Health care finance and utilization is a Pareto curve. A small minority of people drive the vast majority of costs and utilizations. Conversely, most people are minimal users of healthcare services in any given year. This means there are two very distinct strategies that should promote good outcomes. But first, let’s look at a great graph via Martin Gaynor:
Why consumers won’t drive the #healthcare market. Most costs from high $ people who are beyond cost sharing. pic.twitter.com/buoAM00CPT
— Martin Gaynor (@MartinSGaynor) December 10, 2015
For people on the left hand side of the graph, they are relatively healthy and relatively low users. They’ll be using primary care providers, urgent cares, low end prescription drugs, the occasional specialist, the occasional low end surgery and hospitalization. There may be spikes in cost such as a year in which a woman gives birth, but over the medium run, costs and utilization are fairly low because need is fairly low.
Here, consumer driven healthcare could make a decent amount of sense. A co-pay of $50 for an urgent care visit instead of a $25 co-pay for a PCP visit could lead people to make better choices. Reference pricing for simple, straightforward elective surgery could drive people to choose low cost providers. Deductibles may force people to defer care that is not particularly valuable. High deductible health plans paired with health savings accounts are not inherently crazy nor malicious.
However any cost savings here don’t matter all that much because the base level of spending is so low to begin with.
The other side of the Pareto curve is where the real money is.
And there, consumer driven decision making runs into the brick wall of reality. People don’t have $50,000 or $100,000 lying around to fix a blown shoulder that happened while mopping in various states of undress. People don’t have the ability to continually pay $300,000 per year for preventative hemophilia treatments in the hope that they can avoid a $5 million crisis claim. A deductible will be hit no matter what. Coinsurance and co-pay limits will be hit no matter what.
If we were to fully embrace consumerism for the most expensive 10% to 15% of the population, what we will be telling the chronically ill to do is to buy an ounce or two of morphine, a syringe and a blanket so they can die quickly and quietly in the corner.
We’re not going to do that as a society. Instead, we have to do a few different things. The first is the 50 year policy of segregating the group of people who are most likely to have very large claims away from the rest of the population in the form of Medicare and dual eligibility for Medicaid-Medicare. The Federal government picks up a good proportion of the shock claim risk.
But that does not do everything. We put people into the market and hope it works well enough. But that fails. There is no market within a half day drive of the Major Academic Medical Center that can effectively treat certain types of pediatric cancers, so market forces don’t work. Administrative forces need to work instead. And that is where things like Accountable Care Organizations, gain-sharing, risk-sharing, population health management, preventative nursing visits and focus chronic disease management programs come into play. The systems, hopefully, are built so that everyone benefits in that the patient gets better quality of life, and the resources devoted to that goal are used effectively and efficiently.
Baud
What do you mean “we,” kemosabe? /GOP
Mike E
I just opted for the maximum amount for our flexible spending acct, ’cause it’s gonna get spent this coming year…$2,500 just on dental and vision, prolly; medical will have to be paid out of my taxed income as per my seat of the pants calculation.
MomSense
If I need a orthopedic surgical repair, it would be in my body’s best interest to go to the surgeon who has done the procedure the most times with better results than the lower priced procedure done by a surgeon who has rarely performed this procedure. The more experienced surgeon is likely to get a better result which should cost less in terms of length of recovery, my missed work time, unlikely re-hospitalization or revision surgery for me. If the insurance companies and providers could team up to provide networks that have more to do with skill and specialization, wouldn’t that save money as well?
I realize that I sound like a broken record but I have serious concerns about this idea of consumer driven pricing and decision making when there is such a lack of transparency about cost. I am a good consumer when I have enough information to make informed decisions. This is not the case with healthcare consumption.
My last comment has to do with how much we know about why the bottom 50% use only 3% of services. Speaking from experience, the prohibitive cost of certain kinds of screenings causes me to forego these necessary screenings (based on family medical history). How much do we know about the decision making of half of health care “consumers”?
Richard Mayhew
@MomSense: I completely agree, consumer driven health care asks a lot in a high cost for information environment.
