On "Costs"

Back to musing about health care. The issue of rising costs comes up again and again whenever health care is the topic of discussion. But the word "costs" is, confusingly, often used to mean two fairly different things (often simultaneously) so it's worth thinking about the difference. They are:

1. Costs are the prices we pay for procedures or devices. They're a measure of how expensive the units of health care we're buying are.
2. Costs reflect total (national) spending on health care. This is the aggregate amount (>$2 trillion) we're spending every year, or the percent of GDP we put toward health care services. This number, however, depends both on how much individual units of health care cost and how many of those units we buy (volume).

To illustrate the difference, I'll use a mundane example from my weekly routine. I live in an urban area and don't own a car. As such, I shop in a nearby urban grocery store. If I had a car, I could shop slightly further from home at one of the larger grocery chains prevalent in this area.

Given that when I do my weekly grocery shopping I do so on foot, there is a natural limit to how many groceries I can buy. Even if I wanted to buy more than 3 or 4 bags of groceries (not that I do), I wouldn't be able to carry them all home. At the same time, it's worth noting that as a small, independent grocery store, the prices at my grocery store are in fact a bit higher than the prices across town at the larger chain grocery stores.

So let's consider two scenarios. The first is my current routine, in which the amount of groceries I can buy at one time is limited but the prices of individual items is higher than the alternative. In the second scenario I have a car and can load up my trunk as full of groceries as I please. As such, I start shopping at one of the larger chains or even a Costco and give in to the urge to buy in (greater) bulk. What's the cost of my groceries? Or, as a separate question, what are my groceries costing me? If I wanted to answer the first question, I'd probably check my receipt to see item-by-item what everything costs. On that kind of per-unit analysis, the bigger stories with lower unit prices will look better than my independent grocer. But if you ask what groceries are costing me, say per year, I might be spending more money if I'm shopping at the chain stores, simply because I can (and thus am tempted to) buy more every time I go shopping. When I'm not limited to buying only what I can carry home, I might buy lots of extraneous goodies.

The point here, of course, is that while these are very different questions, when it comes to health care people tend to conflate "how much does this cost" (unit price) with "how much is this costing me" (unit prices x volume). I myself am guilty of not specifying what I'm talking about and bouncing between meanings in different posts. As such, alarm over health care costs sometimes manifests itself as disbelief at an outrageous bill for a given procedure, and sometimes as alarm bells sounded over an uptick in national spending and increases in the fraction of our national income we're directing into the health care market.

When I wrote The Case Against Providers back in the summer, I was talking mostly about the component of the cost issue that stems from providers bargaining up the reimbursements (prices) they get for procedures from payers. The Demi-Decade of Coverage, on the other hand, discussed some of the long-term cost containment potential of the reform law and that touches more on the "how much is this costing me" issue. And that's because the tools offered by the Affordable Care Act--the scalpels and chainsaws I mentioned--are aimed largely at reducing unnecessary volume: comparative effectiveness research, payment reforms, more efficient and effective delivery models, efforts to reduce medical errors, and the like are all aimed at streamlining the health care system and make it better at doing what it does (read: achieve good results without flushing huge amounts of money down the toilet for no reason). What the scalpels and chainsaws "cut" for the most part is unnecessary volume. By and large, however, those reforms don't lower the unit costs of procedures. That doesn't mean they're not important steps to slowing our national cost growth, since total spending will equal the prices of our procedures multiplied by the volume of them we consume very year. But still, room for improvement.

This disparity between the two conceptions of "cost" was the subject of a Washington Post article in October entitled "The price problem that health-care reform failed to cure." In it the author argues:

The 2010 law does little to address this. Its many cost-control provisions are geared toward reducing the amount of care we consume, not the price we pay. The law encourages doctors and hospitals to join "accountable care organizations" that have financial incentives to limit unnecessary care; it beefs up "comparative effectiveness research" to weed out inefficient treatments; and it will eventually tax the most expensive insurance plans to restrain consumers' superfluous use of health care.

Such measures could reduce redundant tests, emergency room visits and hospital readmissions, which would help control the costs of Medicare, where the government sets rates. But they are less likely to lower prices outside Medicare and stem the growth of private insurance rates.

The author astutely points out something I've noted before: the robust public option that was proposed in early incarnations of the health care bill (but ultimately was dropped) was targeted at bringing down the actual prices of procedures charged by providers. This is something liberal supporters and conservative opponents alike failed to recognize, with the two camps wrangling over whether this would put the fear of God into insurers or drive them out of business with nary a word about providers.

And make no mistake, the prices of the medical services we buy from providers in this country can be substantial (relative to our counterparts in the rest of the developed world). The International Federal of Health Plans' Annual Comparative Price Report came out a week or two ago and it's full of charts like this one:



The average price for something here is generally more than almost anywhere else but not by a ridiculous amount; it's the huge variation in prices we experience/allow here--where prices are often a jealously guarded trade secret and vary depending on who's buying (the same hospital can charge two different insurance companies different prices for the same procedure in every state except Maryland)--that allows some of what we spend to stretch into the stratosphere.

And while I expressed optimism that the reform law provides the tools to get serious about cost containment--particularly after the first "demi-decade"--the actual prices of services are something we still have to address. And to leave this post with a cliffhanger, I'll note that in some future post I'm going to mention one possible tool for doing that.