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Health, Education & Shelter

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Will Consumer-Driven Medicine Really Cut Health Care Costs?
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One of the most common justifications for consumer-driven medicine is reduced health care costs. The reasoning here is two-fold.


27th Feb 08 -Niko Karvounis, Health Beat

Firstly, since they’re high-deductible and low premium, consumer-driven health plans require more out-of-pocket spending. Consumers are more cost-conscious when they have to actively shell out for purchases. As a result, they will user fewer health care services—and thus overall health care costs will fall.

Secondly, if consumers are in the driver’s seat, competition in an open market will drive prices down. For-profit providers will want to offer the best deal to get the most business. Consumers will also have better information thanks to the commoditization of medicine, which will translate medical jargon into universally comprehensible knowledge. Smarter consumers translate into less over-payment for services.

This is standard-issue free market orthodoxy at its finest. Unfortunately, this isn’t the whole story. In fact, there’s an even stronger argument to be made that consumer-driven health plans could lead to higher health care costs.

The Wrong Patients Forgo the Wrong Care

Research by the RAND Corporation’s health insurance experiment shows that when you shift costs to the consumer, patients forego both wasteful and effective care. And this is particularly true of the patients who cost us most in the long run—those suffering from chronic diseases.

A 2007 paper from the National Bureau of Economic Research looked at retired California public employees on Medicare, and its findings contradict some of the basic assumption of the consumerist movement.

The study’s authors--from Harvard, MIT, and the University of Oregon-- found that chronically patients who are asked to shoulder more of their health care costs deferred, neglected, or opted-out of doctor’s visits and drugs when the price got too high. This short-term cost reduction led to long-term catastrophe, as their hospitalization rates were significantly higher than other patients suffering from chronic diseases. Immediate savings ultimately led to a greater—and otherwise preventable—use of more expensive care. Oops.

This makes a certain amount of sense. Chronic diseases are not always in-your-face. They often simply simmer. But if the disease isn’t managed, ultimately it explodes. Until that happens, it’s easy to ignore the problem, especially in a context of consumerism that places an emphasis on convenience above all else.

Meanwhile, chronic disease is the big ticket item in our health care system. You might think it would be cancer. But most people with cancer either die or survive-they don’t linger on, in need of continuous care, for twenty years. Ten percent of the nation’s sickest patients run up 70 percent of our health care bill, and most of them suffer from one of five chronic diseases (diabetes, congestive heart failure, coronary artery disease, asthma and depression). You can’t manage costs unless the system is built to manage chronic diseases. Period.

Here consumerists would point out that more transparent information would help consumers make better choices. But the reality is that no one looks at health care costs in a vacuum—it’s one of many expenditures that individuals and families have to juggle. Even if a chronically ill patient knows exactly what to do, he or she might be unlikely to do it when given the option to pay for treatment or something else. That might be the “consumer’s right,” but it means higher long-term costs for everyone.

Consumer-Driven Medicine Turns Healthcare into a Commodity

In a market-driven health care system, businesses try to maximize revenue and minimize cost. The quickest way to do that is to market what’s already out there, rather than waste time on true innovation.

Retail health clinics, for example, want to “cross-sell” by encouraging patients to pick up other products that the store sells on their way in or out of the clinic. Why? Because it’s a low-cost way to increase profits: shuttle patients from the clinic to the prescription counter, no muss no fuss. 

A similar reasoning prevails in the prescription drug industry. A January study from York University found that the U.S. pharmaceutical industry spends almost twice as much on promotion as it does on research and development. Again, it’s easier to troll for new customers than to build a better product. Every enterprise wants to leverage existing assets for as much profit as possible rather than incur the cost of something new and risky. Volume becomes more important than quality.

Even when something new does come along, the emphasis is still on volume of consumption rather than actual effectiveness. Recall a recent post on numbers needed to treat. Even though this stat is the final word on drug effectiveness, it gets no airtime in drug marketing. Lipitor, the world’s number one cholesterol-lowering drug, only helps one percent of the people who use it. But this number is nowhere to be found in the drug’s advertising, and despite its relative ineffectiveness it still makes up a full one-quarter of Pfizer’s profit and has been prescribed to over 26 million Americans.