But for low utilizers, it really does not matter too much what the financing and service delivery system is. Low utilizers barely touch the medical/health insurance system at all, so big delivery system paradigms don’t matter all that much. As soon as you schedule a surgery that is more complex than removing a mole, or snipping the vas, payment and delivery system choices matter. But in any given year, 40% to 50% of the population are fundamentally indifferent to system design because they barely use the system.
dr. bloor
@Richard Mayhew:
Given the extremes of utilization at each end of the curve and the fact that the government is already picking up the dime for the extremely expensive, you’d think it would be obvious even to the Republicans that single-payer makes the most sense from every perspective.
I know, unicorn farts, etc.
MomSense
@Richard Mayhew:
I guess I’m wondering if we know why low utilizers are barely touching the system. Is the problem that the insurance companies would be the entities to figure out why they aren’t using the system but they have no reason to find out? Premium paying low utilizers are a good thing for insurance companies.
p.a.
I’m pulling the #s from my rapidly declining mind, but they are accurate-ish I think. 30% health spending due to diabetes & complications, 40% hospitalizations diabetes related also.
90% most people’s medical costs come in the last year of life. Not a great revelation, practically a truism.
Hep C now curable with a brief course of meds, correct? Advances like this (and HIV now a manageable chronic condition) have to help long term.
Now about antibiotic resistance…
different-church-lady
What you did there: it done been seen.
Kylroy
@MomSense: They’re barely using medical care because they don’t need it. Even including recommended screenings, 50% of the population just doesn’t need anything beyond token medical care in a given year.
Richard Mayhew
@MomSense: We’re healthy
I’m a low utilizer. This year my utilization is 1 PCP well visit, 1 urgent care visit for a day care crud bacterial infection that was treated with a $5 generic antibiotic, a day off of work, and lots of tea with honey, a dentist appointment for a teeth cleaning and a vision appointment to get a new pair of glasses (same prescription finally).
From a medical insurance perspective, I barely touched the system. Mayhew Insurance paid under $300 in claims for me this year. I really don’t care if I am in a high deductible plan, a high co-insurance plan, a coordinated care plan, a fee for service plan.
I want to remain a low utilizer for a very long time because that means I am mostly healthy.
pseudonymous in nc
Thanks, Richard, for again making the point that serious healthcare in the US is not priced for consumer purchase, and that anybody who thinks it is needs some serious healthcare.
It’s almost “enterprise pricing”, to be minimised through accounting practices and tax offsets. Which, if you’re an insurer or provider, you do all the time. It’s not priced for consumers.
Richard Mayhew
@p.a.: Those numbers don’t sound right to me. Diabetes is way way way too big of a chunk of the pie for starters
Richard Mayhew
@p.a.: Hep C should be a big long term cost saver although the initial costs are massive and will get bigger as Hep-C treatments are starting to be offered to people with lower F-scores (F-score is the degree of damage to the liver, higher means more damage).
HIV as a long term chronic condition could be an interesting cost modelling problem, especially compared to say 1987 and 1997.
In 1987, HIV tended to kill fast. It was a short burst of very expensive and often futile care per person.
Now, HIV in the US if the person is well insured and well connected to the medical system is a constant stream of payments for a nearly normal life span. I don’t have any research or knowledge to say if the long run cost curves for a typical person who knows they are newly infected with HIV looks like today for the next forty years. It could be that the NPV for a 2015 new HIV infection has increased over the NPV cost of a new infection in 1987 because the person in 1987 died comparatively quickly.
(To be morbid, the ideal death from an insurance company’s point of view is a plane crash while the worst is a long lingering one with multiple ICU admissions that prolong the process of bodily failure)
p.a.
@Richard Mayhew: I’ll try tracking them down.
p.a.
Source
“For the cost categories analyzed” may be the tell why the #s seem so high.
So more like ~10%
p.a.
@Richard Mayhew: Lets make this even more complicated: the treatment expense of any medical issue also includes the patients contributions to GDP. Keeping someone healthy enough to function normally as homo œconomicus* should factor positively vis the cost of treatment. (As an economic exercise. DO NOT want to imply Randian/utilitarian argument about who should/shouldn’t get treatment!)
*cool, huh?
pseudonymous in nc
@Kylroy:
I haven’t been to a doctor in… thirteen years. I could probably have gone for an annual checkup, or for one or two very minor things, but I let it go.
Now, I can understand the mindset of Americans brought up in the American context to think that if you don’t get sick why should you be paying so much, but I’m also mindful to know that an accident (or a terrible American driver) could change that radically very quickly, and does so for many people who go from good health to poor over the course of a year.
