A Case Against Free Markets in Medicine

In the final act of Shakespeare’s Richard III the eponymous villain king arrives on the battlefield to fight against Richmond, who will soon become Henry VII. During the battle Richard is dismounted as his horse is killed and in a mad frenzy wades through the battlefield screaming “A horse, a horse! My kingdom for a horse!” Richard shows us how  market value can change drastically depending on the circumstances, or your mental state, and even the most absurd exchange rate can become reasonable in a moment of crisis.

This presumably arbitrary nature of prices should be the first thing about the US healthcare market that catches the attention of any student of economics. Prices for the same procedure vary greatly between hospitals on opposite sides of the street, and even then appear to have no basis in reality. Further investigation reveals many other features of the healthcare market that economics teaches us will increase transaction costs and the misallocation of resources. The prices we discussed are generally not paid by the patient, but by a third party insurer. Often the patient isn’t even able to select the insurer, but is assigned one by his or her employer. What the patient thinks of the insurer’s ability as a steward of his or her premiums is irrelevant. Further, contracts between providers or pharmacies and the insurer completely hide the true price from the patient’s review. In addition, anti-competitive certificate of need laws limit competition between providers and expensive regulations compel providers to merge in order to compete in a nuclear arms race with the insurers, although the real victim is the patient’s wallet over which the providers and insurers fight their proxy wars. The best way to explain the US healthcare system is if you took every economic best practice and then to did the opposite. How does one get out of this mess?

Academics and physicians from places like Boston and San Francisco often argue that this situation is proof that free market healthcare has failed America and that the only solution is to implement a nationalized single-payer model. Writing in Medical Economics, Dr. Anish Koka makes the above point that “labeling this “the free market” is about as pure as labeling the offspring of a Great Dane and a Chihuahua a purebred” and retorts that the way out of this quagmire isn’t towards a centralized single payer, but to normalize a price driven medical market. When presented with this argument these Boston types profess their support of free markets in general, followed by a regretful proclamation that markets can’t work in healthcare because medicine is not a generic commodity or that people don’t shop.

But Dr. Koka is ready for this and preempts the argument by presenting the case of the Surgery Center of Oklahoma. Founded by Drs. Keith Smith and Steven Lantier in Oklahoma City in 1997, the Surgery Center does not accept insurance and operates on a cash basis directly with patients, or on a contract basis with businesses self-funding their employees’ healthcare. The prices for their procedures are available online and are binding, you won’t be surprised by unexpected items being added to you bill.  Their transparency and quality has earned the Surgery Center high praise from patients domestic and international, and their success is evidenced by their ability to survive for 20 years despite their unique model (unique for healthcare, that is, any fast food restaurant would be quite familiar with it, perhaps that’s why we’re more efficient at creating COPD than treating it?) Dr. Koka proposes that making the Surgery Center’s price model the standard will reveal and remove all the bureaucracy, middlemen and inefficient practices that are making the American healthcare system so expensive.

However, despite the success of the Surgery Center of Oklahoma, there really are features inherent to healthcare that make extension of the price mechanism to the rest of the market impossible or impractical. Every Russian schoolboy knows that one of the first criticisms of the market mechanics in medicine was the recently passed Nobel winner Ken Arrow’s “Uncertainty and the Welfare Economics of Medical Care“. From a libertarian perspective Arrow’s critique is a mixture of truth and opinion, but nonetheless it is a good starting point. He himself wrote that the short paper is an “exploratory and tentative study”.

Arrow’s analysis is built around the ubiquity of uncertainty in the medical field and proposes that “virtually all the special features” of medicine come from this origin. The first unique characteristic is that demand for medical care is irregular and unpredictable. Although there are other industries where demand is irregular, there is truth that relying on insurance financing schema would make a market less competitive as it adds a middleman between the patient and physician. This comment also shows the age of the analysis; written in 1963, when insurance was not as prevalent as it is today (although already a captured market with the employer sponsored insurance tax benefit in place) and medical care was still oriented around irregular acute cases rather than the reliable chronic diseases that are the greatest burden in medicine today.

Arrow next remarks that the physician has a responsibility for the patient’s welfare far above that of a typical salesman, such as a barber (I’ll write more about the Barberians at the Gates of healthcare later). While this is true of the profession in theory, in practice there is a robust medical malpractice industry that is a testament to the fact that in the end physicians are still human and there are good ones, bad ones, and sometimes even evil ones. I have no reason to believe that physicians are more saintly than barbers.

Arrow then makes his best point, which is that medical care is inherently different from commodities because the success of medical care is uncertain. In particular, this point is most relevant to the Surgery Center of Oklahoma’s model, which provides medical services that are most commodity like in their reliability and outcomes. Happy hip replacements are all like, every unhappy chemo response is unhappy in its own way.

Finally, Arrow concludes by pointing out that medicine is endemic with licensing restrictions on entry, uncompetitive pricing, and price discrimination based on income levels. This is a tautology that medicine can’t be a competitive free market because it hasn’t been a competitive free market. We’ve seen industries standardize as they mature (finance) and deregulate (airlines), so there’s no reason to believe medicine’s professional culture can’t change.

