Here's to Your Health

EconTalk Extra
by Amy Willis
Christy Ford Chapin on the Evo... Don Boudreaux, Michael Munger,...

helth insurance.jpg In this week's EconTalk episode, host Russ Roberts welcomes historian Christy Ford Chapin to discuss her new book, Ensuring America's Health. Lots of difficult questions were raised, most left unresolved. For example, how has the American health care system become so expensive and so fragmented and hyper-specialized? To what extent health care be subject to market forces? What should the role of the state be in ensuring adequate health care for its citizens?

I know I felt like I was left with more questions than answers at the end of this episode, and we wonder if you felt the same. Either way, we'd love to hear your reactions to these thorny questions! As always, we love to hear from you.

1. Among the problems with the US health care system as it is today, Chapin says a big one is that "nobody really owns the patient." What does she mean by that, and why does she consider this such a significant issue?

2. Chapin lays most of the fault for the inequities and inefficiencies in American health care today at the feet of the American Medical Association. What were the early goals of the AMA, according to Chapin, and why has their level of influence over health care declined relative to that of health insurance companies? How does this tangled history of interests explain the continuous rise in the cost of health care?

3. How is employer-based health insurance a subsidy to the middle and upper classes," according to Chapin? What effect does this have on the cost and consumption of health care?

4. Chapin, while calling for significant roll-backs in state regulation of health care, also advocates a health care safety net. What do you think such a safety net would look like, and to what extent would you support a similar idea?

5. Toward the end of the conversation, Roberts acknowledges that prices can't work in all health care contexts, though some sort of rationing or allocation scheme must still be necessary. Are we really left with a dichotomous choice- markets or the state? How can we know the best means by which to allocate health care?

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COMMENTS (8 to date)
Doug Iliff writes:

Don't feel bad about having more questions than answers, Amy. The economics of health care is more complex than any other system Russ will examine. Since I have been a full-service family physician for 43 years, still in active practice, and I have worked in a fully socialized system (US Army, 5 years), as a hospital employee (ER, 6 years), and in private practice for 31 years in fee-for-service, fully capitated HMO, managed care, and back to fee-for-service; and, furthermore, have done direct primary care for Medicare patients for 21 years, I have literally seen everything.

So here I go, hoping to provide more answers than questions, with a series of assertions.

1. "Other People's Money" is the fundamental, pervasive, perversion of medicine as an economic system. Until some degree of price sensitivity is restored, reform is hopeless.

2. As Russ noted (sort of), the argument against pricing is always this: "How can a non-physician make rational economic decisions in the face of emergency life-and-death situations?" And, of course, they can't. But 99% of medical decisions are not of this nature. They are eminently susceptible to rational, informed, economic decision-making, but only if the patient has an economic incentive to do so.

3. For a couple of years most of my practice was a fully-capitated HMO. All of the pricing decisions were mine. I had to approve every referral, and every expense ran through my account. My risks were up to a 25% penalty (loss of withhold), or 25% of the insurance company's profit on my account. I made, for a family physician, a fortune-- in one year the equivalent of $500,000 in today's money. This was because I provide excellent primary care, and because my patients trusted me, I could dissuade them from low-benefit tests and procedures.

4. This experiment with HMOs was the only system in my career which stopped the rise of medical expenditures. It ended when lawyers began to persuade juries that physicians were denying care to feather their nests.

5. 85% of my business is with Blue Cross. They try very hard to stand athwart history, crying STOP to efforts by various specialists to screw the public. My favorite: the only local ENT group, which charges $35,000 for a ten-minute office procedure, balloon septoplasty (a balloon on a catheter is inflated to open a sinus orifice). Blue Cross knocks it down to $6,000-- still obscene, but, I guess, affordable.

6. Improvements in medical care, large and small, are opportunities for specialists to gouge the system. There are thousands of examples, but think of the ophthalmic millionaires produced by cataract surgery-- a 10 minute procedure which originally paid $2000 through Medicare. Regulators are slow to rectify payments for revolutionary treatments.

7. Medicare pricing decisions determine the costs of everything, because insurers take decisions by the federal Medicare RUC commission as the basis for their pricing. The RUC is dominated by specialists.

