Controlling Health Care Demand

The Senate started the debate on health care reform today and at the same time there have been a flood of stories about health care demand covering mammography, autism, proton therapy and H1N1 and others.

CNNs H1N1 story this morning caught my attention. A mother tried repeatedly to get her otherwise healthy daughter treatment for flu symptoms. She was repeatedly told "take two aspirins and get bed rest." When her daughter's health started declining rapidly, she ended up in the ER where it was found that the virus had attacked her heart. The daughter barely survived.

Compare this story to the ones where parents are demanding risky, unproven treatments for autism, men are demanding expensive proton therapy for prostrate cancer, women are demanding yearly mammograms and siblings are demanding heroic end-of-life treatments for their elderly parents. All these demands are being made without supporting scientific evidence.

Clearly, there's an element of American middle-class society that demands instant treatment for any illness, regardless of the cost. And, there is an element of the medical community that is willing to provide the treatment. On the other hand, there is another element of American society that doesn't have health insurance and can't afford to get their teeth cleaned or have a yearly check up.

The health care system is trying to fend off these demands--maybe not successfully as in the H1N1 case. The danger of excessive demand and the attempts to control it are that it's overloading the medical system and making it difficult to separate the truly sick and needy patients from the hypochondriacs.

Gift Giving is Irrational

Hardheaded economists have looked at gift giving and concluded that gift giving is irrational (Scroogenomics). Research shows that people value gifts they receive 20 percent less per dollar than products they purchase for themselves. Since $65 billion (approximately) is spent in the US on gifts, 20% of that is about $12 or $13 billion a year in destroyed or wasted value. Worldwide, the number is about twice that big.

So, let's see: the bond market is irrationally selling derivatives with no value; mortgage lenders are irrationally making subprime loans with no value; investors are irrationally buying dot.com stocks without value; physicians are irrationally ordering tests without medical value; and people are irrationally giving gifts to their acquaintances who place little value on what they get.

Are any economic actors doing anything rational? Whatever happened to homo economicus? Is the rational actor, after all, just a neoliberal fantasy?

The Evidence for Evidence-based Medicine

The recent recommendations of the US Preventive Services Task Force (USPSTF) regarding mammography have created confusion and resistance from both the medical community and the general public. The USPSTF recommendations were based on the application of evidence-based medicine (EBM). The current firestorm threatens the entire EBM enterprise.

My recommendation to Kathleen Sebelius, the US Secretary of Health and Human Services (who walked away from the task force recommendations), is to take a cue from the Intergovernmental Panel on Climate Change (IPCC). Ask the USPSTF to stick to the science and avoid the policy recommendations.

The EBM enterprise essentially conducts a literature review of existing studies in the field and assesses the risks and benefits of a particular treatment. This is essentially what the IPCC does in it's Assessment Reports (ARs) and this is where the IPCC scientists stop, understanding that they are not politicians.

EBM as practiced by USPSTF (I know this is acronym overload, but can't help myself), however, can't resist taking two further steps. Evidence-based guidelines (EBG), meant to be applied at the organizational or institutional level, use EBM literature reviews to develop guidelines, policy and regulations for medical practice. And, USPSTF appears willing to even take a further step into evidence-based individual decision making (EBID) which is the application of evidence-based medicine to the individual patient.

Purely from the standpoint of statistics, EBID is a dangerous idea. Population statistical data and results have little if any useful application to individuals. All population statistics describe central tendencies and confidence intervals based on distributions of patients. There is simply no way for a clinical practitioner to locate an individual patient within that data storm.

Even though EBID is not useful, the literature reviews provided by EBM are very useful. The medical literature is huge and of widely varying quality. USPSTF provides an extremely useful service reviewing this research and reaching a consensus opinion on the risks and benefits of a particular treatment. As should be obvious from the mammography debate, they loose their credibility by going any further. Let's shift the pressure to the organizations and institutions that deliver health care to use the gold-standard EBM results to develop guidelines, policies and regulations. And, let's require them to defend those decisions with more outcomes data.

