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CASE STUDY Dear participant: It's important to us that you come away from this seminar with knowledge that you can apply in your world as a professional journalist. Sometimes the principles of economics don't easily lend themselves to that, but it's our job to show you that they can - and should - be used in your reporting more often than you think. We've found that journalists learn best when they can think like journalists. To that end, we've developed a hypothetical situation that requires you to apply what you've learned. In order to be successful with this exercise, it's important that you think for the next two days the way a reporter would think about an assignment - that is, what do I need to understand, need to know, need to ask to write a smart story. So feel free to work backward from this exercise, questioning the presenters with an eye toward the three tasks below. Your editor looks panicked. She’s been told that the newspaper is sponsoring a town hall meeting on the topic of rising health care costs. The speaker is David Cutler, a Harvard economist who wrote a book about health changes and the role of the medical system. The timing for the event is good and the idea is smart – many companies, including your newspaper, are requiring that employees pay a higher share of their health insurance and the employees are not happy. About 3,000 of them from all around your circulation area will fill the Convention Center. The event will be covered by your newspaper, along with area TV and radio stations. But here’s the problem: The event is in two weeks and the reporters at your newspaper who write about health care and economics are on vacation. Your editor wants you to be the moderator and the assignment editor. You suddenly look panicked - Ted Koppel, you're not. Your editor gives you three tasks:
“Why Has Health Improved?” http://icg.harvard.edu/~ec2450a/Fall-2001/lectures-cutler/chapter_1_8-25-012.pdf Medicine is big business. The United States spends more on medical care than on automobiles, TVs, and computers combined. We spend more on health than the Chinese spend on everything in total, including all the tea in China. Like any big business, it is fair to ask what we get for our money. Is medical care worth it, or are we being ripped off? Can we do better, and if so how? These questions are particularly acute because medical care costs have increased so rapidly over time. In 1950, the average person spent only $500 on medical care (in today's dollars). Today, spending is about $4,500 per person. If medical care is not worth the spending, we are wasting massive amounts of money. There are informal answers to these questions in the public debate, but public perceptions are not at all stable. In the early 1990s, medical care costs were increasing rapidly, and the vast majority of people believed that these cost increases were too rapid. Policy analysts uniformly supported this assessment. When President Clinton proposed health care cost controls in 1993, people cheered.(1) By 2000, however, the situation was entirely different. Managed care had lowered costs substantially but along the way had angered vast parts of the population. An overwhelming majority of people, supported by newly-reformed analysts, believed that cost constraints were too tight. When President Bush argued for limiting managed care, people cheered just as loudly.(2) So, which view is right? Do medical costs need to be constrained, or are the constraints already too tight? Should we spend more or less on medical care? Valuing the medical system requires first specifying what it is supposed to produce. There are many goals of a medical care system. It should treat people fairly and with dignity. It should comfort the dying and their loved ones. It should reflect our values as a society. But all of these goals pale behind the goal of making people healthier. Most fundamentally, what we want from medical care is to live longer, healthier lives. I shall judge the medical system on that basis. The medical system does well if it improves health at a reasonable cost and poorly if it does not. Medical therapies of one form or another have existed as long as people have been sick, although not in the same way as today. The modern medical care system really dates from around half a century ago. In 1950, spending on medical care was but a fraction of spending today and was not growing rapidly. Penicillin and sulfa drugs had been discovered, but few other modern therapies were available. Since then, medicine has undergone a revolution in technical sophistication and cost. If we want to know how much modern medicine is worth, the right period to analyze is this modern era of high-tech medicine. I thus evaluate the medical care system since about 1950. Life expectancy has certainly increased a lot in that time. The average person born in 1950 could expect to live 68 years; today, it is about 77, a 9 year increase. Infant mortality fell by three-quarters, and cardiovascular disease mortality fell by two-thirds. In addition, quality of life has improved. Disability is increasingly concentrated in the older population, and within the older population at advanced ages. Along any dimension, these changes have been massive. But how much of this change is due to medical treatments and how much is due to the many social, environmental, and behavioral factors that also affect health? To evaluate medical care, we need to sort out these factors, or at least to isolate the medical contribution. Probing more deeply helps answer the question. Two trends explain the bulk of longer life since 1950: reduced infant mortality, and fewer older people dying of cardiovascular disease. Infant mortality reductions contribute nearly 2 years to the 9 year overall increase in life expectancy. Lower cardiovascular disease mortality is even more important, accounting for nearly 5 of the 9 years.