8. Specialists top the income charts, while generalists fall at the bottom. When I graduated from medical school, the standard joke was, "what do you call the last person in the class?" (Answer: an orthopedic surgeon). Orthopedic surgery is now the highest paid specialty.

9. Thanks to a wonderful app, GoodRx, it is now possible to determine the real price of every medicine. Most non-generic drugs (and some generics, like the Epi-Pen) are obscenely expensive. To restrain costs, insurers use pre-authorizations (externalizing the cost to me) or tiered co-pays to discourage use. Drug makers end-around these restrictions with benefit cards. The dance never ends. It is insane, from a market standpoint.

10. Russ said he had a good friend, and emergency physician, who is dismayed by his younger colleagues who want to order an MRI for everything. He is absolutely right. There is no judgment exercised by younger physicians. And why should they take a tiny risk of a missed diagnosis when avoiding that risk costs them nothing?

11. Dinner is coming, so I'm going to cut to the chase. Say hello to Russ for me. I met him last summer at Stanford with my daughter, Rebekah, who was representing AirPR. Here's the closest I can come to a market solution:

12. High-deductible health plans combined with health savings accounts put most of the incentives in the right place. Over time, the patient builds up an asset which he/she is incentivized to preserve. The high deductible frees the insurer from the uneconomic necessity to manage penny-ante expenses, and frees the insured from the fear of losing the house.

13. The only problem is how to provide this system to every American.

14. I leave that decision to others, because I'm hungry,

Paul Renault writes:

It's astounding, really.

EVERY other industrialized country in the OECD has figured out how to rein in the costs of medical care while - at the same time - substantially improving the health of their citizens, of ALL of their citizens.

Meanwhile, in the USA, medical care costs roughly twice as much it does in these other countries and produces unarguably worse outcomes, outcomes which match seriously under-developed countries' outcomes.

And yet, nominally smart American still argue what the high costs plus poor outcomes are due to the prices for the various procedures end in $0.95 vs. $0.97, or whether it's because they're they're paid by cheque vs. by credit card, or whether it's because "the incentives aren't working".

Nope, these 'smart', educated Americans refuse to look at what the other countries are doing, refuse to allow that maybe, just maybe, other peoples have figured out that it's cheaper, more effective, and much more civilized to have universal, government-paid, medical care.

I'm coming to the conclusion that it's a subtle, pervasive, and deep-rooted form of racism - that because Americans don't do it and other countries do do it, they'll refuse to even consider it or will invent all sort of ideological contortions to admit that other countries go it right, or at least much, much closer to being right, and that maybe, just maybe, Americans got it wrong. I can think of no other explanation that fits the facts.

One of my friends was visiting his mother in the UK. He related how his mother was visibly and audibly annoyed while watching the BBC news; the anchor at the news desk was black. Her son, knowing that trying to talk her out of her genteel upper-crust racism was a lost cause, just said: "Oh mother, you don't have to believe anything he's saying, of course. -Yes, I know," came the reply, "but it still bothers me."

Well, jeepers, universal government-paid medicare saves lives, cuts costs, makes everyone healthier, and makes your country a more civilized place to live.

Doug Iliff writes:


You join the 99% of Americans who find this conundrum astounding. Some perspective:

1. Americans don't like to be told "no," or even "wait." The citizens of the OECD are more culturally tolerant of queues.

2. Britain uses an eminently rational, centrally-planned tribunal know as the NICE commission to ration care. When we considered such a solution, the Republicans deemed this the "Death Panel." Remember that? Game over.

3. We do, indeed, have many "death panels" in America who use "Quality Adjusted Life Years" based on published data to decide which treatments to approve. The system doesn't always work, which is why we get $80,000 cancer treatments which prolong life an average of a month. Somewhere behind the scenes was the wife of a senator.

4. However, if Americans had a Death Panel which overtly applied to them, there would be blood in the streets.

5. Remember that Americans pay full Gentile (sorry, Russ) for our drugs, while the rest of the world gives them a haircut. Only the God of the Testaments knows why this occurs. It must have to do with American exceptionalism.

6. Wealthy outlanders routinely fly to America to get the care they can't get at home. Where would wealthy Americans fly?

7. Answer: to the Carribbean clinics, which would blossom should we ever get Death Panels. The free market always sneaks in somewhere.

