Pay for Perfomance

I’ve had a businessweek article marked to read in my browser for days now, and finally tonight I got around to reading it. It discusses how President Obama spoke to the AMA (American Medical Association) and discussed some of the changes he believes should be made in the current health care system. Many of the changes would result in lower incomes for doctors—so the president was not exactly “preaching to the choir”. Doctors likely see the effects of high medical costs every day, but surely don’t want the cost reductions coming out of their paychecks.

A lot of health insurance policies in the United States are structured in a fee-for-service fashion. This means that as a doctor performs more services he/she receives more money. It’s not hard to see the effect this would have on the number of services provided by doctors. Obama noted that this fee-for-service changed the way medicine has been practiced—and it needs to change.

"It is a model that has taken the pursuit of medicine from a profession—a calling—to a business," said Obama. (taken from businessweek article)

This incentive structure provides another reason health care costs are higher in the United States than in other countries. How much higher--now that is a good question. According to the BusinessWeek article"it is doctor payments that consume one-third of the nation's $2.4 trillion in health-care spending." I think we would need to verify this with more data, but if it's even remotely true, this topic ought to be at the top of the list of necessary health care reforms.

There is no question regarding the power of incentives. Perhaps the solution here is to align incentives with both our financial and health goals, rather than having them compete. For example, what if doctors were paid bonuses when a patient quit smoking—I’m not aware of any policy like this currently in the U.S. Currently doctors get paid to advise people to stop smoking, and they treat the illnesses that occur because of smoking—cancer, emphysema—both very costly (physically, emotionally, and financially) illnesses. If we could persuade doctors to get patients to quit smoking with additional income, rather than just the happiness a doctor gets from getting a patient to quit, I think we would see a decrease in smokers, and eventually a decrease in diseases caused by smoking

Pay for performance. It’s not a new concept—but it is an effective one.

A good talk on Health Economics in the United States

Here is a link to the former CBO Director, Peter Orszag's blog. This post links to an interesting talk on the problems with Health Care costs in the U.S. as well as the slides from the talk. Currently Orszag is the Director for the Office of Management and Budget. He is the youngest member of the Obama cabinet.

This lecture describes some of the health care challenges the U.S. will face in terms of costs. Orszag discusses how medicare and medicaid costs are projected to grow rapidly in the future, and how costs vary geographically.. Run time is a little over 30 minutes.

The Economics of Health Care is one of the areas of Economics that I find most interesting not only because some type of reform is exigent, but also because everyone interfaces with the health care system at some point in their life.

Some may not agree that reform is necessary, and that the system works fine just the way it is. However, I would suggest they do a bit of research before drawing such a conclusion. According to the Economic Report for the President (2009 http://www.gpoaccess.gov/eop/2009/2009_erp.pdf see CH 7), Americans spend about $8000 per person on health care per year. This is expected to grow rapidly as technology advances.

The chart below illustrates approximations of spending as a percent of gross domestic product (GDP) in the U.S., Canada, Japan, and France. Canada, France, and Japan all have universal health insurance—which one would think would be more expensive. As you can see, the U.S. spends the most as a percent of GDP, in 2000 it was around 13%-- now it is closer to 15% I believe.

Some would stop here and say—“okay—yes we spend more than other countries on health care, but we have the best health care in the world, so the extra expense is worth it.” Sadly, as with everything else in life, more is not always better. Our life expectancy is lower than the other countries in the above chart and out infant mortality rate is higher—two leading indicators of aggregate health status. So now it looks like we’re spending more, but not getting more—which, anyone can tell you—that’s not a good thing.

(This thought also assumes that you have health insurance as a means to battle health costs, which is not true for about 16% of Americans. More on this at a later date…) Economists call this phenomena diminishing returns—meaning that with each additional dollar invested in health care, at some point less health is received. It’s really best to illustrate this one with a handy graph. Part of the health care debate is really between the two (poorly drawn) icons below.

The question is: Are we on the star or the circle?

If we’re on the star, this means that as we spend more on health care we get a positive increase in our health status—a good thing! If we’re on the circle it means that as we spend more money on health care we don’t get an additional health from that spending (like trying to ride your bike to the grocery store, except your bike happens to be a stationary bike). Worse, if we’re at a point beyond the circle it means that as we spend more money on health care our health status actually gets worse—yikes.