Admittedly, Lipitor’s sales have been tanking recently, thanks to the roll out of generic alternatives. But this small victory for market logic doesn’t change the fact that millions of people are taking a drug that does nothing for them. For consumers, this is not cost-effective--—but for those selling the product, it is smart business.

A more commoditized health care system will only exacerbate this pattern. Yes, early research shows that patients cut down on health care consumption when they foot more of the bill. But do we know that what’s left—what they do actually consume—is in fact effective? If I use less total health care, but what I do use is junk, than the consumer movement isn’t an improvement.

In a consumer-driven system, where marketing becomes the central principle behind our health care discourse (even more so than today), it’s far from a sure bet that reduced consumption means smarter consumption.

More Inequality

Markets are not about creating equality. This may not seem problematic in most sectors, but in health care, I think, reinforcing existing disparities is a dangerous strategy.

Consider health savings accounts, which favor high-income earners because they are tax-free (richer people save more by not paying taxes). More money in the savings account means more purchasing power. More purchasing power means more health care options—not to mention more providers falling at your feet to get your dollars.

But here’s the rub: such inequality is acceptable only insofar as a rising tide lifts all boats. In other words, it’s okay if the rich get relatively better health care so long as the health care of the poor improves commensurately.

This seems unlikely in a consumer-driven health care system. More out-of-pocket costs means less affordable care for the poor. Even if health savings accounts do give some consumers a little health care nest egg, the amount saved will likely follow income. If you look at stock ownership in the U.S., for example—another investment that is consistently promised as a great equalizer—the value of holdings is perfectly contoured to income.

In a market-driven system, health care prospects improve as you move up the income ladder. But if those at the bottom don’t see a real boost, we have a problem—socioeconomic status is a major predictor of health. Ultimately it’s the poor who need access to health care that lies beyond their means.

Here is the important point: because social environment and daily living are major influences on health, the disadvantaged suffer more when they consume less care than do the affluent. And when patients have asked to have “more skin in the game,” it is the poor who are most likely to forgo needed care. In 2003, the Center for Budget and Policy Priorities cited research from the RAND corporation that found “low-income adults and children reduced their use of effective medical care services by as much as 44 percent when they were forced to make co-payments, a much deeper reduction than occurred among those with higher incomes.”

The RAND study also found that “cost-sharing led to poorer health among low-income adults — including worse blood pressure and vision — than those who were not subject to co-payments.” Similarly, low-income children in families with cost- sharing obligations were more likely to be anemic and to have more untreated dental problems than children who received free care.

By contrast, when the looked at higher-income people they find no difference in health status between those who had had higher cost-sharing obligations and those who did not.” Translation: the poor have much farther to fall if they miss out on care.

Whether we are talking about people suffering from chronic diseases or the poor, it turns out that consumer-driven care which shifts costs to the patient leads certain vulnerable populations to disproportionately negative long-term health outcomes.

And here, information is no panacea. Even when markets do their thing and diffuse knowledge, it’s the “haves” who benefit most. A few years ago two Columbia University professors charted the trajectory of public health risks over the past thirty years to show that, even when information did circulate and spur awareness, it was the upper crust that benefited. Many years ago, smoking, HIV/AIDS, and coronary artery disease affected everyone equally. But as time wore on, the affluent became more aware of the risks and dangers. As a result, these health problems settled in at the bottom of the socioeconomic ladder.

In a market-driven system which thinks of patients as “consumers”, this disparity will also get worse: information will also be commoditized, which means that the rich will be able to buy better, more current information (just as they can now for stocks, investments, or market projections).

Currently, the price tag of health care for the uninsured is over $40 billion. A system that perpetuates poor access to care for the have-nots will only drive that bill higher.


Niko Karvounis is a Program Officer at The Century Foundation in New York City where he researches issues of health care and economic inequality.

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