Reed Freidman writes:

Excellent podcast. I was aware of the market distortions resulting from employer sponsored, Medicare, etc. but had no idea how complicit the AMA was in the entire saga. The one thing that stuck me is that the only group that has largely been denied a fundamental say in how healthcare is structured in the U.S. has been the consumer, which makes it unique among other goods and services. Russ - please keep repeating that the reason we don't have price transparency, etc is that we don't have a functioning market. That point can't be made enough and is almost entirely misunderstood.

Amy Willis writes:

@Doug, THANK you for your thoughtful responses...And please give my best to Rebekah as well!

Paul Renault writes:


I don't think I'll ever understand the rampant, jingoist "Amurica,
yeah!!!"-style of [non-]thinking. Don't y'all get tired of it?

Government-imposed queue (not really) - bad.
Insurer-imposed queue (or denial of care) - good.

Having a loaded gun under your pillow and metal bars on the windows is
considered smart and necessary.
Having government policies on crime/prison/welfare which result in a
society where don't need to have a gun or bars on the windows is
considered stupid and limiting of freedom.

Your country needs some serious talking-to.

David Mitchell writes:

As a physician frustrated with the status quo and interested in improved health care delivery, this was an interesting podcast, Russ. Particularly refreshing was the honest assessment of the incentivized physician. Whenever there are calls for the government to "not get between the doctor and the patient" by conservatives, I just shake my head. Does everyone think doctors are altruistic, always doing the right thing for the right reason? Certainly doctors don't purposely harm their patients, but they don't hesitate to perform tests and procedures that are unnecessary. Yes, someone needs to get between the doctors and the patients. Unfortunately doctors have failed to regulate their own behavior and that is one source of rising costs. If you sell hot dogs you want to sell hot dogs. It is pretty simple. If you go to the barber, you're going to get a haircut. And despite years of training there is still a widespread problem of doctors who do not follow generally accepted guidelines of care. There is certainly art to medical care, but many, many conditions have evidence-based evaluations and treatments which are strongly proven. The practice of medicine outside of academic centers, in particular, is often reckless and illogical. Doctors need stronger oversight to control costs although they will kick and scream all the way. A true market is not possible. Patients don't know what they should or shouldn't buy.

The point I strongly disagree with is the suggestion that there is no significant asymmetry of knowledge between doctor and patient. There is a huge asymmetry. The decision to check this or that lab test or this or that x-ray or provide this or that treatment is often beyond the majority of patients. It is very much like bringing a car to a repair shop when you have the dreaded meeting with the mechanic: Well, you're going to need a new alternator, calipers, belts, pistons, etc. How do I know if he's telling me the truth? I really don't see how meeting with a doctor is any different. Ratings for doctors are very questionable. I know some doctors that are loved profusely by their patients--5 stars-- but they seem to have no idea what they are doing. They hand out antibiotics like candy to please their patients. They order tests and referrals perhaps to prove their interest and concern.

I interviewed with a home visiting doctor company and was told that their physicians were strongly encouraged to order billable tests (echocardiograms, etc.) as often as they were billable. That is just one small example.

Unfortunately, centralized quality measures, JCAHO, etc. are also a disaster. Hospitals just jump through hoops to get good scores and ignore everything else. For example, patients were required to get smoking cessation counseling as a core measure. One hospital I worked at just put a note at the bottom of their discharge form: If you smoke, quit. And that was considered adequate for smoking cessation counseling. The entire health system of this 450 bed hospital had no established program to help patients quit smoking. I asked the pulmonary group what they did for smoking cessation therapy, and they said, "It doesn't reimburse that well, so we don't."

There you have it. The incentivized physician, ignoring what is best for patient health, and doing the minimum to get good scores on the internet.

The answer. I think I'll retire.

Howard Martin writes:

In addition to the comments of Dr. Iliff:

How about the absurdly high cost of Medical education in the USA? How are the doctors supposed to recoup that cost and long years of lost life (4 for college, 4 for medical school, 5 for residency, 1 for fellowship) while we import doctors who've had a much more inexpensive education?

Liability? Doctors color every decision we make by imagining how we would be questioned on the witness stand. It is, by now, very deeply ingrained in our thinking. I'll bet the trial attorney's lobby has quite the war-chest.

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