From Kenneth Arrow’s analysis we can see that there are some concerns about the uniqueness of medicine that aren’t true, some that are irrelevant, and some that are legitimate. It is these valid impediments to free market operation that need to be considered seriously before we propose that the price competition model should be extended to the rest of the market. Arrow’s most relevant point was that the success of medical services is uncertain, but in fact there are many more.

The first set of problems is cases where patients shopping is either impossible or socially undesirable. This includes shopping for medical services and health insurance, since the unpredictable incidence of disease makes the two inseparable, as Kenneth Arrow pointed out. The most obvious example is emergency medicine, which has already been culturally recognized in America as a universal service with the passage of EMTALA. An unconscious person brought into the ER by definition can’t price shop for services. Similarly, we don’t want insurers to be able to price shop by keeping ERs out of network. When I have an emergency, I need the ambulance to bring me to the closest ER able to take care of me, not the closest one that my insurer decided is a good value. Similarly, physicians are correct to be outraged with insurers trying to not cover care performed in the ER that they deem inappropriate for the ER setting. It’s absurd and dangerous to expect patients to self-diagnose when deciding whether to go to the ER. Finally, even the most brave libertarian would be hard pressed to say that the woman who recently pleaded not to have the ambulance called should not receive emergency care if she can’t afford it. I certainly can’t say it, and there are some on Twitter who have been impressed with my lack of empathy. If we as a society agree that emergency care is a public good and that shopping for it is impossible, shouldn’t coverage of ER services be nationalized?

Emergency Medicine is only 2-5% of healthcare spending, but it does demonstrate that there really are parts of medicine where free market competition is impossible. It’s a cornerstone from which the rest of my critique proceeds. Healthcare decisions that have negative externalities on the public are another example where shopping is undesirable. Mass vaccination of the public was one of the most successful medical developments of the 20th century, and the public health benefits provide a good reason for not only vaccination but all infectious disease treatment to be nationalized and available to the public at no cost. Coughing patients not going to the hospital because they’re afraid of the cost is how zombie movies and ebola epidemics start.

We also don’t want shopping to occur when the beneficiary of the medical care can’t shop for themselves. Here I am specifically referring to perinatal and child healthcare. Should infants have their entry into the world endangered because of women not being able to afford their prenatal care? Should children be required to not receive healthcare because their parents are not able to afford, or even worse choose not to purchase, child insurance? There are arguments to be made against John Rawls’ theory of justice, but they usually are based on adults using their agency to take advantage of such a system, which children by definition of their minor status can’t do. The national insurance coverage rate for children is 95.2%, it should be 100%. It is in the public’s interest that all children can receive appropriate care until they reach adulthood and are allowed to start screwing up their health however they wish.

The next set of problems are related to the nature of disease. Unlike televisions and cars, we don’t choose to buy the bodies that we are born into. As the existentialists argued, we are thrust into existence without our consent. This absurdist nature of our lives comes with many equity and justice problems, the most Rawlsian of which are pre-existing conditions, whether genetic disorders such as cystic fibrosis or more nuanced diseases like Type 1 diabetes. Disease like these, especially so when they are progressive, are a permanent tax on individuals’ ability to operate on a daily basis and impede their physiological, psychological, and financial wellbeing. The part about financial wellbeing is most important in this discussion, because these conditions directly decrease the patient’s ability to finance the healthcare that they need. Despite all the injustices and inefficiencies of cross-subsidization in healthcare, if we as a nation really are a unified community, then don’t the healthy among us owe it at least to those who are sick since their youth to support their healthcare financially as a thanks for taking the bullet during the genetic Russian roulette at birth? We did nothing to deserve to be healthy and  they did nothing to deserve to be ill; we can’t deny that we know this to be true.

The next problem is the mental health elephant in the room, which patients don’t talk about because of stigma and policy wonks avoid because there aren’t any clear solutions. In the past we used to have thick family structures to keep us insulated from life’s shocks and priestly confession to keep us from going crazy of guilt. The world developed and we became solitary atheists, but the problems of our minds remain.  Jordan Peterson often talks about how just about everybody either has or knows somebody with a mental disorder, but we still have to get up in the morning and go to work. The result is a society that is increasingly addicted, depressed, and suicidal. Similarly to genetic disorders, mental health disorders progressively decrease our ability to finance the healthcare that we would need, but to make matters worse they also inhibit our ability to even recognize that we need healthcare or to negotiate the prices for that healthcare, in a way that cystic fibrosis does not. There’s a perverse libertarian economic argument that an alcoholic with hepatitis who uses his money to buy more alcohol is making a welfare efficient decision because he is buying exactly what he wants. If we want society to remain even moderately functional, we have to reject this argument. Mental health is yet another area where price mechanisms are untenable.

