Here's Why Health Care Costs Are Outpacing Health Care Efficacy

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In a new working paper called “Technology Growth and Expenditure Growth in Health Care” (abstract here, PDF here), Amitabh Chandra and Jonathan S. Skinner offer an explanation:

In the United States, health care technology has contributed to rising survival rates, yet health care spending relative to GDP has also grown more rapidly than in any other country.  We develop a model of patient demand and supplier behavior to explain these parallel trends in technology growth and cost growth.  We show that health care productivity depends on the heterogeneity of treatment effects across patients, the shape of the health production function, and the cost structure of procedures such as MRIs with high fixed costs and low marginal costs.  The model implies a typology of medical technology productivity:  (I) highly cost-effective “home run” innovations with little chance of overuse, such as anti-retroviral therapy for HIV, (II) treatments highly effective for some but not for all (e.g.  stents), and (III) “gray area” treatments with uncertain clinical value such as ICU days among chronically ill patients.  Not surprisingly, countries adopting Category I and effective Category II treatments gain the greatest health improvements, while countries adopting ineffective Category II and Category III treatments experience the most rapid cost growth. Ultimately, economic and political resistance in the U.S. to ever-rising tax rates will likely slow cost growth, with uncertain effects on technology growth.

This paper strikes me as sensible, explanatory, and non-ideological to the max. It would be nifty if the people who work in Washington read it, and thought about it, and maybe even acted on it. (And it would be nifty if the Knicks beat the Celtics too, but I’m not holding my breath for either outcome …)

Here’s a very good paragraph from the paper:

The science section of a U.S. newspaper routinely features articles on new surgical and pharmaceutical treatments for cancer, obesity, aging, and cardiovascular diseases, with rosy predictions of expanded longevity and improved health functioning (Wade, 2009). The business section, on the other hand, features gloomy reports of galloping health insurance premiums (Claxton et al., 2010), declining insurance coverage, and unsustainable Medicare and Medicaid growth leading to higher taxes (Leonhardt, 2009) and downgraded U.S. debt (Stein, 2006). Not surprisingly, there is some ambiguity as to whether these two trends, in outcomes and in expenditures, are a cause for celebration or concern.

And the authors offer good specific examples of what they built their argument on, noting the …

… wide heterogeneity in the productivity of medical treatments, ranging from very high (aspirin for heart attacks and surfactants for premature births) to low (stents for stable angina), or simply zero (arthroscopy for osteoarthritis of the knee).

This echoes our SuperFreakonomics chapter on cheap and simple solutions, including medical fixes:

Polio is a stark example, but there are countless cheap and simple medical fixes. New ulcer drugs reduced the rate of surgery by roughly 60 percent; a later round of even cheaper drugs saved ulcer patients some $800 million a year. In the first twenty-five years after lithium was introduced to treat manic depression, it saved nearly $150 billion in hospitalization costs. Even the simple addition of fluoride to water systems has saved about $10 billion per year in dental bills. As we noted earlier, deaths from heart disease have fallen substantially over the past few decades. Surely this can be attributed to expensive treatments like grafts, angioplasties, and stents, yes?

Actually, no: such procedures are responsible for a remarkably small share of the improvement. Roughly half of the decline has come from reductions in risk factors like high cholesterol and high blood pressure, both of which are treated by relatively cheap medicines. And much of the remaining decline is thanks to ridiculously inexpensive treatments like aspirin, heparin, ACE inhibitors, and beta- blockers.*

* Underlying research includes: Marc W. Kirschner, Elizabeth Marincola, and Elizabeth Olmsted Teisberg, “The Role of Biomedical Research in Health Care Reform,” Science 266 (October 7, 1994); and Earl S. Ford et al., “Explaining the Decrease in U.S. Deaths from Coronary Disease, 1980– 2000,” New England Journal of Medicine 356, no. 23 (June 7, 2007).