(3) To understand better health, therefore, these are the conditions one should start to analyze. Consider the babies first. Many factors affect infant survival: maternal behaviors such as smoking and calcium intake; the baby's development and position in the womb; genetic predisposition to disease; intensive technology available for low birth weight infants; and so on. There is no definitive way to separate out all the medical and non-medical factors. But we can learn about a part of the medical contribution by isolating one particular set of children: those born at low birth weight. Behavioral and social factors have a strong influence on whether a child is born low birth weight or not, but almost no influence on whether the low birth weight baby survives. Survival in these infants is almost exclusively a result of medical treatments; when more treat is available, the probably of survival is greater. We can thus evaluate the role of medical care in better health by focusing on how it has affected these infants. Technological change for these infants has been impressive. Little therapy was available for a low birth weight baby in 1950. Today, there are respirators to help breathing, medications to promote more rapid development, and surgeries to deal with common complications. The armamentarium of the neonatologist is vast. Survival improvements testify to this advance. Where one in five low birth weight infants died in 1950, today the share is one in twenty. The average low birth weight infant will live an additional 13 years today over 1950. But if the gains are large, so are the costs. Neonatal intensive care can cost up to $5,000 per day, and many month stays are not uncommon. The average low birth weight baby spends in present value $70,000 more on medical care and social services such as special education today than in 1950. (4) Is 13 years of additional life worth this much money? Medical care always involves moral choices, and here is the greatest one: how much is health worth? Health is priceless - is a common refrain. Taken literally, this suggests that no amount of money is too much to pay for better health. But it is really meant figuratively, not literally. At some point, all of us would reach a limit. Understanding roughly where that limit lies is important because it is how we judge whether medicine is worth the money. Medical care researchers have thought long and hard about how to value health. There is no single answer accepted by all. But there is a rough consensus. Think about a new technology, perhaps an air bag in automobiles, that reduces the odds of death in an auto accident. People are willing to pay something for this technology -- not everything they have, but still something. By seeing how much people are willing to pay, we can get a sense about how much people value their life. For example, if the air bag reduces the probability of death by ten in ten thousand and costs $300, the implied value of a life saved is $3,000,000 ($300 divided by one in ten thousand).(5) In formal terms, this calculation is the value of a statistical life. Three million dollars is not the value people would pay to avert certain death tomorrow. If that were the choice, people would presumably pay everything they had -- either more or less than $3 million. Rather, it is the value of a smaller risk, expressed per person affected. In the case of low birth weight or other medical care, this is really what we want. We don’t know what diseases we will get, but we want to know what treating them is worth should we get them. One can conduct this experiment in many settings -- spending on safety devices such as air bags, insurance for personal risks such as life and health insurance, the choice between risky and safe jobs, and so on. We can also survey people about the values they attach to particular risks. The results are usually expressed as the value of a year of life rather than the value of a life itself, since a life is worth more if more years are added. In the air bag example, suppose the person buying the air bad is 40 years old. A 40 year-old has a remaining life expectancy of about 40 years. Thus, the implied value of a year of life is about $75,000 ($3 million divided by 40 years). Looking across a range of these different settings, a rough consensus is that the value of a year of life for a typical person is about $100,000. This value varies in different studies. It generally ranges in the area of $50,000 to $150,000. I use $100,000 as the best guess. Fortunately, none of the conclusions I reach would be qualitatively different using any other value in this range. One can think about improvements in quality of life as