Code Red: Two Economists Examine the U.S. Healthcare System

December 18, 2013

What We Don’t Know Can Hurt Us

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 1:39 pm

As the health insurance exchanges find their footing and potentially millions of Americans gain access to insurance, this may be a good time to step back and take a longer term view of the ACA. When you get down to it, expanding health insurance coverage was the easiest and least controversial part of health reform. There is no shortage of ways to expand health coverage and almost any credible health reform proposal would have done the job, provided enough money was thrown at the problem. In designing the ACA, perhaps as a result of political pressure, President Obama opted for a combination of heavily subsidized individual insurance exchanges and generous expansions of Medicaid. Freed from political constraints, he might have instead pushed for the single payer system that many of his most ardent supporters desired. Republicans inclined to expand coverage (at least one of us is proof that unlike the unicorn these do exist) might have pushed for a pure voucher program that harnessed market forces. All of these options would expand coverage to the degree that policymakers were willing to fund them. So while we congratulate the President for his political success (we doubt the other options could have made it through Congress), it is a simplistic mistake to evaluate the implementation of the ACA by counting the numbers of uninsured or waiting for the monthly updates on the enrollment figures from the exchanges website. Any regulator with a big enough purse can, in the fullness of time, expand access. Frankly, that’s the “easy” part of healthcare reform.

But what about the other elements of the so-called “triple aim” of health reform: cost and quality? You see, while we agree that liberal, moderate, and conservative health reforms can all improve coverage, they each will have very different effects on the other important outcomes. Consider for example the oft-discussed “Medicare for all”; i.e. a single payer system. This would increase access without the messiness of the exchanges. It would also allow the government to flex its monopsonistic muscles and quickly reduce costs – though likely at the expense of quality. In contrast, relying on markets may not reduce costs in the short run, and may not necessarily reward real quality (though it has a better short than single payer in this regard).

Evaluating health reform in the context of the “Triple Aim” is important, but even that approach is not nearly enough. There is a broad consensus among that technological change is the most important long run driver of cost and quality. It follows that the most important element of health reform is its impact on technological change.

To understand how technological change affects all of us, consider the profound impact of the top ten medical advances in the last ten years, as listed by CNN:

1. Sequencing the human genome
2. Stem cell research
3. HIV cocktails
4. Targeted cancer therapies.
5. Laparoscopic surgery
6. Smoke free laws
7. The HPV vaccine Gardasil
8. Face transplants
9. Drugs reducing or eliminating periods
10. Bionic limbs

Going forward, it is hard to imagine not enjoying the benefits of these advances. So we wonder which, if any, of these advances we would be enjoying today if a single payer system or even the ACA had been enacted 20 years ago. We can’t provide a precise answer to this question, but we have a strong intuition about the direction of the effect. Consider these three stylized facts:

1) Considerable private sector investments were required to translate most of the ten advances from the original basic research into viable medical treatments.
2) If researchers and private firms do not expect to cover the costs of their investments, then research will dry up as capital flows towards more productive ends.
3) In health systems that regulate prices (i.e., every industrialized country except the U.S.), governments are able to use their market power to reduce prices down close to marginal costs.

The stylized facts lead inexorably to the conclusion that medical innovation depends critically on profits reaped from American consumers. From a pure equity standpoint these facts are not great for Americans, as the rest of the world free rides off our largess. However much we lament this outcome, it is hard not to think of an even worse situation. Had the United States adopted single payer health reform in the 1980s, then by now, we would have largely solved our access problems. Unfortunately, what we might also find is that we’ve made sure that everyone has access to the essentially the level of technology available to the 1980s medical consumer, and the innovations on CNN’s list would look much different, and much less innovative. Imagine having to move forward without some of these innovations. Which would you sacrifice? Targeted cancer therapies? The HPV vaccine? Here is a situation where death is an option.

