A Better Way to Save $1 Trillion

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.

Comments (21)

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  1. Matthew says:

    “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.”

    This is proof that if patients had more control over their care, with less in the hands of insurers, prices will fall. Efficiencies will be created under a free market system, especially for health care.

    • Andrew says:

      It always seems like the free market approach is the best approach to reach cost effectiveness and efficiencies. However, it also seems to be the more unpopular opinion in the main stream. What a shame.

  2. Thomas says:

    “…going back over his list of ways to spend the $1 trillion I see that all his examples are public expenditures.”

    I also noticed this. The savings should be seen in the pockets of the patients, not to justify more government spending.

  3. Devon Herrick says:

    How to save $1 trillion? The list is long…

    o Restructure medical licensure into a system of certification (with state registration) rather than licensure controlled by medical societies.
    o Restructure medical education, creating multiple provider levels with scope of practice, opening up more residencies, to boost competition in the field.
    o Telemedicine and medical outsourcing would be free to compete in in-office care.
    o Restructure health insurance to a system where the tax advantage favors casualty insurance rather than pre-paid insurance.
    o Create a system where individuals are encouraged to create medical IRAs (e.g. HSAs) to pool life’s health risks over a working life time rather than pool across co-workers.
    o I would probably make HSA deposits a compulsory payroll deduction (similar to Singapore) so people could pay for day-to-day expenses.
    o Medicare and Medicaid would mostly be turned into a defined contribution system rather than an open-ended entitlement.
    o Medicare would be transformed into a high deductible plan with a wrap around HSAs for expenses under the deductible.
    o Drug approval would be brought into the information age.

    • Ralph @ MediBid says:

      Devon, The easiest way is through the market, not government regulation and mandates. We are doing it every day

  4. James M. says:

    “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.”

    It may be particularly missed by high income patients, but it will be missed by all patients as well. I don’t know why the exclusion of middle and low income patients.

  5. G. King says:

    Someone says if we put this argument into an dimension of supply and demand, we will find that such high price is basically caused by scarcity of doctors. A person has to receive an over 5-year-long graduate education and practice for another couple years to be a doctor. However, please imagine the professors working at universities. They also need a doctoral degree and decades of research experiences to be a tenure professor. In fact, doctors generally earn much more than professors while these two jobs need similar training. Is overpaid a factor causing high expense of medical treatment?

  6. Alex B says:

    It seems that many economist love the way the healthcare system works other countries. Because they have managed to save money and provide average healthcare to “everyone” it doesn’t mean that those are the only steps to be taken. The U.S. has shaped its history with groundbreaking innovations that changed the way the world functioned. I cannot think off any situation in which America copied another country that lead to a successful change. We must improve the healthcare system and to actually be successful we need to come with those solutions ourselves.

  7. Perry says:

    Oh no, we can’t have market forces at work, then the government would not be involved, that’s heresy!

  8. Roger Waters says:

    Victor [and his ilk] are welcome to move to Canada, Russia, China, or other countries they believe have it better [but, of course, not UK as they are going in the opposite direction].

    Once they have truly experienced the [supposed joys] of what they describe ["Fewer visits...reduced high-tech procedures...reduced medical interventions...Longer waits...Less privacy..."] (and live to tell the tale), then we can talk.

    The arrogance of people who try and ‘teach’ this stuff, or “do policy” without ever having to ‘do’ health or care, astonishes me? What about you?

    • Martin P says:

      It is very easy to praise a system you don’t have to endure. Like the wealthy that praise socialism but they don’t want to be affected by it. There are lots of people out there that love the theory, they love the utopic ideals behind it, yet they are blind to reality. They forget that there is a difference between what theory claims and when it’s applied in reality. Opinion leaders that support these ideals are the first ones to reject treatment under the conditions they support.