The System Strikes Back

The US government is earnestly focused on solving complex problems (health care delivery, climate change, terrorism, etc.) but tends to think very linearly. "If we could only implement some government policy, everything would change". The difficulty is that we are dealing with complex systems and the systems will fight back.

Here's an example from an island nation in the central Pacific, Kiribati (pronounced KIR-a-bahs) that has a simple Robinson Crusoe economy. The natives either catch fish or pick coconuts (I'm not making this up). The government was concerned about overfishing so it decided to subsidize coconut production to give people a better standard of living and reduce overfishing. The result was that fishing increased by 33 per cent and the reef fish population dropped by 17 percent. What's going on here?

The standard textbook economic analysis says that as people's incomes increased they would choose more leisure. And, that's what happened, except they chose to spend their leisure time fishing!

Textbook economics does not provide the only lesson here. Most governments approach policy making with a linear mindset: subsidize coconut production and we will solve overfishing. But, we're intervening in a system with three positive feedback loops that the government policy disrupted. And, the system worked to defeat the policy initiative.

There has been a debate in economics about whether people's expectations defeat government policy initiatives (rational or model-consistent expectations theory). Although there is a kernel of truth in the theory (people do have expectations), it entirely misses and could easily be confused with the system aspects of government interventions.

The Kiribati economy and the problem of over-fishing is more complex than presented in the diagram above. In 2004, my wife and I visited Fanning Island (Tabuaeran), an atoll in the Gilbert (Kiribati) Islands. The highest point on the island is only a few feet above sea level and there was even concern when we visited that any sea level rise might flood the island. In the face of looming environmental problems, the government did not really try to understand the reasons for over-fishing: are the the coral reefs dying and supporting fewer fish? Is population pressure created by economic growth pressing on declining resources?

There have to be some lessons here (similar to the Robinson Crusoe lessons from textbook economics) that would inform our current policy debates. Understanding systems is a prerequisite for effective government policy. How well do we understand the US economic system or the US health care system or the World environmental systems? How likely to be effective are policies based on linear thinking? If we don't understand something, it's a signal to invoke the precautionary principle.

A Lens on Climate Change

Had enough charts and box diagrams explaining climate change? Here's a great video site, Consequences by the NOOR climate change project (scroll down the page for video and photography about the pine needle infestation in British Columbia; sea-level rise in the Maldives; the burning coal fields of Jharia, India; nomadic Nenet tribes under threat from global warming; the Canadian oil tar sands; Somalia's environmental refugees; and more).

Regional Variation in Health Care Spending

We know from the Dartmouth Atlas that there are large regional variations in the cost of health care. Now it is being reported that academic medical centers are resisting attempts by the Institute of Medicine to study the sources of variation. The academic medical centers are raising the old argument that their patients are sicker and so cost more to treat (an argument that can easily be refuted). So, why would academic medical centers, the "guardians of the scientific basis of medical practice" resist a research study? Are they afraid of the answer?

Here's my hypothesis about why costs of care are different at different academic medical centers. The capital budgets for buildings and technology are different across the centers and positively correlated with costs. A center with a large capital budget must pay the debt on it's buildings and machines and it must utilize the buildings and technology fully to justify their costs and to justify better facilities and better technology in the future. It's just a hypotheses but it will be difficult to test since, unlike the public Canadian system, US hospitals do not make their budgets public.

Doomsday 2012

Will the World end in 2012? Evidently, some people are worried by ancient Mayan prophecies. "If you want to worry, most scientists say, you should think about global climate change, rogue asteroids or nuclear war."

Health Care Market Failure

Yesterday, Harvard economist Greg Mankiw pointed out that increasing demand for health care driven by expanded insurance coverage will increase prices. Today, the New York Times reported that pharmaceutical manufacturers are increasing prices in anticipation of health care reform. The magnitude of price increases for physician's services depends on how quickly supply increases to match demand and unilateral price increases should reduce demand for pharmaceuticals. So what's going on?