Finally, we need to discuss chronic disease management and the problem it poses to the medical field. When Kenneth Arrow was writing in 1963, the majority of healthcare was infectious disease treatment and low-probability surgeries, or conditions amenable to insurance financing mechanisms. Back then obesity affected 10% of the population and childhood overweight was virtually non-existent. Today 75% of the population is overweight and 40% is obese. 50% of the population has at least one chronic disease. The obesity, addiction, and e-cig trends all indicate that the problem is only going to get bigger. It is increasingly becoming not a question of whether somebody will get a chronic disease, but when they will get it. Conservatives correctly raise the concern that insurance covering a known adverse event is no longer insurance. The problem is further complicated by the fact that although there are behaviors that can significantly improve their outcomes, there are many smokers who won’t develop COPD and there are many exercise junkies who will get diabetes. These diseases have too many causal variables to attribute blame to any specific reason. But we can’t throw up our hands and give up just because insurance isn’t going to be a viable financing mechanism. Is price driven medicine a viable solution? It doesn’t seem so. The problem is that chronic diseases are developed over decades from the accumulation of strain caused by daily living and normal aging, with the majority of costs rapidly (and somewhat reliably) materializing in the last 1-2 decades of a person’s life. People don’t consciously factor in the cost of diabetes 40 years from now when they decide to eat a slice of pie because they simply can’t forecast effectively over such a long horizon. The correct financing mechanism to solve this asymmetry is not an insurance (the outcome is known) or uninsured shopping (the cumulative cost is too high) but a long maturity bond, with the person paying into the bond over the course  of their life with the bond paying out a large lump of cash at maturity. Sound familiar? That’s exactly how pensions work, which is something that has always been nationalized (the problems with our pension schemes is a separate discussion).

To conclude, this is not a critique of the Surgery Center of Oklahoma’s model, which I praise and admire, but a beginning analysis of its limitations. The broader problem that I see is that much of the health insurance market is already nationalized through Medicaid, Medicare and the VA. The reality is that it is politically impossible to reverse from this position. If we then add to this list emergency medicine, perinatal healthcare, child healthcare, genetic diseases, mental health and chronic disease management, all of which I earnestly believe have a legitimate case to be nationalized, then what are we left with for free market shopping? Surgeries and generic drugs? At that point you might as well nationalize the rest just to simplify things and remove any regulatory asymmetries. I hate to say it, but it’s not clear to me that single payer (or at least universal coverage + optional private supplemental coverage) isn’t the right solution.

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Social Medicine Infantilizes Patients

I came across a revealing  post by Dr. Hans Duvefelt on KevinMD discussing the game theory problem created by health insurance where hidden cross-subsidies incentivize individuals to make healthcare decisions that benefit the individual tremendously but are inefficient for the group as a hole. The traditional tragedy of the commons problem. In particular Dr. Duvefelt focuses on an example presented by Dr. Siddhartha Mukherjee of ‘Emperor of All Maladies’ fame in an earlier NYT article, the CV drugs Brilinta and Plavix.

Brilinta, at $6.50 per pill, twice a day, reduces cardiovascular events more than generic Plavix (clopidogrel), which costs 50 cents per pill, once a day. But only by a little: a 20% relative or 2% absolute risk reduction. The event risk was 10% with the more expensive drug and 12% with the one that costs 82% less.

Put differently, if 100 patients were treated with Brilinta for a year, at a cost of $4,680 for each patient, 10 patients would still have an event. With clopidogrel, 100 patients, each one at a cost of $180, 12 events would occur. That means two fewer events would happen per 100 patients on Brilinta at an extra cost of $450,000, or $225,000 per avoided cardiovascular emergency (number needed to treat, NNT=50).

There’s an important error in this back of the napkin calculation because it forgets to factor in the savings created by the avoidance of a cardiovascular event. One study reports that the average initial and follow costs of a cardiovascular event in the US are $16,981 per case, ranging from $6,669 to $56,024. This does not include any non-medical costs that are incurred after a cardiovascular event, including lost productivity, personal utility, etc. Some may say that this is a pedantic criticism of back-of-the-napkin math, but it is necessary to emphasize that there is more to all of this than initially meet’s the eye.

Drs. Duvefelt and Mukherjee thus try to reconcile the ethical conflict between patient welfare and social welfare. What is to be done? Which drug should the physician prescribe? Mukherjee points out the argument that the physician has a responsibility to provide the best care available to the patient. It’s arguable that cost containment is in conflict with the Hippocratic Oath. For Mukherjee the physician can’t do anything, “the solutions are abstract and political”. Dr. Duvefelt points out that although Americans may dislike socialized medicine, ultimately all healthcare where somebody else pays for it, and therefore all health insurance, is by definition “social” and therefore all medicine is social medicine. In his opinion physicians have a responsibility to be stewards and spend resources wisely. But as I said earlier, there’s more to this than meets the eye. Notice anything missing in this entire discussion?