  9. Patrick S says:

    Every country is free of determining their priorities. Some choose education, others religion, some prefer military over infrastructure, some have healthcare as their top priority, others ignore it. The U.S. has made its top priority R&D and education (reason why the best schools are in this country and why the majority of the innovation is generated here). But to achieve this, tradeoffs must occur. The country cannot become the leader of everything in the world without innovation. If America wants to keep being the “global force for good” and the originator of innovation it cannot become the leader in healthcare doing what other countries do. America needs original thinking to reform its healthcare system into something competitive and better than other systems.

  10. Gabriel O says:

    There are a lot of things in which the healthcare system can improve if the government abstracted itself from the market. The sole competition will decrease prices, will increase demand and will encourage innovation. America can have an amazing healthcare system, but to do so government should not intervene.

  11. charlie bond says:

    Hi John:

    Ah, how to find the true cost of care? It has nothing to do with the prices we pay.

    The grossest waste is the overtreatment occasioned by defensive medicine. As I so frequently say: The single part of the anatomy most treated by American medicine is the doctor’s ass. We waste anywhere from 30-60% of our dollars protecting it. That alone is about a trillion dollars that could be redirected to caring for folks and for sustaining wellbeing.

    Having helped write California’s malpractice reforms (MICRA) in 1975, I have long felt we could do even better. Since 1985 I have advocated medical adversity insurance in lieu of the wasteful tort system, Such first-party insurance would provide a rational, free-market alternative to the lottery brought to us by our friendly trial lawyers.

    Medical adversity insurance is nothing more than first-party insurance that combines health, disability and life insurance into a single policy that pays upon the occurrence of an iatrogenic injury. If properly underwritten (with appropriate deductibles to eliminate nuisance and de minimis claims) and exclusions (to carefully deter fraud), such policies would be affordable and easy to administer.

    Arguments that such policies would be actuarially unaffordable are thoroughly refuted by the fact that for over a generation California has made the patient’s own accident, health, disability and life insurance primary sources of reimbursement in medical malpractice cases. They did so when we eliminated the collateral source rule as part of MICRA. Placing the primary burden on these other insurers in malpractice cases has not driven those other insurers from the state, nor has it adversely affected the rates for life, health, accident or health insurance.

    In short, we can afford such first party insurance, and we, at the Patient-Physician Alliance are looking for a fronting company or partner who wants to start offering such insurance to patient members. Patient members would voluntarily waive their right to sue for malpractice in exchange for the first party insurance. They would in turn get a discount on services from member doctors, hospitals and other providers. As more and more patients seek the discount the need for traditional malpractice insurance would diminish; malpractice premiums would go down and eventually disappear thereby lowering a significant cost in the system.

    More importantly, the need to practice wasteful defensive medicine would disappear and the patient would no longer be seen as a potential adversary. Imagine the untold benefits by simply restoring the relationship of mutual trust.

    Medical adversity insurance is an entirely free market solution that requires no legislation to implement. (Perhaps government-pay patients would have to have a regulation or two issued to permit their participation and perhaps some insurance commissioners would have to specifically allow the combination of disability, health and life coverage in a single policy, but otherwise the regulatory path is pretty clean and clear.)

    Such a simple reform would help assure that our country does not go broke paying for the Baby Boomers’ care and could quite easily erase a trillion from our health expenditures. Anyone interested in working on this project with us, please contact me at cb@physiciansadvocates.com.
    Cheers,
    Charlie Bond

    • Wanda J. Jones says:

      Charlie: You are adequately insured against retaliation by the trial lawyers gang?

      Wanda J.

  12. Joe S. says:

    Excellent post.

  13. Wanda J. Jones says:

    John and Friends: I thought Victor Fuchs was dead. I guess it’s only his rational mind that is.

    If it were not for American healthcare, I would be a dead duck at my age with my genetics. I’ve lived in both England and France, so have seen their antiquated health systems at first hand. The trouble with these utopianists in love with Europe is that they are arguing for average healthcare–not too bad, but not too good, either. That means it would fit only “average” people, and we know that most people think they are “above average.” Certainly, health economists seem to think that.

