. That's a lot of money. Is it worth it? As a consequence of the spending, the survival rate has risen sharply. The survivors in turn live to an average of 70 years old. But they don't live lives as healthy as those of normal-birth-weight babies. Moreover, society must pay additional social costs for the disabilities of these survivors. Making adjustments for these latter issues, Cutler figures the value of the $70,000 investment is nevertheless $350,000 per low-birth-weight infant. That is quite a return.
Cutler presents several other examples. He finds similarly high rates of return on spending for antidepression drugs, for example. Progress in the treatment of heart disease has also been especially successful. There are advances in procedures and therapies such as catheterization and bypasses. There are new drugs to control hypertension and high cholesterol. Cutler figures that the value of life extension due to these heart-disease therapies is worth four times what is spent on them.
In fact, Cutler says that even though we do not have data for all new procedures, the benefits from advances in the treatment of low-birth-weight infants and heart disease alone are so great that they justify new expenditures on everything else, even if all expenditures in other areas do not improve the nation's healthcare at all.
Such market-based analytical tools have inherent problems. Extrapolating the willingness of consumers to pay now concerning an event of low probability far into the future is at the least a little shaky. The rationality of consumers is not always evident, even in the short run and concerning issues of far greater certainty. These analyses do not necessarily differentiate adequately among the desires of different individuals. Some value life more than others, for example, especially at different times in life. But such analyses are at the least suggestive that what we are spending on medical care is worth it.
What they do not suggest, however, is that the nation spends its money in an ideal way. As noted earlier, Cutler makes clear that there is much waste in the system. What concerns him most is an important but underreported phenomenon: the underuse of available medical procedures. People fail to take beta blockers after a heart attack, for example. Depression is under-diagnosed, for all the popularity of the new drugs. And so on. Cutler's answer is that we should not cut back total spending. Rather, we should improve the quality of care it is providing.
But one moment. Why are health outcomes so good in many countries that spend far less than the United States does? Longevity is higher and infant mortality lower in such countries, for example. Furthermore, some studies show that these nations get more bang for their buck because healthcare providers charge significantly less. Gerard F. Anderson, Peter S. Hussey, and Varduhi Petroysan of Johns Hopkins University and Uwe Reinhardt of Princeton argued in a fascinating piece in the May-June 2003 issue of Health Affairs that the high American healthcare prices result in fewer services being sought in the United States than elsewhere. For example, doctor visits and hospital days per person were below the median of other developed nations.
These researchers claimed the problem might be that those who buy healthcare are fragmented and much less powerful than the large corporate entities that provide it. This could be used as an argument for a single-payer system, or something like it, in which government can bargain with equal power with private healthcare providers to hold down costs.
Cutler inexplicably does not deal directly with these important points—and as a consequence, he too casually dismisses the value of one-payer systems. I can understand this brevity, given that a government system in the United States is politically infeasible. But for efficiency reasons, the arguments in favor of a one-payer system require more respect than Cutler gives them.
Instead, he endorses a system that will get the market incentives right. The old fee-for-service system and the newer managed-care system, he explains, both failed at this. The fee-for-service system encouraged expensive high-technology care. Managed care was designed to reduce hospital costs and restrain intensive services, but not to distinguish adequately between more useful and less useful treatments.
What is needed, writes Cutler, is to reward providers according to the quality of their services. Good hospitals get paid more, doctors who use the best procedures get paid more, incentives for outreach services are increased, and so on. But how do we establish these specific guidelines? Can we really measure quality? Isn't that like trying to establish incentives for the quality of teachers?
The reader waits to be convinced this can work, and I think Cutler would have benefited by devoting more attention to the successes and failures of experiments so far. He cites some hopeful examples, but does not present a comprehensive set of quality definitions and new formulas for financial compensation. Without some attempt at this, his argument remains abstract.
Just as troubling: he simply punts on the question of how we implement such a complex revamping of the system. Cutler says we can either be led by the government or by private enterprise. For this reader, that is not good enough. A group of researchers, for example, has publicly encouraged Medicare to lead the way. It's not clear to me that without government prodding, the private market will get it done.
As for covering the uninsured, Cutler proposes a plan that "allows all families to purchase insurance the way government employees do." In fact, federal health-insurance programs are widely praised. They pool employee money and allow federal workers a choice among private insurers' plans. But where will the money come from? Cutler proposes that the Bush administration's tax cuts be redirected as credits to Americans to buy the new insurance. Again, this reader thirsts for more discussion of the details of costs and the political practicalities of such a program.
My doubts about some of Cutler's assertions notwithstanding, he makes a cogent case for reform, and one that is admirably optimistic. His principle is a good one: get the market incentives right and avoid government if you can. But can we? My sense is that the nation can go a long way toward orienting insurance reimbursement to improve the quality of our healthcare, but I do not think doing so will be easy. If it is to be done at all, however, I find it hard to imagine that government will not play a key part. Cutler would have benefited us all by putting his impressive body of knowledge and good mind to the pragmatic realities of making his ideas work, not simply telling us they are desirable. I look forward to a sequel.
Jeff Madrick, M.B.A. '71, editor of Challenge magazine and an economics columnist for the New York Times, teaches at Cooper Union and New School University. He is the author of Why Economies Grow and a forthcoming history of the U.S. economy since 1970.
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