The patient. Both gentlemen are so focused on fixing society that they forget about the patient that they’re supposed to be helping and begin treating him or her as just another input into the medical industrial complex. Gauze, saline, Plavix, patient. The patient no longer has needs, preferences, goals or capacity, they are now merely the vehicle of a disease to be solved efficiently by the system. Social medicine therefore infantilizes the patient in two key ways. The first is that  it strips the patient of agency. Like children that have to do what their parents tell them, the patient now has to follow the decision made between the physician and insurer. What if my insurance covers the more expensive Brilinta, but I would like to make the socially responsible choice and go with Plavix? There are strange people like that out there after all; some even voluntarily pay more in taxes than they have to. What if my insurance only covers the cheaper Plavix, but I want to pay for Brilinta out of pocket? What do I work for after all? Some people work for a bigger house, others for a car, and perhaps I work for better care, even if it’s only 2% better. I don’t get to express my preferences because the system has decided for me. The second way that social medicine infantilizes the patient is by assuming that they are incapable of taking care of themselves. Children don’t have jobs and need to be financially supported by their parents. Similarly social medicine assumes that patients are financially helpless and need to be taken care of by the insurer. Perhaps that’s true for the $4,680 per year Brilanta, but why is that an assumption for the $180 per year Plavix? It’s insulting that the automatic assumption of the healthcare system is that the patient needs insurance to afford this generic. Frankly most people don’t need insurance for a $180 per year prescription, they need it for that $16,891 cardiovascular event we mentioned earlier. Mukherjee mentions the Ashish Jha study that I critiqued in my previous post to discuss the causes of high healthcare expenditure in the US: administrative waste, drug prices, procedure prices. Maybe expenditure wouldn’t be so high if we stopped using health insurance as a healthcare subscription and stopped hiding every single cost, including $180 per year generics, in the premiums?

Drs. Mukherjee’s and Duvefelt’s ask “what is a doctor supposed to do?” How about stop treating their patients like helpless children. Don’t withhold information from them, don’t make decisions for them, don’t assume their resources and circumstances. The patient doesn’t need you to be their parent and they certainly don’t need you to be an efficient steward of economic resources. There is no profound ethical dilemma to be resolved. You work neither for the government nor the insurer, as a physician you work solely for the patient. Explain to them all of their options, give them your recommendation, and let them decide what to do. That’s what a doctor is supposed to do; nothing more, nothing less.

On Comparing Healthcare Systems

Ashish Jha et al published a paper in this month’s JAMA comparing the US healthcare system to other countries. It’s a fairly robust effort comparing several system features, so the paper made its rounds through medical twitter, although I wouldn’t say that it’s any different from the Commonwealth Fund reports that get published in Health Affairs every year and from which the Jha paper draws heavily (more on this later). I’m not sure how familiar the medical community is with Health Affairs literature, since that’s a journal designed for administrative types that are the mortal nemesis of clinicians, so there may be some utility in publishing this in JAMA. The paper’s basic argument is that the US does not appear to be meaningfully different from the mean of a basket of comparable OECD countries on measures of utilization or social spending and therefore the cause of the high healthcare spending in the US is prices. This is an analysis that we have seen before, notably Uwe Reinhardt’s 2003 paper which reached the same conclusion. Although I do not disagree with the Jha conclusion that the U.S. prices for goods and services are elevated and need reform, the proposition that the U.S. isn’t structurally different from other systems is incorrect and needs to be put into context.

When I started my degree in health policy, it immediately struck me how the U.S. healthcare system does not function as a free market. Without prices set by competitive interaction between patients and providers the system suffers from the chronic information problem Hayek highlighted in The Fatal Conceit where any innovations are stuck in the hospital where they were developed and diffuse through slow channels like academic journals and conferences rather than the much faster market pressures. Even if a large system like Kaiser Permanente is doing something very unique and effective, the rest of the healthcare system may never find out about it because of the lack of signal mechanisms. My intuition was therefore to focus on comparative healthcare research and to look for international perspectives of how a healthcare system could be organized and coordinated. Perhaps we can identify best practices by figuring out what some countries are doing drastically differently to achieve drastically different results? The good news is that there is indeed a rich area to explore, especially in the developing world where healthcare systems can’t afford to waste money like we do (my quick look into Iran’s community health worker system is just one example). The bad news is that that comparative healthcare research is a very new area and the research methodology and data are often questionable. Although comparisons of the US healthcare system to other countries have been made many times in the past, such as this talk from the 1980s by Milton Friedman at the Mayo Clinic in which he compares us to the NHS, the first major thrust for comparative healthcare system research was made by the WHO with their 2000 health system report  in which they attempted to rank 192 countries in a variety of areas, ultimately nominating France as the best healthcare system. Although this pleased the French, the report was deeply criticzed by academic and politicians.

Data Problems

The major problem with the WHO report, and much of comparative healthcare literature in general, is that the data was unreliable. The report provided an 80% uncertainty interval for each country, which obviously leaves a lot of room for error that would be unacceptable in other healthcare literature. These intervals made it difficult to state with a large degree of certainty that any system really was better than another and resulted in large potential swings, with the US potentially ranking anywhere between 7th and 24th. In order to improve the data available and expand our understanding, the Commonwealth Fund began compiling comparative reports on the performance of several English-speaking countries, eventually expanding to include several other Western European and Nordic countries. The Jha paper relies on the Commonwealth Fund surveys for perception and access metrics. Does the Commonwealth data achieve their goal of providing high quality data? I respect the Commonwealth Fund tremendously and appreciate the difficulty of their task, but having worked with their survey I don’t believe that this goal is achieved for the US. The Commonwealth surveys have sample sizes of 1000-2000 per country, with the exception of Canada which generally has samples of 4000-5000 because the Canadian Ministry of Health contributed funds to expand their survey sample size. A sample of size of 1000 may be sufficient for small countries with homogeneous systems like the UK, Switzerland or Sweden, but a basic sanity check tells us that it would be inadequate for competently describing a diverse federal system like the United States, especially when you consider that New York is not Alaska and the 2000 sample size is spread out evenly across the 50 states. 40 responders don’t tell me much about healthcare in NY, especially considering how the differences between NYC and upstate NY are like night and day. In addition to the Commonwealth surveys, the Jha paper also relies on the 2016 OECD Health panel for utilization and spending data. I haven’t personally worked in depth with the OECD data, but my general attitude can be summarized by a gaffe from a former Ukrainian state economist, “the Ministry hasn’t published the report yet because we haven’t decided yet what we want the numbers to say.” The Jha paper itself admits that there’s problems with the OECD data: “When OECD data were not available for a given country or more accurate country-level estimates were available, country-specific data sources were used.” I propose that it’s irresponsible to make authoritative claims like “utilization rates in the United States were largely similar to those in other nations” when the data is compiled from a diverse set of sources of clearly varying reliability.

