Monday, June 1, 2009

“Assume a can opener…”

You've heard the joke: A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Let's smash the can open with a rock." The chemist says, "Let's build a fire and heat the can first." The economist says, "Let's assume that we have a can-opener..."

I thought of this admittedly lame joke when I read Peter Orszag's post at the OMB blog discussing the Obama administration's health care reform plans, in which Orszag effectively assumes massive reductions in health care costs without specifying any plausible route by which these reductions would take place.

As Orszag points out, there are two elements to Obama's health care plan: first, expansion of health coverage to reduce the number of uninsured; and second, measures to reduce the long-term growth rate of health costs, which threaten the budget and the economy. Orszag also accurately points out that coverage expansion would increase costs immediately while savings from reducing health care cost growth would materialize only over time.

So far, so good. But here's the problem: nothing the Obama administration has proposed would come anywhere close to producing even the most modest cost savings discussed by Orszag. The Obama administration puts forward three principal health care reforms: information technology, particularly in the form of electronic medical records; disease management, which includes intensive follow-up of chronic diseases such as diabetes; and cost-benefit analysis to find the best treatments for the dollar.

But as the CBO has repeatedly pointed out – see CBO director Doug Elmendorf's March congressional testimony for a summary – these reforms, while potentially improving health care treatment, are unlikely to do much to reduce costs and could potentially even increase costs. The key, Elmendorf stresses, is to get incentives right (the word "incentives" occurs 37 times in a relatively short document). The Obama administration is taking an "if you build it, they will come" approach, assuming that the simple presence of these reforms will cause health care participants to act on them. CBO's point, and that of many others, is that participants currently lack much incentive at all to focus on savings, so these reform won't affect their actions very much.

These costs savings are what Orszag in his Social Security days called a "magic asterisk," money that materializes out of nowhere.

Policymakers should be wary of "reforms" that offer spending increases in the here and now followed by cost reductions out in the mist.

9 comments:

Brooks said...

The absence of the "how" (how the "reforms" add up to the supposed magnitudes of savings) reminds me of the, er, business model of underpants gnomes http://www.southparkstudios.com/clips/151040

Arne said...

If we were talking about selling cars, it would (today) be obvious that assuming it will continue to grow at the same rate it did from 1995 to 2005 was the punchline. Assuming an unsustainable rate of growth seems like bad modeling to me.

James said...

CBO's point, and that of many others, is that participants currently lack much incentive at all to focus on savings, so these reform won't affect their actions very much.

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Far and away the greatest savings would come from preventative care, where individuals are rewarded for healthy lifestyles and penalized for unhealthy lifestyles through the cost of their insurance coverage. Smoking and poor eating habits result in immense medical costs each year. Two thirds of Americans are overweight, one third are obese, resulting in a bevy of medical ailments later in life. Indeed, one sixth of Americans are either pre-diabetic or diabetic.

I see nothing in Obama's health care plans that focuses on this part of the problem.

Andrew G. Biggs said...

James: Precisely. Obama is proposing reforms that the private sector would itself probably bring about if they had reason to do so. Not having reason to do so, however, implementing these reforms likely won't have a big effect. They may know, for instance, that treatment X is more cost-effective than treatment Y, but if neither patient nor doctor has any reason to think about cost then this research won't mean much to them.

Brooks said...

James and Andrew,

Just a couple of points to consider re: preventive care and more healthy lifestyles (e.g., not smoking):

First, the overall net savings of much of what we apply as preventive care is often often overstated, and many types/programs of preventive care increase healthcare costs on balance. Obviously there is a trade-off between the cost of wasted preventive care provided on a broad basis vs. savings from prevention of more expensive (less cost-effective) treatment in the subset of individuals who eventually need (or would need) more expensive and/or less effective care later. See "Does Preventive Care Save Money?" at http://content.nejm.org/cgi/content/full/358/7/661

Second, smokers ultimately reduce federal spending by dying younger and collecting less Social Security (and, I assume, also some of the healthcare under Medicare they would have received). I know that sounds cold, but if we're talking numbers, we're talking numbers. I don't have a link but I recall reading an analysis a few years ago that I considered very credible that reached that conclusion. Perhaps the same applies (or at least to some extent) to other unhealthy lifestyle habits.

James said...

First, the overall net savings of much of what we apply as preventive care is often often overstated.

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The study cited relies on a very narrow definition of "preventative" medicine from what I can tell, involving the application of drugs and other measures to help prevent conditions from worsening or developing. When I talk about preventative medicine, I'm talking about what individuals are doing to improve their health condition, such as not smoking, exercising, and eating healthy diets BEFORE they get into trouble. We would not need nearly the amount of drugs, hospital care, or use of extraordinarily expensive medical procedures if people took responsibility for their own health.

Smoking DOES illustrate this. The CDC estimates it costs roughly $200 billion a year in lost productivity and health care costs because of smoking. That's an immense figure.

>Second, smokers ultimately reduce federal spending by dying younger and collecting less Social Security (and, I assume, >also some of the healthcare under Medicare they would have received).

I would love to see that study, especially in view of the numbers above, which would seem to far exceed anything not paid out in SS payments. Many smokers don't die that young, they simply develop a variety of diseases over time, at great cost to their employers and the rest of us.

Brooks said...

James,

Just to correct your terminology, the healthful habits of which you speak are not preventive "medicine" at all, nor are they preventive "care". If you were speaking only of healthful habits, you probably should not characterize it as preventive "care". (As a more minor and more subjective note, although both "preventive" and "preventative" are used; I also think the former is used more widely, and seems more linguistically appealing and sensible IMHO, since it's "preventing" something, not "preventating" something).

As for smoking and obesity, etc., you can Google (as I just did) keywords like "smoking", "social security" "cost" etc. and come up with results like these:

http://www.nber.org/papers/w4891

http://www.usatoday.com/news/health/2009-04-08-fda-tobacco-costs_N.htm

http://www.usatoday.com/news/opinion/columnists/freeman/ncjf49.htm

http://www.usatoday.com/news/health/2008-02-05-obese-cost_N.htm?loc=interstitialskip

As a note, it's not just saving on Social Security, but also other Medicare costs (for years prior to eventual death, and then at end-of-life due to whatever ends their lives), Medicaid nursing home costs, etc.

Brooks said...

James,

Another link, this one to a Congressional Research Service report:
http://www.law.umaryland.edu/marshall/crsreports/crsdocuments/97-1053_E.pdf

From the Summary:
"Governments save on the costs of old-age medical care, social security, and nursing home care due to the earlier death of smokers...Smoking has apparently brought financial gain to both the federal and state governments, especially when tobacco taxes are taken into account. In general,
smokers do not appear to currently impose net financial costs on the rest of society."

Arne said...

If smokers are dying before that can retire, that means they are a drain on company insurance programs. Just an observation.