Medical Quack

You folks think a lot like me and I study and post on all the latest devices, drugs, etc. and yes a changing world around us except in Washington:)

They need to do queries instantly and simulate to help the country avoid at least some of the unintended circumstances that get dumped on us. Yes I would love to see the folks trash their 8 track once and for all as digital illiteracy with lawmakers exists at all levels and is killing the country as there's no white hope left, all about collaboration, smart collaboration that is.

If these folks in Washington don't get on this bandwagon soon, they are going to sink us all as right now lawmaking can't keep up with the pace of algorithmically created business models which change all the time and thus they are treading water only it seems. Here's an example below and shoot even judges today can't keep up to date with potential conflicts of interest with all the mergers and acquisitions going on, so I question some of their opinions too as I think some of the secretly keep a few 8 tracks in their back pockets:)



I'm visualizing what it would look like to tell a patient's loved one that the ventilator and life sustaining drugs that he is receiving are not a cost effective use of health care resources.

What I do as an ICU nurse is find a tactful way of saying "What we are doing is causing him great pain and will not save his life... Why don't we just give him drugs to keep him comfortable and stop doing things to him that border on torture?"

Here is a question, Why don't we just shut down all ICUs and NICUs and invest in better primary care? Certainly we would create a better quality of life on margin. We don't do this because we are a nation of idealists who root for the long-shot underdog, and in healthcare, at the expense of overall health.

Dave Auerbach

Excellent point. I would further suggest a tiered insurance system to help with this and similar hard choices. If the family opts for a full scale assault on dying there should be a very high deductible and co-insurance payment. If hospice care is selected, it should be fully reimbursed. I don't know what to do about those with no insurance.

Dave Auerbach

This seems an excellent example of how enormous benefits can be achieved fairly quickly and inexpensively, whether it be withing medicine, pollution, seat belts, etc. After that small incremental improvements become complex and expensive. It is easy to say a 90 year old should not receive complex ICU care, unless one is 90 and in need of care. However, this is a difficult decision that society needs to make. I don't know the answer, but suspect that we are spending very large amounts of money for very limited results.


And who decides the cut-off age, after which medical intervention would be a waste of money? And for that matter, does that person have a say in the person's quality of life to determine whether an older person with "more to live for" should get more medical treatment than a younger person who has already "lived a full life"?


Why is health insurance structured the same for the young and the old? The old need something that guarantees coverage to everybody and will cover them up to "reasonable levels of care" no matter what. The young, conversely, should purchase health insurance like auto insurance. It makes sense for the young to pay almost all of their non-catastrophic medical costs out-of-pocket. It makes no sense to apply this model to the old, but it makes no sense to apply the old-person's model to the young. I assume that the business reason for this is that insurance compaines would go broke covering only the old (hence the need for public coverage).

Dave Auerbach

The old are covered exactly as you suppose. It is called Medicare and to a lesser extent Medicaid. Medicare does require fairly extensive out of pocket expenses, hence Medigap insurance. The younger want free medical care, and moral hazard causes medical expenses to climb. High deductible health insurance is a step in the right direction. It would be nice if everyone had it, medical costs would surely go down, at least some.


I'm neither American nor involved in health care, so I may be off base with this comment.

It seems to me that the number one problem in excessive US health care costs is medical malpractice litigation. A great many tests and procedures are ordered which objectively are very poor cost-benefit, but which protect the doctor from being sued. For example, this patient has a condition which gives them no greater chance of having bowel cancer than anyone else in their demographic, but Dr Smith across town regularly orders a colonoscopy for people with this condition. If Dr Brown doesn't order a colonoscopy, and the patient (completely coincidentally) does have bowel cancer, Dr Brown will be sued, probably successfully. Therefore Dr Brown has no reason not to order an expensive and near-pointless colonoscopy, and a strong reason to do so.

Where procedures carry risk of adverse side effects, the doctor simply can't win - if they don't order the procedure, and later events prove that the patient might have benefited from the procedure, they get sued. If they do order the procedure and adverse side effects happen and the procedure is shown to have been unnecessary, they get sued.