Analysis Problems

Jha et al suggest that the US system is unremarkable because US utilization for various services is similar to the average utilization of the eleven countries analyzed. For example, US discharges for mental and behavioral conditions is 679 per 100,000 population so the US is unremarkable because it’s close to the average discharge rate of 736. This analytical strategy is fundamentally flawed for two reasons.

The first is that the average behavior of a basket of very different systems effectively has no meaning because you cannot infer any conclusions on the behavior of any single system based on its relationship to the average. If you take the mental health discharges example, if I wanted to design an average healthcare system from scratch, the average of 736 per 100,000 population tells me nothing about how much staff I should hire, what facilities I should construct and which patients I should admit. Furthermore it would be incorrect to describe the US protocols as “typical” because these systems are clearly very different. The mental health discharge rate for Netherlands is 119 per 100,000 population, while the rate for Germany is 1719 per 100,000. These are not systems that are doing the same thing and marginally varying around a mean, there’s a difference by a factor of 14! The US can’t be a “typical” system because a “typical” system clearly can’t exist with such large variability. Either the Germans or the Dutch are doing something very wrong, because I highly doubt that they’re both right. And if they are somehow both right then the entire concept of the average becomes irrelevant because countries deliver care that is appropriate for their population and any nation’s position with respect to the average is irrelevant since the average is not representative of their proper patient population. Another example of this problem is hospital discharges per 1000, where Japan and US have similar rates of ~125 hospital discharges per 1000. Can we safely conclude that Japan and US have similar admission and discharge practices? That would be an impossible conclusion if you knew that Japanese hospitals are simply closed on evenings and weekends. These two systems will clearly behave very differently as a result of this hospital schedule even though they may appear to be similar when only looking at them on a graph.

The second problem with the use of the average of eleven countries as a benchmark to compare US performance to is that the average can be manipulated to serve your needs by adding or removing countries. Why does Jha use these specific countries? They state that it’s to use the wealthiest countries, but that’s a dubious proposition because the US is MUCH wealthier than the rest of the world. If Germany was a US state it would be the 40th poorest state in the union, France would be the 48th poorest. Are these really comparable? We have to therefore admit that we’re taking some liberties in how strict we are in our selection, and if we are going to do that then maybe the analysis should be expanded to the full 34 countries of the OECD? Alternatively, maybe we should be more strict with the selection criteria. Culture obviously has a large impact on population health, and Japan is one included country that’s clearly very different from the rest as reflected by Japan being the lowest on just about every utilization metric. But if we’re removing Japan, are the Germanic countries really that similar to the US? Perhaps it would be best to focus on the four English-speaking countries which will be the most similar culturally? But doing that changes all the averages. It shifts the COPD discharges per 100,000 population from 206 to 252 and suddenly the US utilization rate of 230 goes from the middle of the pack to the lowest utilizer! The point is that there is no such thing as objective data, all data has an opinion, and all comparative analysis of many countries is vulnerable to manipulation by adding or removing countries until you make the US look the way you want it to look. Using an average as a benchmark does not fix this critical flaw.

Knowledge Problems

Finally, a major challenge that I encountered while working on comparative system research data is simply figuring out the truth of what I’m looking at and how the data maps onto reality. Nassim Taleb calls it the pseudo expert problem, where you may have a lot of knowledge about a topic but still have no idea what’s really going on because you don’t have direct contact with the situation. In comparative system research the problem comes from trying to reduce complex systems to simple metrics that can be analyzed and compared, which unfortunately strips out critical qualitative information.