being worth some share of that value. Living with the effects of chronic heart disease, for example, might detract about $30,000 per year. Living with Alzheimer’s disease could cost even more. The value of better health is the primary benefit of medical progress. This value is psychic -- we get it, but not in dollars. But there are also financial effects of changes in health that need to be taken into account. A new drug that allows a formerly disabled person to work leads to more tax revenue and lower disability payments. At the other end, extending life in nonworking years is worth less to society, because non-working people use social resources but do not pay in. I account for these financial costs and benefits that health changes produce in the analysis. In all cases I consider, though, they are much smaller than the direct health benefits. Armed with this value, we can return to the low birth weight infants. As noted above, life expectancy for the average low birth weight infant has increased by 13 years since 1950. There is some change in quality of life, but it is relatively small; changes in length of life are much larger. Using the $100,000 value of a year of life gives a benefit of $1.3 million. To compare these benefits with the costs, though, it is necessary to express them in present value. Benefits received many years down the road are worth less than benefits today. The present value of these additional years is about $350,000 per low birth weight infant. Recall that spending increases were only $70,000 per low birth weight infant. Comparing the costs and benefits yields a clear conclusion: improved medical care for infants is well worth the money. For every dollar invested in low birth weight care, society got $5 in return. That return is astronomical. For a typical business, a dollar invested might yield $1.10 or $1.20. Medical care for low birth weight infants has a return 50 times greater. Medical care for low birth weight infants costs a lot, but it has brought even more. One can do a similar analysis for cardiovascular disease. Cardiovascular disease strikes particularly at older ages, so I consider the value of medical changes as of age 45. Cardiovascular disease mortality reductions have been extremely large. Between 1950 and 2000, life expectancy at age 45 has increased by 4½ years solely as a result of reduced cardiovascular disease mortality. The key question is how much of this results from medical care, and how much is due to other factors? In my analysis of cardiovascular disease, I spend some time on this question. My summary is that about two-thirds of reduced mortality is a result of improved medical care. This includes intensive treatment of severe events such as heart attacks as well as medical management of risk through anti-hypertensive and cholesterol-lowering medication. The remaining one-third of mortality reductions I estimate to result from behavioral changes such as reduced smoking and fat intake, and less frequent heavy drinking. If medical advance accounts for two-thirds of lower mortality, this has added about 3 years to life expectancy at age 45. We can value these years in the same way as above. Doing so yields a benefit of medical treatment changes of about $120,000 in present value (compared to about $300,000 without discounting). This amount needs to be compared to the cost of providing this care. Between 1950 and today, spending on cardiovascular disease for the typical 45 year-old has increased substantially. In prevent value, the average 45 year-old will spend about $30,000 more on treating cardiovascular disease than his predecessor did in 1950. This amount is high, but it is nowhere near the benefits. For every dollar spent on medical care, we have received $4 in return. This is comparable to the rate of return for low birth weight infants, and it too is enormous. Medical care is expensive, but it is well worth it. But even this return of 4 to 1 pales in comparison to the return to behavioral changes. The most striking thing about behavioral changes is how much they are a product of medical research. Smoking declined after medical research showed that smoking was bad for health, and people learned that information. Fat intake fell for the same reason. Across the board, biomedical research showing the beneficial and harmful effects of different behaviors has translated into immediate and widespread changes in lifestyles. We can use this fact to evaluate how much this basic knowledge is worth. Behavioral changes have added about 1 year to life expectancy at age 45. In present value, the benefits of this are about $30,000. There are costs to the medical research and information dissemination leading to these changes, but they are not large. I estimate them at about $1,000 in present value. Thus, the return to increased knowledge about risk factors for cardiovascular disease is about $30 for every $1 spent. Increased spending on basic disease research is justified many times over. Low birth weight infants and cardiovascular disease are both cases where mortality is a significant end point. Mortality for these conditions was falling dramatically, so it is obvious that health was improving. The question was just what role medical care played in this. Health is more than length of life, though. Quality is