Obviously we know there are big gains to some basic health care spending—immunizations, annual exams like paps, breast exams, prostate, etc. However, are there the same gains when a patient undergoes every MRI, X-Ray, and other expensive test necessary in the name of “just in case”? This is where people get divided because the answer to that question usually depends on whether or not anything useful results from the battery of tests. It probably isn’t worth it to give someone an MRI for a stress headache, but it is certainly worthwhile to give someone an MRI for a headache that is caused by a brain tumor.

This brings us to our first point of discussion in this series of things that contribute to the high cost of health care in the United States: Defensive Medicine.

Doctors are supposed to only run tests that they believe are likely to produce useful results. However, doctors often practice what is known as defensive medicine to protect themselves from expensive lawsuits. The JAMA noted that 90% of doctors say they have practiced defensive medicine—and who would blame them given the costs of a malpractice case—both financial costs, but also costs to his/her reputation.

Clearly defensive medicine raises medical costs as patients are subjected to more tests than are necessary. This is costly not only due to the money it costs patients, but takes time away from work/family, adds stress to the life of the patient undergoing the test, and adds to the crowding of hospitals with test equipment.

Sometimes the tests themselves can be lead to health problems for patients. More on all of this at KevinMD—a physician’s blog: http://www.kevinmd.com/blog/2007/04/defensive-medicine.html

What are some solutions to this? How do other countries get around the costs of defensive medicine? This is perhaps a topic for a future post, but what are your thoughts?

Thoughts on Globalization

I’m currently reading The Travels of a T-Shirt in the Global Economy by Dr. Pietra Rivoli. I’m about half-way through and the author just discussed her trip to Shanghai and her visits to various mills where cotton thread and fabric are produced. Growing up I remember the scandal with the sub-par conditions in mills that got tied to Nike and the public outrage that ensued. Everyone is familiar with the stories of mills outside U.S. borders where OSHA and minimum wage laws aren’t present. Men, women, and children work 12-14 hour days for cents on the hour in unsanitary conditions. By our standards it’s disgraceful.

The book quotes a young woman working in one of the mills and, surprisingly she says “it’s not that bad” and “it beats the hell out of life on the farm”.

In a lot of my classes, and surely at dinner tables around the world, the topic of third world factory life comes up. The conversation usually includes descriptions (not first-hand, of course) of how hard third world factory life is. We hear about 12 year old boys working 12 hour days with only 1 meal break, and being paid only 10 cents at the end of the day. The obvious conclusion is always “we need to shut down those factories—they’re not humane!”

I wouldn’t argue that we should allow children to work such hours without breaks, but I also would not argue that we take their job away from them. It’s all a matter of perspective. It would be unheard of for a 12 year old boy to work that type of job in America. A 12 year old boy here should be in school during the day and going to baseball practice after school—not working to support his family at the factory. However, in many other countries, there isn’t mandatory schooling (or even the option of public schooling), so when the opportunity to work to support your family arises, the best choice may be to take it—besides, what’s the alternative? Being able to work gives people a bit of autonomy and the ability to not only help their families—but they can help themselves. In the book, one girl leaves her family farm to work in a cotton factory so that she can gain some freedom. Despite the sub-par conditions of the mill, she is able to earn a steady income every month and purchase things that she wants like a variety of food, clothes, movie tickets, etc. She was even able to pay back her family for the money they gave to her (arranged marriage) husband so that he would agree to wed her. Now she gets to date who she wants, and she can even afford to spend a night on the town with the girls—which she could not do when she worked on the farm. Even though the factory life, by Western standards, is unacceptable it was able to give this woman, and many others, autonomy she had never dreamed of. Had someone gone in to shutdown her factory in the name of humanity, she would have lost her job and likely would have had to go back to the farm where there was no autonomy, and less (if any) pay. What I’m saying is—although the factory isn’t great, the alternatives are worse.

Next time this factory life conversation comes up I think it would be smart to remember that we need to examine the situation from the perspective of the person who is in the factory—not from our own. We ought to take into account cultural norms, as well as what alternatives for income exist for people in factories. Obviously some situations are not acceptable—there are child labor laws, etc. But I think we need to not be so quick to criticize the hardships that people are willing to endure to gain a little freedom.

What do you think?