For example, Jha puts forward data suggesting that social spending in the US is similar to other countries, but doesn’t comment that this is only true after adding up public and private contributions to the programs that constitute “social spending”. That’s not exactly what most people would consider as “social” spending and after taking away private contributions the US quickly falls behind. Is it appropriate to combine private and public social spending because Americans are generally wealthier than Europeans and have more disposable income? I don’t know, but the issue is too complicated to be casually glanced over. One more example is hospital beds per 1000, which Jha reports as 2.8 in the US and 2.7 in Canada. These figures may lead a policy analyst to conclude that these systems have similar levels of hospital bed supply and similar problems, but this would be incorrect. Canada has a chronic shortage of hospital beds that does not exist in the US because Canadian law requires patients to be discharged directly to appropriate post-acute care. However, there is a shortage of post-acute care facilities in Canada, resulting in as many as 13% of Canadian hospital beds at any time being occupied by patients who no longer need acute care and are simply waiting to be discharged, sometimes for months. These beds are effectively virtual, resulting in blockages in other areas, such as EDs where it is not uncommon for Canadians to wait over 24 hours just to be admitted. Another example is primary care physician consultations for which Jha reports 4 visits per person per year in the US compared to an average of 6.6 visits per person per year. An analyst may even be impressed with Germany which reports just over 10 visits per person per year. This analysis, however, makes the error of assuming that all consultations are born equal and ignores the fact that American consultations are on average ~22 minutes long compared to only ~8 minutes in Germany. To make matters worse, we don’t even know if the American consultations are of higher quality, because the American doctor may be fiddling with the EHR for 20 minutes with only 2 minutes dedicated to the patient, while the German doctor may be able to dedicate the full 8 minutes to the patient. Baicker and Chandhra raise similar concerns regarding intensity, quality and measurement  in their response to Jha. We almost never know what the reality is!

Conclusion

This rant isn’t meant to discredit the work done by Jha et al, or the effort of the organizations responsible for the data they use in this paper. A lot of work obviously went into this report and it has definitely expanded people’s knowledge of the area, as evidenced by the fanfare it continues to receive on social media. I’m only seeking to express my frustration over the significant analytical errors that are present in most literature comparing healthcare systems. Healthcare is 18% of the economy and any errors have massive ramifications. My own view, to echo Hayek, is that these systems are far too complex to be properly analyzed en masse and instead it is best to focus on very specific topics ie rural nursing home care in Japan and United States. Anything more broad than that is almost certainly going to be wrong and I encourage researchers to hesitate before making firm statements like “it’s the prices stupid”. If we don’t respect the complexities of these systems, how could we possibly expect the New York Times to understand them?

Bezos, Buffett and Dimon walk into a bar

That must be how the healthcare story of the week must have started. Amidst the drama about the State of the Union address and the FISA memo release came a tidal wave of coverage about the announcement made by the leaders of Amazon, Berkshire Hathaway and JP Morgan Chase that they will be collaborating on a new healthcare venture seeking to reduce the burden of healthcare costs. The subsequent media coverage was torn between promises of major disruption and foreboding of incontinent failure. What struck the most was not the announcement itself, but the absolute conviction with which these predictions were made despite there being so much unknown. Here’s what I mean.

The first thing that struck me is the simple question “why these guys?” Nobody seems to be asking this, but it’s critically important. It’s especially strange to have a venture between three different partners. Usually it’s a single company entering into the market, such as with Oscar insurance which also promised disruption. Otherwise it’s two firms cooperating, such as Apple’s venture into the data space while partnering with various healthcare provider networks around the country or the CVS/Aetna merger. But three firms getting together? That’s bizarre. Why not four? It would make perfect sense to throw in a pharmaceutical company into the mix. Why not two? It’s not immediately clear what critical skillset JP Morgan is bringing to the mix. Three? When was the last time you heard of a joint venture between three leading partners? It’s so strange that one has to wonder if they came up with the idea while drinking in a bar or playing golf. It’s probably the golf course, Warren Buffett is on record saying that he doesn’t drink.

The bizarre partner mix brings us to the strategy, which also doesn’t make much sense. Despite the deep conviction of the media analysis, the actual announcement didn’t include ANY specifics. The official statement says that the mission was “to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs.” This roughly means nothing, so all we’re left is looking at the core competencies of the companies involved. Much of the subsequent coverage focused on Amazon’s technological innovation and ability to disrupt markets. Is this even true? Does Amazon disrupt? Their Fire OS phones were an abysmal failure, which died off so fast that the media seems to have forgotten they even existed. Similarly their Anime Strike service was shuttered after only a year, while less notorious businesses like Crunchyroll and Funimation are operating just fine. Would people even pay for the Amazon Video service if it was unbundled from Amazon Prime? Amazon acquired Whole Foods but the results so far are mixed. The only business that Amazon ever truly disrupted was the retail market which was done through aggressive supply chain management and competitive pricing. But healthcare isn’t a retail market, it’s a services industry which is an entirely different game (read Baumol’s cost disease). The other business that Amazon has been successful with is Amazon Web Services, which provides an on-demand cloud computing service to individuals and businesses. Amazon could try to leverage this IT expertise, along with their AI projects, to better assess patient data, but this runs into the dual problem of legal restrictions on the usage of patient data and the fact that most patient data is junk (there’s a very good reason why MedPAC is rolling back on MIPS). Amazon also has a relationship with the Express Scripts PBM, but it’s hard to call that a core competence. Berkshire Hathaway is a conglomerate that runs a variety of businesses of which there are too many to describe individually, but my understanding is that they’re also involved with healthcare only tangentially. They don’t run any hospital networks, nor any biotech or pharmaceutical companies. Warren Buffett basically said fairly recently that pharma investment is too difficult to discern and Berkshire Hathaway at the time accordingly only had exposure to positions in vanilla players like Johnson & Johnson and GlaxoSmithKlein. They do provide health re-insurance through the General Re business, but that’s a somewhat different expertise compared to what a health insurer does. Finally we have JP Morgan Chase, which is a bank, they do bank things. Could they be replaced with any other large bank? Probably. So why JP Morgan Chase? Who knows, but I cite my golf course theory. Presumably they’re involved in the project to capitalize this new venture, but the announcement stated that this is going to be a non-profit, which is a hard sell to both shareholders and potential investors.

