Tuesday, July 10, 2012

Health care: We don't want more stuff, we want more years.

Stanford's Chad Jones and Robert Hall tell us health care spending really is different ...

Why Americans want to spend more on health care (Louis Johnston, MinnPost, 7/6/12)

... Income elasticity measures how much more of a good or service a person will buy if their income goes up by 1 percent. For most goods and services this number is less than 1; that is, if income rises then people will buy more of most goods but they will increase their purchases by less than 1 percent. 

Years of life are different. If you have a medical procedure that extends your life, then the first, second, third and however many extra years you receive are all equally valuable. So if your income rises by 1 percent, you will increase your spending on medical care by at least 1 percent, and possibly more.

Jones, along with Robert E. Hall (also of Stanford) embedded this idea in an economic model and found that it does a good job predicting the path of health care expenditures from 1950 to 2000. Further, they show that if this is true, then the share of GDP we devote to health care could easily rise to 30 percent or more over the next 50 years as people choose to spend more on health care to obtain more years of life.

Thinking about the rise in medical spending this way puts health care policy in a different light. People want to live longer, better lives, and they are willing to pay for it. They don’t want more stuff, they want more life...

Life extending [1] health care is an inexhaustible good. That's what simplistic happiness studies, like a pseudo-science [2] article claiming that $75,000 is "enough", usually miss. They implicitly assume, or indirectly measure, good health [3].

Years ago, when health care spending was a mere 12% of GDP (we're about 15% now), my partner, Dr. John H, saw no reason why it wouldn't, and shouldn't rise to a then unthinkable 15% or more. His point was that people like being healthy, and to the extent that health care works, they will want more of it.

Health care that is perceived to be effective is the ultimate growth industry.

That's why this is where we'll end up. We could do much worse.

[1] A shorthand for extending life that we care about, particularly life-years of loved ones. More years of dementia don't count, though significant disability has less impact that many imagine. I assume there's some amount of quality lifespan that would, depending on one's memory, have an income elasticity of less than one. Science fiction writers often put that at somewhere between 300 and 30,000 years.
[2] I read the published study; "Participants answered our questions as part of a larger online survey, in return for points that could be redeemed for prizes." Can you image a less representative population? Needless to say they didn't define what household income meant, yet they turned this into a NYT article.
[3] The Jimmy Johns' insultingly stupid parable of the mexican banker is a particularly egregious example. 


oiojes said...

This is fundamentally why we keep going round and round on health care: we're looking at buying life and the market for life is inelastic. We want as much as we can possibly afford. Most mechanisms of "cost control" revolve around bringing down accessibility since demand can't be reduced.

The follow on issue is that since the demand for life is inelastic the demand for health care products (including physicians) is also affected. I don't say it's inelastic but it's close. Consequently, physicians, pharma, medical equipment manufacturers, etc., are built to expect increase in their remuneration over time.

I think the best solution is accept a two tiered system. It's a full expression of something that we already have. We guarantee fundamental health for all which protects everybody from communicable diseases, basic injuries, etc. Those that can afford it can purchase better care- in effect longer life. It's in the best interest of the rich to do this since bacteria and viruses do not recognize income boundaries. It's in the best interest of the poor to do this because it is better than what they have.

Why don't we have it? Because we're idiots.

JGF said...

Most countries are moving to an effectively two tiered system, Quebec from one direction, the US from another.

Done well the 'lower' tier can be better than expected. For one thing, many of the most popular, new and costly interventions turn out to be either ineffective or harmful. (Ex: Bone marrow transplant for breast cancer)

Another thing is that technology costs can fall quickly. If high initial costa are paid for the wealthy, then there's a fast return. Then costs can drop and the 99% get the tech. A few years late, but proven.

I suspect, done well, the lower tier could have better or equal outcomes to the upper tier -- but far less luxury, and much less fashion.