Bobby Thomson
So, basically, the fantasy that consumers are to blame for rising health care costs is just that
FSM, people don’t blow money on health care and take vacation days because it’s fun. They do it because they are sick or injured.
RSA
@p.a.: On the cost of care toward the end of life, the best I could find is the abstract of an article from 2001:
Of course, we can’t predict who’s going to die within a year with or without treatment (or maybe I should say that it’s bound to be a probabilistic estimate), and even we did have good predictions most people aren’t well-prepared (in my experience) to make hard decisions that trade off money, lifespan, and quality of life. I think both situations will gradually improve, though.
Ignatz Topo
I guess there is no point in asking this question (especially at this late date of the discussion) but…isn’t the premise of medical insurance inherently flawed?
Meaning, everybody is going to die and most will be from old age or disease, AND hospital and doctor costs in our current era are astronomical. (This is especially obvious to those of us who have watched aging and dying parents and looked at their medical charges). Insurance companies must know it is a bad bet since so many people will end their lives at the expensive end of the graph.
SO, given that the point of a business is the maximize profits and minimize expenditures, the whole thing just seems like a questionable business model.
Or am I missing something obvious?
Of course my eyes glaze over just glancing at any insurance form, so there is a good chance my understanding is limited.
Richard Mayhew
@Ignatz Topo: I want insurance against the probability of blowing my knee out tomorrow afternoon.
Sure, I will die some day, hopefully that day is in the far future. I want my knee working well and I don’t have $30,000 lying around just in case things go pop in my right knee. I want to see my daughter graduate from college, my son do a happy dance after he beats his qualification exams and I want to avoid bankrupting my entire family in case I get cancer before then.
From your perspective, every form of insurance is pointless as we’ll all day someday, and life insurance is oxymoronic. What it is protection to provide a better quality of life
Richard Mayhew
@Ignatz Topo: Point #2, insurance companies have already gotten out of the business of insuring most of the soon to die individuals.
That fleeing to the hills away from bad risk is called Medicare. Medicare covers old people and people on long term disability, both expensive populations to cover.
p.a.
@Ignatz Topo:
The proof is in the pudding: insurance companies exist, make profits, provide jobs, hookers, and blow. The high cost end of life stuff is mostly via Medicare: mom and pop taxpayer. Before Medicare age they do try to cut off ‘unproven/experimental’ expensive treatments for those who have the gall to require ‘extravagant’ treatments. Before ACA there were many avenues to dump expensive subscribers. Now it’s difficult, so the feds sweeten the pot for insurers by requiring healthy people to carry coverage.
With any insurance product, health, auto, home the center and left areas of the bell curve cover the right side + profits, if the insurer designs the product properly.
mclaren
@Mike E:
Get your prescription glasses from Zenni Optical in China — $16 per pair of glasses, including shipping. Go to Los Algodones Mexico for dental care. Dental costs drop by a factor of 10. That’s not “10 percent,” that’s a factor of 10 — as in, $35,000 worth of U.S. dental work will cost you $3500 in Los Algodones.
Of course your health insurance doesn’t cover dental work in Los Algodones, Mexico! That would reduce costs. And as Richard Mayhew keeps trying to avoid discussing, reducing costs is exactly what the broken U.S. health care system tries to avoid at every level, from insurers to hospitals to doctors to path labs to specialists.
A Reason To Smile: Mexican Town Is A Destination For Dental Tourism,” npr.org, 24 June 2014.
What’s that?
Oh, right — your American health insurance doesn’t cover dental work done in Los Algodones, Mexico. Oops.
So now we see the real cost driver in U.S. health care costs…and the real Pareto curve in U.S. health care.
The real cost driver in American health care costs isn’t a tiny minority of sick people, it’s the insatiable greed of U.S. doctors and dentists and hospitals and imaging clinics whose costs are 10x what you have to pay in other countries.
And the real Pareto curve in U.S. health care isn’t the 20% of really sick people, it’s the 5% of the world’s population that lives in America, yet greedily demand payments 10x those of the health care services of other nations.
revrick
Way off topic, but that graph could just as well be of the mortgage market as it was crashing in 2007-08 with the subprime market representing the same slice as the top 5% health care utilizers!