This brings me to the final thing that I noticed, which was the assumption by the media that this was some benevolent project that seeks to save American healthcare from persistent cost inflation. The joint statement clearly said that the goal was to provide solutions for “their employees”, which indicates that they would start locally before even considering expanding to America as a whole. This isn’t a charitable action, despite calling it a non-profit, but intended to benefit these companies and their shareholders. The question is what that benefit is. The thing that struck me most was the statement of intent to focus on providing “simplified, high-quality and transparent healthcare at a reasonable cost.” That could be a plausible benefit, but is this really something that people at these companies don’t have access to right now and are complaining about? All of these are big brands, one would assume that employees there have access to cadillac plans with low deductibles and broad access. This bares out in the Glassdoor pages, where Amazon’s insurance benefits’ rating of 4.1/5 is supported by comments like “Amazon has the best health insurance benefits I have ever seen.” The same is true for JP Morgan and Berkshire Hathaway. Employees at these companies seem satisfied with their benefits, so something is not right about this announcement. If the employees are not going to benefit, maybe the companies can? It could make sense to establish a non-profit insurer and then transfer the savings that would normally be the insurers markup to the shareholders of the three companies, therefore effectively transferring wealth from the insurer shareholders to parent company shareholders (note, not a charitable action), but this assumes that the new non-profit can operate more efficiently than the existing businesses. Contrary to popular belief insurers aren’t making enormous profits, publicly traded health insurers have a profit margin of only 3% on their revenue. Can Amazon et al negotiate more aggressively with pharmaceuticals and hospitals than their current insurer? It’s doubtful, they don’t have much market power. Although much of the media tried to position the 1 million US employees who work for these companies as a competitive advantage, this isn’t actually a large number. To put things into context the largest US insurer, United, has 70 million subscribers and the 5th largest, Cigna, has 15 million. Amazon+Berkshire+JP Morgan Health just doesn’t bring much weight to the table.

So what’s going on and what’s going to happen? The problem I have with this announcement is the amount that we don’t know and the amount that doesn’t make sense. There’s no company name. There’s no business plan. There’s no competitive advantages. There’s little relevant expertise. The bizarre partner mix makes no sense. All we have is a vague mission statement about improving quality and reducing cost for their employees, but even this doesn’t square out with what employees are saying on Glassdoor. If this announcement was brought in front of a venture capitalist by no-name Jeff, Jim, and John instead of Bezos, Buffett and Dimon they would have been thrown out of the room for wasting people’s time. By their own admission the business is in “early stages” but if you’re just starting out, why even make an an announcement? This is the one question I can’t reasonably answer, why even make an announcement? When nothing makes sense, your assumptions are wrong. This leads me to believe that this isn’t about making a business but all about sending a message. Obviously there’s no proof, just as none of the other theories have proof, but it seems the least incoherent answer. They’re signaling to somebody, most likely insurers but also possibly the government or phama, that this is something they consider to be a problem and are willing to exercise a nuclear option on (ie starting a dubious business) if the rest of the industry doesn’t shape up. It’s about having a strategic bargaining chip on the negotiating table, however credible or real it may (not) be.

 

Turns Out Celebs Are Bad Health Policy Analysts

After Jimmy Kimmel’s impassioned critique of the Graham-Cassidy repeal bill and the canonization of the Jimmy Kimmel Test for evaluating health policy,  celebrities are becoming increasingly active in the nation’s policy debates. I really wish they would stop, because they don’t know what they’re talking about, especially when it comes to healthcare, and the attention that they receive with their celebrity status makes it incredibly irresponsible for them to misinform the public. The newest entrant into the policy arena is Julia Louis-Dreyfus, famous for her roles on Seinfeld and Veep, who announced on Twitter that she has been diagnosed with breast cancer (get well, Julia).

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The problem is that she then took the opportunity to plug universal health care as the solution to cancer mortality. Why is this a problem? Let’s take a quick look at how poorly the US compares to other OECD countries in breast cancer survival rates:

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source: OECD

Oh. Well. That’s awkward. Despite not having universal health coverage, the United States is the best healthcare system for actually treating women with breast cancer and keeping them alive. That’s because contrary to popular belief, we do actually receive higher quality care than other countries. It’s important to point out that the US is a lot better than some key countries. The Commonwealth Fund’s darling “Best Healthcare System” in the United Kingdom is almost 9% behind the US in 5 year breast cancer survival rates. This is actually a massive problem, because as Julia Louis-Dreyfus correctly points out, 1 in 8 women will be diagnosed with breast cancer. That’s a full 1% of all British women who die because the NHS is failing them on this single important disease. Julia Louis-Dreyfus should study the facts before pushing such a system on American women as well.

By the way, since we’re sharing personal stories, my mother was diagnosed with breast cancer and as an uninsured poor immigrant went through chemo paying for treatment with loans. She lived. It’s certainly tough financially, but it’s not impossible, and the idea that being sick while uninsured is an automatic death sentence is yet another irresponsible falsehood.