important as well. It is important to also analyze medicine’s role in situations where quality of life is the key outcomes. I thus consider the role of medical changes in mental health, in particular treatment of depression. Depression is a natural condition to examine because there is a strong perception that it has increased over time, as life has become more stressful and social ties have frayed. Thus, there is not a great sense that advance in medical treatments has been very productive. My analysis, however, shows that it has. The major technological change in treatment of depression is the development of Prozac and like drugs in the 1980s and 1990s. Prior to these medications, depressed people were treated with psychotherapy or older anti-depressants. These drugs worked, but had many side effects. In the past decade and a half, the use of Prozac-like drugs has significantly replaced the use of these other therapies. This treatment change has had two effects on the health of people with depression. First, it has led to more effective care for those being treated. Many people who started on psychotherapy or older antidepressants did not get fully effective care. The monetary or time costs of psychotherapy were just too high, and the older medications had too many side effects. Prozac-like drugs, in contrast, are easier to use and have fewer side effects. Further, the new anti-depressants are cheaper than psychotherapy and about as expensive as older medications, once physician and other visits are factored in. Thus, switching from older therapies to the new medications would up costing about the same, but got people more effective care. But there is a second change that is even more important. Prozac-like drugs have brought more people into the treatment system. The new medications were heavily promoted by pharmaceutical companies. Physicians were taught to be alert for depression, and depressed patients were urged to seek care. Depression was to a significant extent destigmatized. The messages worked. Historically, depression was horribly underdiagnosed and undertreated. In the past decade, though, diagnosis of depression has doubled and more diagnosed people receive therapy. For newly diagnosed patients, the benefits of treatment can be large. Depression is a substantial quality of life impairment, and also costs financially in time missed at work and lower productivity on the job. I estimate that treating depression has benefits of about $6,000 per patient, through these two channels. The costs, by contrast, are nowhere near as large. A course of Prozac-like therapy costs about $600. Thus, the benefits of extending care to new patients with depression are far greater than the cost. Not all people using Prozac are truly depressed, and the efficacy of the drug may vary for them. Some people are misdiagnosed with the disease, for example, and others take the medication for other reasons (Prozac helps with weight loss, for example). An analysis comparable to the low birth weight infants or cardiovascular disease would therefore compare the total spending increase from treating more patients with the population-wide change in mental health. Unfortunately, though, this is not possible. We do not have time-series data on mental health for the population as a whole. Nor do we have good information on how many of the new users of Prozac are really depressed and how many are not. As a result, it is impossible to determine for sure what the value of technological change in mental health care has been. But it is clear that diagnosing and treating more people who were historically not cared for is worth a great deal. Unless there is an enormous amount of waste, the expanded treatment for depression is bound to have been worth it. Infant mortality, cardiovascular disease, and depression are similar cases. In all of them, medical spending has increased over time. But in all three, health outcomes have improved. Valuing the health outcomes yields a clear conclusion - the increased spending is clearly worth it. In the case of infant mortality and cardiovascular disease, the returns are $4 or $5 for every $1 spent. One cannot do the same calculation for depression, but that order of magnitude seems reasonable. One would like to know if these examples generalize. Does medical care as a whole have the same 4 or 5 to 1 return? Alas, generalizing from these examples is very difficult. The chief difficulty is that these conditions are not average. Infant mortality and cardiovascular disease are areas where mortality reductions are known to have been particularly rapid. Depression is a case where medical advance has been particularly great. We don't really know how representative these conditions are of medicine as a whole. I thus cannot estimate a rate of return to the medical system in its entirety. But that does not mean we have to give up on this question. It is possible to make very important statements about the medical system in aggregate. Consider the longevity gains from medical treatment of low birth weight infants and cardiovascular disease alone. If the benefits of health improvement for only these conditions are at least as great as the entire increase in medical care spending, the medical sector as a whole is bound to be worth it. The only way it could not be