The solution to this has to be political, but I don't know how it can be sold to the electorate.


Dave Auerbach

It is estimated that defensive medicine adds about to 2% to the cost of medical care. Certainly not a driving factor, but 2% of enormous is real money. Unfortunately, the problem is complex in that studies have suggested that there is both too much and too much litigation. Only about 16% of individuals probably negligently injured sue, but only 14% of law suits are found for the plaintiff.

I, for one, would favor the English system. The loser pays the costs of both parties. I think that would definitely decrease frivolous litigation.


The 2% or so is looks to me to be the accounting costs of litigation. The true cost of litigation is probably much higher due to hidden behavioral cost of physicians and administrators. For instance, how would you even measure the cost/waste of primary care physicians prescribing antibiotics for a viral infection to shield themselves from law suits in the rare case that it was bacterial? Physicians work in such a grey environment where decisions are never black or white, so their incentives are to order as many tests/procedures as your insurance will pay for. This is where I think litigation is driving the bulk of the costs...


Actually, no. The 2% is the estimated cost of tests that are ordered for purely defensive purposes, plus therapies give for purely defensive reasons. It sounds low until you realize just how much medical care is being given out there. It is extensive and expensive. And 2% of total health care costs is billions and billions of dollars.


Consider also that even when two treatment alternatives have the same outcome, there's often an incentive to choose the more expensive high-tech one.

A classic example I've seen is kidney stones: many can be treated either with lithotripsy (at a cost of about $15K) or by giving the patient painkillers and waiting for the stone to pass naturally, at a cost of a few hundred dollars. So you're a doctor, and your practice has just invested in an expensive lithotripsy machine: which procedure do you recommend to your insurance-covered patients? And if you're a patient with insurance, which do you choose, the "do something high-tech", or the cheap & natural?


The classic medical treatment for a kidney stone was a six pack of beer. Drinking them all in a couple of hours produced good analgesia as well as diuresis to help move the stone along. After my sister was being watched for a couple of weeks by her urologist for an intermittently obstructing stone I suggested this to her and it was gone the next day.


I think the fatal flaw in your second argument Stephen, is that purchasing healthcare is not an analog to purchasing a new Mercedes. If you want a new Mercedes, and can not afford it, you buy the Ford instead. If you need a heart transplant and can't afford it, you don't buy an ace bandage. It is an illogical comparison between 'want' and 'need'. While protected in your economic bubble, you can say we must all choose a health care option we can afford, but you'd be missing out on the fact that people make unreasonable choices when life and love is at stake. I understand the need for cost considerations to make the larger system work, but those considerations as you suggest, will only apply to people who can't afford the required healthcare. Doesn't this lead to discrimination based on economic status? How would this even remotely benefit society, or even capitalism? This capitalistic-only approach does not address healthcare needs from the human aspect. I'm fine with capitalism where it works for society... and it clearly does not, and will not in healthcare.



I somewhat agree with you Kevin. However, if my tax money is being used to subsidize someone's health care I feel it reasonable to insist that those so covered do everything possible to stay healthy. If you need someone else to pay your bills you should not be allowed to smoke, drink to excess, be sedentary, overeat, have unprotected sex, etc. It is totally irresponsible to do what ever you wish AND expect someone else to pay for your self induced problems. And lets face it, a healthy lifestyle is lots of work, and not as much fun. Perhaps it would induce some to get a better job.

Peter of Brooklyn

As I understand it, data collected from the OECD countries shows the United States has comparatively poor health outcomes, yet spends nearly double what several other countries spend on health care (that is, total spending, both private and public).

This data ought to be cited in every discussion on the cost of health care.

I'm not sure if telling people that every other OECD country pays less for health care, yet gets better outcomes is ideological, but it is relevant to every discussion on the efficacy of health care policy.