    Wanda Jones
    NCHI
    SF

  14. Barry Carol says:

    It’s not the resource use that counts; it’s the price we pay per unit of resource use. In America, prices for hospital based care as well as for care delivered in and by hospital owned outpatient facilities and physician practices as well as brand name drugs are grossly out of whack with prices charged in other countries. Moreover, with the exception of brand name drugs, price discovery before services are rendered is virtually impossible, even by referring doctors, because of the prevalence of confidentiality agreements between providers and insurers. Legislators and/or regulators need to require the disclosure of actual insurer contract reimbursement rates. Hospital chargemaster prices are meaningless and irrelevant to all but the uninsured.

    As for defensive medicine, I think we could make a dent by adopting safe harbor protection from failure to diagnose lawsuits for doctors who follow evidence based guidelines and protocols where they exist. Even liberal expert, Ezekiel Emanuel supports this approach.

    Less intensive medical intervention at the end of life would also be helpful as would more aggressive efforts to mitigate fraud in the Medicare and Medicaid programs. The so-called skin in the game that comes with high deductible insurance plans is significantly overrated as a healthcare cost controller in my opinion.

  15. Bob Hertz says:

    If we actually saved $1 trillion a year in health care, the result would be millions of lost jobs in hospitals, clinics, and insurance companies. Plus much lower incomes for a good portion of the doctors, nurses, and drug company sales reps and administrators who remained employed.

    This would not be wholly unjust, but that is not my point.

    The rest of the economy would go into a tailspin. What portion of new luxury cars are bought today by medical people? What portion of new urban construction is done by hospitals? etc etc.

    Economically, the cure might be worse than the disease. Prof Fuchs may be guilty of static analysis, assuming that less spending on health care means more spending possible elsewehere.

    • Barry Carol says:

      Bob,

      The potential savings of $1 trillion in U.S. healthcare spending is more likely to happen over a ten year period, if it happens at all, than immediately. Let me put some numbers to how this would play out in practice if it happens, which I think it very well may.

      Current U.S. GDP is about $16 trillion. If it grows 5% annually in nominal terms (3% real plus 2% inflation) over the next 10 years, it would reach $26 trillion by 2024. Until the last couple of years, healthcare spending grew two percentage points faster than nominal dollar GDP on average. At 7% annual growth, healthcare spending would go from $2.8 trillion in 2014 to $5.5 trillion in 2024. If we bend the cost curve and limit healthcare spending to the same percentage growth as GDP (GDP plus zero), in 2024, healthcare spending would be “only” $4.55 trillion or slightly less than $1 trillion less than it would have been if it followed its long term historical growth trend.

      Now it is quite possible and even likely that many hospitals will close over the next ten years. However, the nurses won’t be laid off for the most part. Instead, they will work in surgical centers, outpatient facilities, rehabilitation centers and even patient homes (house calls) instead of inpatient hospitals. This would be a hugely positive development as more of the normal GDP growth can be spread around to other desirable and worthwhile priorities both public and private.

      I believe this trend is already underway and is likely to continue especially if we can get robust price transparency tools for both patients and referring doctors so that more healthcare utilization can be steered to the most cost-effective high quality providers even if, for more expensive procedures, they are outside the patient’s home region.

  16. Paul O'Neill says:

    John,

    There is a trillion dollar opportunity out there. To see the potential you need to go to virtually any care delivery site and be a silent observer…what you will see is half of an average nurse’s time is spent doing non-value added work….for sure they are busy, but busy is not the same as productive.
    It is not their fault there is no learning system design that lets them participate in continuous improvement, so they continue to spend lots of time hunting and fetching for things they need that are not readily available. And then there are the two million infections we give patients every year…not much of a gift…adds enormous cost without value and too frequently kills the patient….and then there are the 300 million medication errors every year…and by the way the health and medical industry is the most dangerous place for people to work…OSHA recordables higher than any other industry.
    Too many commentators do their work from 20,000 feet…the opportunity is on the ground…and it will only be captured when we have real leaders on the ground…a few places for you to visit…Virginia Mason in Seattle, Cincinnati Childrens hospital and Thedacare in Wisconsin.