worth it is if all the rest of medical care had no effect on health, which is clearly not the case (as the depression case shows). In fact, this is exactly the case. As a result of medical care improvements for low birth weight infants and people with cardiovascular disease, the typical person born today will live 3½ years longer than the typical person born in 1950. Valued using the approach above, this increase in longevity is worth about $50,000 in present value. The increase in lifetime medical spending for the same person, including infant care, cardiovascular disease, and everything in between, is also about $50,000 in present value. Thus, the benefits from better medical care for just these two conditions are equal to the entire increase in medical costs. Considering the certain benefits to treating other conditions, medical care as a whole has clearly been worth the cost. Behind every great invention is the money to pay for it. We get a lot of benefit from medical care, but it still costs a great deal. Without a medical system willing to pay the bills, we would not have such rapid technological change. The traditional medical system paid extremely generously for such care. On the patient side, sick individuals who had insurance paid very little for medical care. Thus, they wanted all care that would improve health. On the provider side, medical care suppliers were reimbursed based on what they did. When more was done, more was earned. And the reimbursement for high-tech care was particularly generous. Doctors who provided this care made a good living. As a result, providers were happy to provide all the sophisticated care that would benefit the patient. Patients benefited enormously. But the flip side of valuable use is overuse. High-tech care was provided in situations where it did a lot of good, but also in situations where it did much less. From the patient's financial perspective, it was all the same; little was paid either way. Similar, the doctor earned money regardless of whether the care was really needed. But overuse of care is risky, and wastes social resources. There is significant evidence of such overuse. Empirically, a lot of care is provided in settings where the clinical literature says it is not appropriate. Indeed, there are examples where less is done and outcomes are no worse. The United States spends $1,500 more per person on medical care than does Canada, for example, but health outcomes are very similar in the two countries, even for people with very acute conditions. In Canada, less is spent because there are fewer overall resources. The generosity of the US system leads to more care and no obvious health benefits. Overuse is the most noticed failure of the medical system. But there are others as well. The medical system has a very high error rate. Take an example. Beta blockers are drugs that reduce the workload of the heart. Given to a person after a heart attack, they cut the risk of a recurrent episode in half. Because they are off patent, beta-blockers cost about 20 cents per day. And yet, half of the people in the Medicare program who have had a heart attack do not receive beta-blockers.(6) Medicare is as generous as health insurance gets, but it still fails people. This is not an isolated example. Patients are given the wrong medications, or the wrong doses of medications. People go to low quality surgeons when there are better ones they might use. The safety record in medicine is astonishingly bad. A recent study estimated that errors in hospitals kill as many as 50,000 to 100,000 patients annually. These errors persist because the financing system lets them. Doctors are paid for doing things, but not really for the quality of what is done. Outright malpractice, of course, is not condoned. But sloppy or incomplete practice is ok. Doctors are paid the same whether they correctly treat the patient, or whether they omit to prescribe the right medication. Omissions are thus routine. And no one is paid for checking on this, so many errors are not caught. Perhaps the biggest failure is the treatment of chronic disease. The vast majority of people with manageable, easily controlled chronic disease are not well-managed and are not controlled. Only a quarter of people with hypertension are brought under control. Diabetes has the same failure rate. The reasons for failure are vast. People do not go to the doctor enough, do not get regular tests, and do not take medications when needed. The medical system does next to nothing about this. Nurses could call patients, but they do not. Doctors could monitor chronic disease patients more carefully, but they do not. Home monitoring could be electronically tracked, but it is not. Even e-mail is foreign to the medical world. Once again, reimbursement is at the center of the story. None of these services is paid for in standard practice. Seeing patients when they come to the system is reimbursed. Reaching out to patients, or making the system more convenient to them, is not. Thus, care for chronic disease patients remains poor. There is a common theme to the successes and failures of the medical system. At heart, the medical payment system is treatment-oriented. It pays for, and worries about, what treatments people receive. But health is more than just medical treatment. It is quality