Here's the textbook graph for the pharmaceutical market and the market for physician's services. Pharmaceutical manufacturers can unilaterally increase prices without worrying about demand because most buyers (particularly for patented medications) are price insensitive. Either you must have the drug or someone else is paying for it.

The Pharmaceutical industry says the price rise is due to the need for more R&D but the Congressional Budget Office disagrees. When you exclude spending on human clinical trials and the money spend on manufacturing process (neither of which are research) as the National Science Foundation did (above), pharmaceutical R&D expenditure has been flat.

We also expect large price changes for physician's services (the right panel in the first graphic). Because the supply of physicians services is fixed both in the short- and long-term (it takes a long time to train a physician, not every unemployed manufacturing worker can be retrained as a physician and US medical schools have graduated the same number of physicians every year for many years), large price increases can be expected from increased demand.

Markets for pharmaceuticals and physician's services are classical examples of market failure. A public option that could directly bargain with pharmaceutical manufacturers (as exists in every other major industrial company except the US) would help hold down drug costs and have very little impact on R&D. Increasing supply of physicians services would require restructuring how health care is delivered. Physician's assistants could easily give screening physicals, for example, in response to increased demand. The public option might also be able to exert some leverage here. Reducing payments to physicians could induce some innovation and reorganization.

Moonstruck Lunacy

Predictably, NASA's $79 million mission to crash the Lunar Crater Observation and Sensing Satellite (LCROSS) into the moon succeeded beyond expectations, kicking up 25 gallons of water. Regardless of this space spectacular, the Moon is still dryer than any dessert on Earth. Not many people live and work in Death Valley. Why is NASA so excited about this finding and why are we fixated on the Moon?

The Review of U.S. Human Spaceflight Plans Committee has just released its final report and NASA is worried. The committee is trying to scale back NASA's budget and reduce the cost of space exploration recommending that (1) astronauts be lifted to low-Earth orbit using private resources and (2) NASA bypass the Moon to concentrate on unmanned flight to more remote planets in the Solar System. But NASA and the rocket jockeys that are all over cable news today want to go to the moon.

Why are we doing this? "The Committee concludes that the ultimate goal of human exploration is to chart a path for human expansion into the solar system." Really? Humanity has not expanded into Death Valley. There is no planet, asteroid or moon in our Solar System that is inhabitable. Travel beyond our Solar System within the currently understood limits of physics would subject humans, unprotected by Earth's atmosphere, to severe radiation. Is human space flight just delusional escapism?

Actually, this is all about a Federal agency and the interest groups that inevitably form around agencies with large budgets, trying to maintain it's budget. Space flight has produced few scientific advances (see my earlier post) and the money being wasted here is desperately needed for Federal Energy R&D. If NASA's R&D budget was immediately transfered to DOE, the budget for energy R&D would be doubled--exactly what's needed right now.

Is there a role for NASA in the real world? Currently NASA is on a crusade to convince the public that the world is not coming to an end on December 21, 2012 as predicted by the Hollywood movie 2012. There are popular beliefs about an apocalypse in 2012 fueled in part by NASA's own predictions about the most intense Solar maximum in fifty years scheduled for 2012. All this seems an appropriate example of mass hysteria as a result of a society and Federal agency under stress. We need right now to deal with the world we're living in which is also under a lot of stress.

Sheila Bair, Bear Sterns, Bare Knuckles

The regulators are starting to weigh in (the boxing metaphor) on financial regulation. Sheila Bair, FDIC director, gave an interesting interview tonight on the PBS News Hour. Her comment in response to Paul Solman's question about the Christopher Dodd, D-CN, financial regulation bill: "I believe strongly in checks and balances." Reading between the lines, there are no checks and balances on the Federal Reserve. Checks and balances require multiple regulators with clear missions watching not only the regulated but each other.

But, she didn't explain how to avoid regulator shopping (looking for the regulator who will give you the best deal). This problem exists throughout the Federal government and is not unique to the banks. In bioterrorism, for example, university laboratories would rather be regulated by the CDC than by the Department of Agriculture, the later being perceived as uninformed about and out of touch with university research. Multiple regulators, regulator shopping, captive regulators and poor regulators are just some of the problems surrounding practical regulation. There's the bell for round one.