By changing the rules affecting payment rates and technology adoption, health reform affects the incentives for medical innovation. Leave the status quo, and incentives remain high. While we readily acknowledge that the current “market” based system might inappropriately reward technologies that provide few benefits, witness Da Vinci surgical robots and Proton beam therapy, it also leads to innovations like the ones on CNN’s list. We wonder how many of us would give up targeted cancer therapies and bionic limbs so as to avoid paying for Proton beam therapies. Not us. On the other hand, if we implement draconian rules, then the innovation pipeline may run dry.

Twenty years from now, some future version of CNN will publish a new list of the top medical advances. The health policy decisions that we make today will shape that list, yet no one is discussing them. How will planned reductions in Medicare payments affect innovation? Will efforts to promote pricing transparency, in the absence of comparable data on outcomes, drive consumers away from providers who use more costly technologies? Will narrow network plans be followed by narrow technology plans (that limit reimbursements for expensive technologies?) How will the newly created independent payment advisory board (IPAB) weigh the role of innovation incentives when establishing payment rates for existing technologies? Will further government encroachments into health care system, perhaps by taking a step closer to a single payer model, avoid draconian cuts in payments for technology?

In the absence of a debate about these issues, we worry that the federal government will take the politically expedient view by saving money today while sacrificing innovation in the future. After all, we will all reward politicians for the cost savings, but how can punish them for innovations that are never realized? If we implement the wrong policies, then Americans (and the rest of the world) might find themselves in a perverse version of Waiting for Godot, waiting in vain for medical advances that can only be dreamed of, because the innovators lack the financial incentives to turn dreams into reality.

As we continue to evaluate the launch of the exchanges, let us remember that expanding access is the easy part of health reform. Getting right the dynamics of technological change is much harder, and, we believe, much more important. Let’s start having that conversation before it is too late.


  1. The CNN list is a funky one.

    The smoke free laws (like many aspects of public health) were not expensive to enact at all.

    The cancer therapies (based on my very amateur knowledge) have a checkered record. Sometimes they only increase life expectancy for short periods in exchange for billions in costs.

    The HIV cocktails and laproscopic surgery have in fact been of benefit to millions

    The last 5 items on the list seem to benefit relatively few persons.

    I am not knowledgeable on numbers 1 and 2 on the list.

    Overall, I think there is some risk that America will come out poorer in the end for our massive health care spending.
    Our life expectancy may inch up a few years, but we might have wish we chose differently.

    I am 65 years old. If I am told that my social security check will go up $400 a month and in exchange I might not survive prostate cancer, I might like those odds.

    That is a crude example, but not an awful thought experiment. Even now the ACA controversy is turning up a lot of people who chose to have partial health insurance so they could put more money into homes and cars.

    Comment by Bob Hertz — January 1, 2014 @ 11:29 am

  2. The CNN list is easy to pick on, but here I go. What has sequencing the human genome accomplished, exactly? I was under the impression that doing so had posed more questions than it answered.

    While I certainly agree with HIV cocktails, Laparoscopic surgery (I’m a surgery resident) and the HPV vaccines, I question the actual value realized to date by stem cell research, proton beam therapy, and face transplants. I don’t mean to sound anti-basic-science, in fact quite the opposite. But the truth is many basic science models don’t pan out.

    I would instead promote less sexy but more widely adapted advances such as the advent of 1:1 blood replacement in trauma, advanced ventilation modes in the ICU that minimize ARDS, and the endovascular surgery revolution that has cut the mortality of common aortic surgery in two thirds.

    An argument about which advances are most important will always be subjective. Realizing that affects your premise here: no one today can properly evaluate which scientific ideas will pan out. That goes for the government too, which should not be in the business of playing investment banker. Consider the Solyndra debacle. Instead the government should focus on what it is uniquely positioned to do: fund the basic science that will allow fundamental changes in science down the line.

    Comment by Jack McCallum — January 7, 2014 @ 2:59 pm

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