Monday, April 25, 2005

Healthcare Costs: Information vs. Incentives

The President and those who support the idea of an "ownership society" believe that removing third party payment will make costs more transparent to consumers--thus reducing the incentive for patients to seek care, and cutting US healthcare expenditures overall. The president's plan calls for health savings accounts and insurance with high deductibles to cover major medical costs like hospitalizations and surgeries.

Leaving aside for a moment the fact that this plan rewards skimping on one's preventive healthcare while still leaving no incentive to cut down on the major medical expenditures which are the lion's share of total health costs, the President's plan suffers from an even more fatal flaw. The assumption here is that the main driving force behind the low-end health expenditures is individuals trying to get as much medical care as they can for as little cost as they can, as in any other industry. But health care is not just any other industry.

A fundamental condition for capital markets is the idea that individuals have enough intelligence and information to make rational choices. In health care though, individuals don't know enough medicine to decide if they need an echocardiogram or not; they must trust a doctor. And the more doctors there are in an area, the more procedures and consultations are ordered-- supply increases demand. When supply is not independant of demand, the familiar supply/demand curves that determine price are meaningless. Price is determined by many other things, including government policies, cultural values (why is an interventionalist paid three times as much as a healthcare provider who does not do interventions?) and economic arrangements between organizations attempting to secure market share.

But perhaps the most useful way to look at cost of healthcare is to start with regional variation. It has been well documented that the same procedure in different areas in the country varies widely in cost. What is more interesting is that the rates of referral for those procedures varies as well. The Dartmouth Atlas of Healthcare linked above provides evidence that regional medical culture drives much of this cost difference, and shared decision making can bring high cost systems back into alignment with lower cost systems. Here's how it works.

Medical care is divided into three kinds of treatment:
1. Evidence-based (everyone with the given condition clearly should get a certain treatment,)
2. Preference-based (quality of life and cultural features drive decisions rather than evidence of efficacy.)
3. Supply-senstive (primarily in chronic diseases: local supply of the treatment predicts utilization more than patient characteristics: I'll address this sector of care in a later post).

In healthcare systems using Shared Decision Making, patients considered for Preference-based care (a good example is elective back surgery for chronic pain) are given literature and AV materials informing them about regional variation and some information about the known rate of efficacy for the treatment. This simple intervention does >bring costs down without decreasing patient satisfaction or outcomes.

Medicare and Medicaid could make evaluated Shared Decision Making protocols the standard of care. Shouldn't we expect healthcare systems to adhere to the same standards of evidence-based care that individual physicians do?

Before we treat healthcare like it's just another commodity, let's give patients/consumers the tools they need to take ownership of their medical care, and do so in the sector of medical care where it makes sense to limit expenditures.


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