An Inconvenient Half-Truth

Al Gore's documentary and associated book, A Inconvenient Truth, has been the subject of intense controversy and has stood up quite well to the attacks. But, nothing is perfect and here's one example discussed this week in the Global Warming Debate.

From the book (page 196): "If Greenland melted or broke up and slipped into the sea--or if half of Greenland and half of Antarctica melted or broke up and slipped into the sea, sea levels worldwide would increase by between 18 and 20 feet." This is a true statement and if it happened the World Trade Center Memorial would be under water.

The assertion, however, begs the question of (1) how likely is a sea-level rise of 18 to 20 feet and (2) how likely would such a sea level rise result from the melting of the ice sheets in Greenland or Antarctica? The Intergovernmental Panel on Climate Change (IPCC) has the answer buried in its reports.

Sea-level rise (SLR) is forecast to increase by about one-half foot every 100 years. In other words, sea level is expected to rise by 20 feet in the year 6000. What are the most likely sources of SLR?

This graphic is a little more difficult to explain since there are different measurements from two periods (Blue=1961-2003 and Brown=1993-2003). The important point to notice is that for either period, thermal expansion and glacier melt are the two most important sources of SLR. The melting of Greenland and Antarctica, given the error bars, provides almost a zero contribution.

This is not to say that we should not be concerned about the Greenland ice sheet or that there might not be a tipping point where the rate of melting gets accelerated. It's just that it's pretty far off in the future.

Fixing the Fed

Christopher Dodd, D-CN and chair of the Senate banking committee, introduced a 1,136 page plan to overhaul regulations for banks and other financial institutions. There are many obviously needed new regulations proposed in the bill (control of derivatives, consumer protections, controlling systemic risk, etc.) but what caught my attention was the provision that takes banking regulation away from the Federal Reserve. This step should be thought about very carefully and I haven't seen any blog traffic but expect to see a lot of discussion soon.

The mission of the Federal Reserve has changed over time (read the history here), but one of the original founding objectives was control of the money supply. The US Treasury controls how much money is printed but the banks control the extension of credit (effectively creating money) and the Federal Reserve controls bank reserves (the source of credit). On the one hand, the Fed needs a very good understanding and control over what banks are doing if it wants to control the money supply. On the other hand, the Fed is just another bank, the central bank. Since it operates independently, it begs the question of "who regulates the regulator"? I guess this is the point of Ron Paul's, R-TX, bill and book ("End the Fed").

We seem to be at an historical conjuncture where the Fed is loosing political support for its mission. It would be useful, before acting, to reflect on the financial history of the late 20th century, re-read Hyman Minsky's "Stabilizing an Unstable Economy" and have a very open public discussion about financial regulation and the role of the Federal Reserve. It would also be useful to think about how fast we want the US economy to grow and how much of the growth should be the result of financial manipulation. Slower growth and less financial manipulation would lead to fewer housing and stock market bubbles and lower CO2 emissions. Unfortunately, politicians are hooked on growth and they will ultimately decide the fate of the Fed.

Sick Around the World

Last night PBS Frontline replayed "Sick Around the World: Can the U.S. learn anything from the rest of the world about how to run a health care system?" I've seen it twice now and have been struck each time by a number of points: (1) there seems to be general agreement that ending the fee-for-service system (essentially, paying physicians a fixed yearly salary) will control prices for physicians services, (2) mandating health insurance, eliminating underwriting and, here's the tough one, making insurance companies nonprofit organizations, solves the coverage problem, (3) fixing drug prices (in Switzerland) did not reduce innovation (although Swiss drug firms still had the lucrative US market), and (4) setting limits on prices for medical technology (e.g., CAT scanners) led to the development of lower-cost technology (Japan). These four steps, if they could be implemented in the US (a big "if"), would effectively control health care costs.