monitoring, convenience, and outreach too. In those cases where the difference between treatments and health improvement is greatest, the system fails the most. It is ironic that the medical care system as an institution cares very little about whether people remain healthy or not. The system has been a great success not because it is focused on health, but because health improvements were a byproduct of what it was focused on. As patients, though, this is not what we want. We care as people about health improvement, not just what we receive. Thus, there is a mismatch between what we want and what we pay for. This analysis suggests an obvious remedy: if we want the focus of medicine to be more on health improvement and less on the provision of services, we should pay directly for health improvement and not just what services are provided. Think about it at the insurer level. Imagine that health insurers were paid not just on what their medical spending was, which is how they are paid now, but on how much they improved health. If health of the enrollees improved significantly, more would be paid. If health worsened, insurers would earn less. The incentives in this system would be very different. Insurers would start to look at where they were falling short. Are diabetic complications high? Call the patients and see what help they need. Has a woman at risk for breast cancer been too busy to schedule a mammogram? Make an appointment for her after hours. Did a hypertensive patient forget to order a medication refill? Have it delivered to him. Insurers could take an active role in making sure people are healthy. Insurers would transmit these incentives to doctors. Longer life for cancer patients means more money, so insurers would pay doctors more for cancer survival. Good doctors would do better; bad doctors worse. Primary care physicians would have much more incentive to research who the best specialists were. There would be money at stake for doing so. A health-based system of payments is not hard to design. Mortality is a ready outcome for some diseases, such as cardiovascular disease and cancer. Control rates could be used for other cases, such as the share of hypertensives with managed blood pressure. And process measures could be used for others, such as the share of age-appropriate women receiving a mammogram. The design and monitoring of such a system would not be that hard. We even have evidence that it will work. Several quality indicators are now published for medical care providers and insurers. Some states rate the quality of cardiac surgery providers, for example. And many HMOs release data on how well they meet various testing guidelines. The measures of quality in these report cards are incomplete, but they are out there. And they have had a large effect. Publication of these measures has forced medical care providers to examine what they do and how they do it. Insurers have reacted to the HMO data by increasing the quality of their care in those areas. Even the most basic of quality reporting has helped to increase quality in medicine. Design of a health-based payment system is not the big issue, nor is concern about its efficacy. But getting from here to there is more difficult. Implementing a health-based payment system will require some doing. The reason for this is that no single employer would benefit much from implementing such a system. For the new payment system to change the way health care as a whole operates, it would have to get insurers and doctors to change their entire approach to care. This requires concerned, not individual action. Either groups of employers will have to act together, or government will have to start the ball rolling. Both are possible, and each would be valuable. In recent years, the medical care system has changed, but not in this way. Beginning in the 1970s and 1980s and peaking in the 1990s, the medical system became focused on the high cost of medical care and the overuse that implied. The crescendo of this concern was the Clinton health plan, which was built on the idea that there was enough waste in the system to pay for universal insurance coverage. The failure of the Clinton plan didn’t discredit the view that waste was prevalent. Rather, it encouraged the private sector to go after this waste. The result was managed care. Managed care actually has a long history in the medical field. Some managed care plans have been around for decades. But managed care really came into its own with the focus on cost containment in the 1990s. Employers turned to managed care for cost savings. Managed care obliged. Managed care insurers paid doctors less for delivering services than they made under traditional plans. This upset many doctors, but not all doctors had to be in all plans. Paying less helped insurers sort out who they wanted to contract with. Plans also limited what was done. Annoying 800 numbers with nurses reviewing physician decisions were an innovation to limit use, along with second review of coverage decisions and service denials. Plans even provided financial incentives to do less. Some providers receive a fixed amount per patient, out of which they pay for all costs. The less that is spent, the more the doctor earns. Switching from traditional insurers to managed care insurers saved money. Medical