Oh for a health care monopsony

Those who blame for-profit health insurers for high U.S. health care costs usually focus on administrative and marketing costs. As Ezra Klein has highlighted, however, these are difficult to calculate; they're not always significantly higher in the private sector than in the public; and they don't fly as a primary cause of the U.S.'s uniquely high per capita health care spending.

Yet our Balkanized health care payment system does have a huge impact on health care costs. Klein again, citing Kaiser Permanente CEO George Halvorson pointing out that CT scans cost about 3x as much in the U.S. as in Europe, links to a 2003 study published in Health Affairs ("It's the Prices, Stupid...", Gerard F. Anderson et al. ) analyzing why procedures cost so much more in the U.S. than in OECD countries with universal healthcare.

The conclusion of this study bears out T.R. Reid's reporting in The Healing of America. Countries with universal health care all accord government the power of monopsony - "a state in which demand comes from one source." That is, the governments of France, Germany, Japan, Canada and England all set the prices for every procedure (or patient, in a capitated system) -- regardless of whether or not payments are funneled through private (nonprofit) insurers. All of them, by American standards, squeeze doctors and hospitals. Anderson et al:

In the U.S. health system...money flows from households to the providers of health care through a vast network of relatively unccordinated pipes and capillaries of various sizes. Although the huge federal Medicare program and the federal-state Medicaid programs do possess some monopsonistic purchasing power, and large private insurers may enjoy some degree of monopsony power as well in some localities, the highly framented buy side of the U.S. health system is relatively weak by international standards. It is one factor, among others, that could explain the relatively high prices paid for health care and for health professionals in the United States.

In comparison, the government-controlled health systems of Canada, Europe, and Japan allocate considerably more market power to the buy side...

Even a pure monopsonist is ultimately constrained by market forces on the supply side -- that is, by the reservation (minimally acceptable) prices of the providers of health care below which they will not supply their goods or services. But within that limit, monopsonistic buyers enjoy enough market clout to drive down the prices paid for health care and health care inputs fairly close to those reservation prices. It can explain, for example, why Fuchs and Hahn found that "U.S. fees for procedures are more than three times as high as Canadian fees [and] the difference in fees for evaluation and management services is about 80 percent."

From this perspective, individual health insurance companies are not "to blame" for high U.S. health care costs. But the system that allows them to exist is. When the government abjures monopsony power, patients lose.

Doctors do consider themselves underpaid and in some cases overmanaged in monopsony systems. On the other hand, they generally have to cope with zero medical school debt, piddling malpractice insurance fees, and minimal administrative burdens (in France, where national health cards record every procedure and fee, the time and money doctors spend on administration is close to zero). Ironically, one reason U.S. insurers pay doctors and hospitals so much more than their rich country peers is that the balkanized payment and claims system imposes onerous admnistrative costs on providers.

Scat, CAT scan: Obama on U.S. health waste

In a long interview with Obama on healthcare, Time's Karen Tumulty pressed the President on an example of a tough cost/benefit decision on treatment he had raised in an April interview with David Leonhardt -- a hip replacement Obama's grandmother received at the very end of life, when she was terminally ill with cancer. Should Kaiser Permanente have paid for the operation? They did - and Tumulty asked whether that was a good use of healthcare dollars. Obama's answer was evasive - and properly so, I think:

I guess my point is, is that you don't even get to those really tough decisions, you don't even have to get to those really tough decisions before you've already saved a huge amount of money and made people healthier and made sure that Medicare was solvent and bent the cost curve. I mean, there's 20, 25% of the cost — of the system that is wasteful right now, even before you get to tough decisions about end-of-life care...

Let's just take one example, and that is testing. It turns out that we pay 10 times what Japan pays, for example, for CAT scans and MRIs. Well, why is that? And it turns out, by the way, that we are having those tests five, six, eight times as often as folks in other countries who have just as good outcomes.

Now, some of that may have to do with reimbursement models. There may be differences that have to do with the approach that hospitals here take in recovering costs for expensive equipment. There are a whole range of reasons why that might be true, but the point is, is that it's not like people out there are — would automatically be prevented from getting CAT scans if we just tried to think when is a CAT scan or an MRI working and appropriate in improving care and when it's not.

And what we've said is that if doctors and patients had that information, and you start changing some of these delivery systems, you will see significant changes in the cost of health care and you will see improved outcomes and improved convenience, because if people are going through a battery of tests when one test would be sufficient, every time they're going to the doctor, that's gas, babysitting, sitting around for two hours, a day off work. We're not even factoring in those costs.

Obama is right that the U.S. should be able to save huge amounts by eliminating patently unnecessary care, regardless of how public and private insurers resolve the really tough cost/benefit decisions. What he did not make clear in this interview, however -- and I wish Tumulty had pushed him on this as she did on his grandmother's operation -- was how currently proposed legislation would signifcantly change those skewed incentives he keeps citing. He gave a kind of answer to Fred Hiatt on this question -- "MedPAC on steroids." But we need to hear way more about this.