However, I was also struck by the cultural differences between the other capitalist democracies (United Kingdom, Japan, Germany, Taiwan, and Switzerland) compared to the US. There is a clear agreement in these countries (even among conservatives, it seems) that health care is a basic right, something that every citizen should have regardless of income. In the US brand of capitalist democracy, health care is still a commodity. Without a change of philosophy in the US, there can't really be a change in policy.

Divide-and-Conquer in Health Care

After struggling with health care reform since the passage of Medicare in 1965, the US House of Representatives passed H.R. 3962, the Affordable Health Care for America Act. The fate of H.R.3962 is unclear. At least for Senator Lindsey Graham, R-SC, the bill was "dead on arrival to the Senate." What, if anything, might get through the US Senate and be eventually resolved in conference committee?

If you just look at H.R. 3962's rock-solid provisions, health insurance reform has to top the list. Eliminating underwriting and cancellation when the policy holder becomes sick (makes a claim) would be a major step forward. Providing subsidies for the poor seems like a necessary part of insurance reform but it creates another set of marginal tax rates that differ from the marginal tax rates on income. When you think about the interest groups that support H.R. 3962 (AARP, AMA, AHA, AJA, PhRMA, etc.), any proposed reform beyond health insurance will have a difficult time in the Senate.

Comprehensive health care reform would have to provide universal coverage and deal with controlling why health care costs so much in the US. A study by the International Federation of Health Plans and other research shows that prices of hospital visits, physician visits, routine procedures, and laboratory tests are all much higher in the US than in other countries. To this list, we might as well add tort reform to keep Republicans on board. Notice that the list of cost drivers pretty much matches the list of interest groups that support H.R. 3962 (the America Hospital Association, the American Medical Association, the Pharmaceutical Manufacturers Association, the American Justice Association, etc.). The bill doesn't address these cost drivers.

The major problem with comprehensive health reform is taking on all the interest groups at once as was attempted in 1993 during the Clinton administration. A divide-and-conquer strategy would make a lot more sense. There seems to be wide-spread support for taking on the Health Insurance Industry. Let's make sure that health insurance reform gets passed. Then, lets take on the remaining interest groups one at a time. It will be slower but it's probably the only realistic approach to comprehensive health care reform.

A Global Warming Denial Based on Vapor

One commonly heard argument in the Global Warming Debate is that since water vapor makes up the largest greenhouse gas (GHG), CO2 emissions can't be having that much effect on global temperature. Water vapor is the most important GHG, but focusing on this fact ignores the difference between forcings and feedback.

Fossil fuel emissions, a forcing, kicks off a positive feedback loop involving water vapor. Atmospheric CO2 increases temperature (since CO2 is a GHG) which increases the saturation capacity of the atmosphere which increases water vapor which in turn increases temperature. What is less clear is the effect of increases in water vapor on cloud formation. Clouds are water droplets and the formation of those droplets and the level they form in the atmosphere determine whether clouds have a positive or negative effect on temperature. The effect is called the Iris hypothesis and it is currently being tested by climate scientists, with mixed results. The formation and effect of clouds is poorly understood and presents a challenge for current Global Circulation Models (GCMs) used to make climate change predictions. This doesn't mean the GCMs are wrong (a subject for a later post) just incomplete.

How the Health Care Free Market Works

Although I'm guessing here (its not evident from their Common Sense Health Care Reforms), Republicans probably favor a free market for health insurance. What would that be like and how would it work? Here's an example from the Midwest. A woman from Bethel, MN was shocked to learn while her husband was lying in the intensive care unit of an Arizona hospital, that she had no health coverage even though she had a health insurance card. She had been duped.

Dubious health insurance plans are spreading across the US according to the Coalition Against Insurance Fraud. The Minnesota Attorney General has reportedly sued two out-of-state insurance companies and ten more investigations are under way. This is the current free market for health care and this is how an expanded free market would work under Republican plans.

Actually, we've been here before. Prior to the Flexner Report that reformed health care in 1910, we had a free market for health care. Anyone could hang a shingle out, practice medicine and dispense snake oil. The US has already seen the unregulated free market for health care. Let's not go back there.