spending grew far less rapidly in the 1990s than in any decade since 1950. Today, medical spending is about $400 per person lower than it would have been without managed care. But people hate the system. Managed care ranks up with the oil and gas industry as the most hated industry in the country. The discontent is wide and deep. The most fundamental reason for the anger is that people are afraid that their health will suffer in managed care. Managed care focuses on cost reduction, but suppose improving health means getting very expensive care. Will managed care insurers authorize that? In a choice between saving money and getting valuable care, people fear managed care will pursue the cost savings. But people value their health too much to trade it off for these cost savings. At root, this is the basic problem. Managed care focused on saving money, but people want to be in better health. No business can ultimately succeed if it does not produce a product that people actually want. The managed care system will not last. Some argue for replacing the managed care system with the old fee-for-service system. After several years of manage care, nothing looks so welcoming as the good old days. But we must recall the failures there too. The old system was wasteful, and it didn't give us enough. It is not a good model. A far better strategy is not to go backwards but to refocus. In the past decade, we put in place strong incentives to reduce costs. Now, we need equally strong incentives to improve health. Paying for health improvement will do this. The same vigor brought to lowering what we spend can be brought to making us healthier. The system would perform better. The medical advance we have seen is but the tip of the iceberg. The genetic revolution promises to bring untold benefits in health, if we enable them to happen. The potential for gain is great, but so is the possibility of failure. Two economic factors will determine the success or failure of innovations over the next several decades. The first factor is how welcoming the medical system is for new innovations. Systems that encourage innovations to be used also encourage their development. This is particularly true for those innovations developed by commercial firms. Pharmaceuticals, implantable medical devices, and new imaging machines all fall into this category. In practice, the issue of encouragement is largely a question of how generous reimbursement for new technology is. In the traditional medical care system, reimbursement was quite generous. Fees were high, and use was unquestioned. Thus, innovation was rapid. In the new managed care system, reimbursement is less generous. Fees are lower, and monitoring of utilization is more stringent. This may have a long term impact on the development of new therapy, but it is hard to know how big this will be. To date, there does not seem to have been a major effect of managed care on commercial medical research. Still, paying on the basis of health outcomes would help, though, by increasing the incentives to adopt new technologies if they contribute importantly to health. The second factor that is important for innovation is funding of basic research. Not all technologies are produced by commercial firms. A significant amount of medical research is done in the government or at universities. Indeed, many of the major innovations of the past half century were discovered in this way. This research is not designed to make a profit. It is designed to add to knowledge, enable new treatments to be developed, and possibly bring the discoverer fame and glory. The key to the success of this research is public funding. Medical researchers need time for research, equipment to do the research, and money for research support. Clinical practitioners working on new surgeries or other techniques need the same. Private firms will not fund this research, because they do not get any benefit from it. Research devoted to the public interest must ultimately be sponsored by the public sector. To its credit, the government has recognized this and supported basic medical research well. This has been true since World War II. Indeed, public support for basic research has been increasing in recent years, as the benefits of such research have become more increasingly apparent. It is a welcome situation to see such foresight in the public sector. But I suspect that even more is needed. Even with public research at its new, higher level, medical research accounts for only about 5 percent of total medical spending. Rapidly innovating industries in general usually spend 10 or 20 percent of sales on research. The potential for advance in medical science is as great as in any other industry. Thus, it makes sense to increase this research commitment even further. As one goal, we might aim to devote 10 percent of whatever is spent on medical care to biomedical research. Under any scenario, medical care costs are certain to increase. Where we spend $4,500 per person today, we might easily spend twice that amount in the middle of the century. Many are horrified by this prospect, but I am not. I believe this future is a happy one. But nothing in medicine is without any pain. The pain in this case comes from the mismatch between costs and benefits. The benefits of better health are largely psychic -- the value of living a longer, healthier life. But the costs are in dollars. We will be better off over time, but we will have to pay for it. It is important to be clear what this means. Incomes as a whole will increase over the next half century too. While medical care is likely to increase rapidly, it should not account for all of the income increase. Spending on other goods will rise, just less rapidly than if medical costs were flat. At one level, this situation poses no particular problem. The benefits of cleaner air and public parks are also largely psychic, while their costs are in dollars. We have successfully managed to pay for many of these services without great trauma. Medical care differs, though, in scale. We spend much more on medical care than on parks and the environment, so the consequences of further increases in spending are greater. In the private sector, adjustment to rising medical care costs will happen relatively smoothly. Individual out-of-pocket payments for medical care will increase. Employers faced with higher health insurance costs for their workers will pass back these costs back to their employees, in the form of less rapid wage increases. These changes involve difficult adjustments, but they have happened in the past and will happen again in the future. Adjustment in the public sector is more difficult. There is no automatic mechanism to increase taxes as public sector medical care programs increase in cost. Thus, the government must pay for medical care cost increases by making painful choices: reducing spending on other services, raising taxes, or running deficits -- which just defers the tax increase or spending reduction. Cutting back on other programs to pay for medical care cost increases is not a real option. Already, spending on education and environmental programs are too constrained. We won't reduce them much more. Ultimately, we will need to raise other revenues or make people pay more for the medical care they use. These steps are painful, but even here not all of the news is bad. The fact that health has improved, and will continue to improve in the future, can help us address the financing problem. There is nothing that says that older people cannot work more and contribute more to their own health care. Indeed, the health improvements we have witnessed suggest that this is possible. The vast majority of retired people are physically and mentally able to work. They choose not to in large part because public policy encourages them not to. Change the incentives and people will change their behavior. Getting people to work to older ages will also help with other public problems. Social security, for example, has a long-term funding difficulty as well. Benefits have been promised to future retirees on the basis of what they paid in, but as the population ages the money to pay for these benefits will fall short. Delaying the age at which people retire and collect benefits will significantly help this financial problem. No adjustment in life is easy. But we have been blessed with good health that is becoming even better rapidly. These health improvements can help us address the problems we face as a country, if we take account of that which we have so bountifully been given. 1. Consider these passages from President Clinton’s speech to Congress introducing his health care plan in 1993: Rampant medical inflation is eating away at our wages, our savings, our investment capital, our ability to create new jobs in the private sector and the public treasury. Our competitiveness, our whole economy, the integrity of the way the government works, and ultimately our living standards depend on our ability to achieve savings [in medical care costs] without harming the quality of health care. 2. In President Bush’s first major speech to Congress, he said: [T]his Congress and this president will find common ground to make sure doctors make medical decisions and patients get the health care they deserve with a patient’s bill of rights. When it comes to their health, people want to get the medical care they need, not be forced to go to court because they did not get it.” 3. The remainder is due to other factors such as fewer traffic fatalities, less risk of death during pregnancy, and improved treatment of conditions such as kidney failure. 4. Throughout the paper, I use a discount rate of 3 percent in real terms. 5. These estimates are from John D. Graham, Kimberly M. Thompson, Sue J. Goldie, Maria Segui-Gomez, and Milton C. Weinstein. “The Cost-Effectiveness of Air Bags By Seating Position,” Journal of the American Medical Association, November 5, 1997, 278:1418-1425. They estimate that air bags reduce auto fatalities by 10 per one million vehicles. If an air bag lasts 10 years, this is about 100 per one million vehicle years, or a one in ten-thousand chance of survival. 6. Harlan M. Krumholz, Martha J. Radford, Yun Wang, Jersey Chen, Asefeh Heiat, and Thomas A. Marciniak. “National Use and Effectiveness of Beta-Blockers for the Treatment of Elderly Patients After Acute Myocardial Infarction,” Journal of the American Medical Association, 1998, 280:623-629; S. Yusuf, J. Wittes, L. Friedman, “Overview of Results of Randomized Clinical Trials in Heart Disease,” Journal of the American Medical Association, 1988, 260:2088-2093. |