Healthcare Reform is Comatose

The Sanders/Klobuchar/Graham/Cassidy CNN healthcare “debate” is a must watch for anybody who cares about healthcare reform in the US. However, it’s not important because it was filled with intelligent and critical discussion of the health care system’s problems and the smartest ways to fix them. On the contrary, it’s essential viewing because it reveals how politically dogmatic and intellectually lazy the two sides have become.

To start off, the bright point of the debate was that both sides seem to finally agree that the ACA isn’t working. When the ACA marketplace’s average deductibles increased to $6,000 and premiums increased by 17% in 2017, the true believers argued that this was a one-time actuarial adjustment as the marketplaces aligned themselves to the demographics of the newly insured population. As we get closer to 2018, this position is becoming increasingly indefensible as it’s becoming clear that exchanges are going to see another wave of large premium increases. Florida, a state that expanded Medicaid under the ACA, is forecasting a 45% increase. It shouldn’t be a surprise that the marketplaces are spiraling since ACOs, which were the primary cost saving mechanism in the ACA, have been a tremendous failure at producing any meaningful results. Importantly, this mechanism has been a failure nationally as well as locally in Massachusetts, which was lauded as a better version of the ACA because it had more robust wealth transfers and higher individual mandate penalties. This is why nobody at the debate tried to argue that the ACA is working. The Democrats praised the law for expanding coverage, but were also eager to admit that something is rotten in the state of Denmark and called out to their Republican colleagues to work together on fixing it together. And this is where the problems begin. Despite agreeing that cooperation will be needed, the ACA has warped policy thought in DC to such a degree that neither side is capable of thinking of solutions outside of the “fund the ACA” vs “defund the ACA” paradigm.

Republicans for their part are completely obsessed with pushing through a repeal bill that also controls Medicaid spending. While their hearts may be in the right place (the CMS trust is still scheduled to run out of money in 2029), this is a fight against reality. Three Senate vote defeats have made it clear that a bill that reduces future spending will not pass and that bill writers need to move into a new direction, including consideration of increasing taxes to stop the fiscal hemorrhage. The proposed Trump tax cuts, however, provide little hope for a balanced budget. Similarly, the desire to completely delegate healthcare policy to the states is also unrealistic. Nicholas Bagley wrote up a reasonable critique pointing out how despite transferring control of funds, the federal government is not going give states the ability to pick and choose federal regulations. What may have worked for welfare in the 90s probably would not work for healthcare because of the entrenched special interests that protect themselves from competition through legal barriers to entry.

Democrats, on the other hand, may be in an even worse position. They quite literally have no idea what to do about the ACA. This is why Hillary’s campaign position on healthcare could be accurately summarized as “we will do stuff.” Despite agreeing with the Republicans that the ACA isn’t working, they seem to have stumbled unwillingly to the bizarre conclusion that the solution is to throw more money at the fire. The Maine and Alaska reinsurance programs Klobuchar championed at the debate is simply taxpayer funded nationalization of sick patients and their costs, and Graham was correct in criticizing it as throwing good money after bad. The other proposal from the Democrats is Bernie’s Medicare for All single payer, which not only throws good money after bad, it throws enough money to bankrupt the nation within a decade (his own words, not mine). The helplessness of the Democratic position is therefore fueling the growth of a malaise among ACA supporters. Where there was once exuberance and joy about the law’s potential, there is now a resigned feeling that this is the best that we can do. Aaron Carroll, ACA proponent and one of the panelists on NYTimes’ recent “Best Healthcare System” tournament, now says that “THERE IS NO WAY TO SPEND LESS, COVER MORE, AND MAKE IT BETTER” (his emphasis, not mine), which effectively concedes that the ACA does nothing to push the health production possibility frontier outward. Aaron Carroll is obviously wrong about this; competition and innovation have been making healthcare cheaper, broader and better for a century now. But more importantly, that statement reveals the lack of imagination that pushes the Democrats to promote more spending. In their view the only way to improve care for everybody is to spend more, so if we’re doomed to spend more then it’s better to do it now rather than later. There’s an internal logic to this fiscal suicide. In addition, because deficit spending and redistribution are critical to this vision, they are also doubling down on centralization of healthcare management in the federal government. Aaron Carroll criticizes the Republican’s state-oriented vision by claiming that none of the states have any idea how to fix this mess. It’s a strange  argument to use to defend the ACA, because it makes the false assumption that the federal government somehow does know what to do and ignores the fact that the ACA itself was a watered down version of a state idea.

Ultimately the biggest problem is that neither of these boring approaches is going to solve America’s problems. The ACA isn’t what’s wrong with healthcare in the US, it just magnified the problems by adding more money into the system. Whether you eliminate it completely or empower it with more money, you’ll still be left with the same structural problems that are driving the irrational healthcare sector. There are critical market focused reforms that need to be made to price transparency, provider market entry, occupational licensing, health insurance purchasing, drug patent law and funding for behavioral health, all of which would immediately and significantly bend the healthcare cost curve. Instead we’re going to keep going back and forth about ACA funding. With so little brain activity going in Congress, the only plausible conclusion is that healthcare reform is comatose for the foreseeable future until something critical breaks.