• Priceless: Chapter 11

    1. I found these two sentences from Chapter 11 of John Goodman’s book Priceless puzzling:

    We could spend our entire gross domestic product on healthcare in useful ways. In fact, we could probably spend the entire GDP on diagnostic tests alone—without ever treating a real disease.

    How is that useful to the consumer? Maybe John is only thinking of the device manufacturers’ welfare.

    2. No argument with this:

    [M]edical science offers varying evidence on how frequent such [cancer diagnostic] exams should be, making this a subject of continuing controversy. That means that decisions about diagnostic tests often reflect a personal value judgment, and people’s values differ. In general, when a test is not prompted by a risky event or some other indication, it should be a matter of individual preference.

    But insurers do need to decide what they will cover, and consumers, as well as their physicians, will want to know what medical science says about the tests even when the results aren’t decisive.

    3. John clarifies the role of value-based insurance design. What he writes about vaccinations applies more generally.

    Take immunization for childhood diseases. Studies show that these procedures pay for themselves by avoiding future healthcare costs that are greater than the costs of the vaccinations. This implies that members of an insurance pool have an economic self-interest in seeing that all children covered by the pool are vaccinated. It may make economic sense for the pool to pay for vaccinations, thereby incurring more cost than self-pay would generate, or to require that members obtain them, thereby reducing autonomy.

    John has a nice figure to illustrate. In the “new HSA” there would be first dollar coverage from third-party insurance for high-value services the insurer wishes to promote.

    4. Another good idea is reference pricing:

    Suppose a patient is diagnosed with cancer, and the health plan normally would contract to pay a fixed fee to a medical facility to cover all costs. If the plan could be assured that this fixed fee were its maximum exposure, the plan would have no economic interest in restricting the patient’s choices. It could, for example, allow the patient to go to an alternative provider and pay more, if needed, out of pocket or from an HSA. In this way, the plan controls its costs, and patients still exercise choice; the exercise of choice puts pressure on the plan to maintain quality in its own preferred medical facility.

    5. A main concern about consumer-directedness is the snake-oil problem.

    One spectacular success story is Dr. Bernard Salick, a kidney specialist who has become a millionaire by pioneering a national chain of round-the-clock cancer clinics.

    I have no problem with Dr. Salick or anyone else becoming a millionaire provided that reflects the value he has provided to society. (And I am not suggesting that Dr. Salick has not provided full value for his wealth, though, to be honest, I have no idea.) That this necessarily would be so is unclear in a market that is not comprised of well-informed consumers. Health literacy is a real problem. You can test this at home. Go to Choosing Wisely. Pick a specialty. Read which procedures that are not recommended and why. If you don’t or couldn’t understand what is written there, how would you know to reject what an unscrupulous provider might offer to do for you for access to your wallet? What’s to prevent a Dr. Salick from making his fortune at your expense, conferring little or nothing of actual health value?

    I know what some readers are thinking: this type of thing sorts itself out in other markets. That’s largely true, though some people do get scammed some of the time, perhaps many more of us than we realize. Also, small problems in other markets are not as big a deal. You won’t physically suffer from mistakenly buying fabric softener that does nothing. You really could if you buy a useless or even dangerous medical product or service.

    All other posts on Priceless are here. Sunday’s post will cover Chapters 12-14.


    • The “Snake Oil” problem is real, and severe. I remember vividly the public outcry when laetrile (the worthless “drug” promoted for cancer) was banned by FDA.

      Further, where I live there is widespread use of homeopathic “drugs.” These are made through serial dilutions, and it is common that the overall dilution is as high as 1 in 10 to the 60th, ie it is highly unlikely that there is even one molecule of the original substance in the bottle. But people swear by these preparations, and pay additional insurance premiums so that they are covered. Well, at least they are probably safe!

      And look at the huge markets for herbal/nutritional products. In this case, neither efficacy nor safety can be assumed.

      Put people in situation where they are frightened. Their healthcare providers give them advice that is difficult to understand, and often different providers give conflicting advice. Even with highly effective treatments, some people fail to get better. Even with completely useless treatments, some people get better anyway.

      This is a perfect opportunity for the unscrupulous to take advantage. And they do.

      • “And look at the huge markets for herbal/nutritional products. In this case, neither efficacy nor safety can be assumed.”

        Actually, safety can be assumed. The rate of adverse reaction and death reported by those taking herbal/nutritional products is so low that most of the results that show up via google search are ZERO or near zero. Efficacy is another question. Most natural substances are reported effective anecdotal, because these non-patentable substances do not have the funding to do placebo controlled randomized trials. Also, variation in manufacturing practices and sources can alter the efficacy.

        However, prescription drugs cause more than 100,000 deaths every single year according to the CDC and this is likely an underestimate, as the CDC states only 1-10% of adverse reactions are reported. Not only that, but for a drug to be considered “effective” it only has to outperform placebo, and not even by much. So taking any Rx is a true roll of the dice when your health is concerned.

        When it comes to my health, I’d rather take something that I know is safe and may or may not work, versus something that has a laundry list of side effects up to and including death and may or may not work.

    • It seems to me that that the best defense against snake oil is information provided by the health plan itself. Isn’t this something health plans would do in a rational world? We’re so used to health plans functioning like bureaucracies – with all the consumer friendliness of the Post Office — we forget that in other markets producers and sellers are actually trying to please their customers.

      • People tend to distrust information from their insurer about treatment effectiveness because the insurer has such an obvious conflict of interest. I know I do anyway.

        • K Marq, who chose your insurer? You or someone else?

          Is your insurer competing in the market place of ideas or is it being told how to compete?

          Do you feel you have as much freedom of choice when buying health insurance as you do when buying other types of insurance?

          • Someone else (my employer) chose my health insurer. I don’t think that is terribly significant to this point.

            I’m not saying that I think my insurer is evil or anything, and not saying that I’d ignore any information that they provide. But I’d definitely take it with a grain of salt if they were advocating for me to believe that a cheaper treatment is better for me than a more expensive one. I’d be a fool not to realize their conflict of interest.

            I have much more freedom of choice for auto insurance, but I’d be similarly skeptical if they sent me “safe driving” tips or tried to encourage me to use public transportation.

            • @K. Marq: “(my employer) chose my health insurer. I don’t think that is terribly significant to this point.”

              I agree, one always has to maintain a degree of skepticism based upon divergent incentives, but don’t you think that your interests would be more aligned with your insurer if you were the purchaser rather than your employer whose interests are different from yours? The insurer wishes to keep you as a customer and therefore will adjust his services better to your needs if there is freedom of choice and competition.

              @K. Marq: “auto insurance, but I’d be similarly skeptical if they sent me “safe driving” tips”

              An auto insurer can tell you a lot about safety because you don’t want to get killed and they don’t want to make payouts. Their business depends upon statistics that have to do with driving habits, roads and cars. Health insurers have similar statistics in their own field. In fact life insurance tables accurately predicted that hypertension needed to be very aggressively treated before the medical profession became so aggressive.

    • Markets and the market for information can deal pretty well with snake oil sold to people only wishing to be a bit healthier.

      Where snake oil becomes very expensive is when science has no answer. Laetrile promised a cure to people with incurable and fatal cancer. Snake oil salesmen are rife in the Autism market.

      People find it very hard to accept that some bad outcomes are inevitable. For their own lives and the lives of their children, people are willing to try extortionately expensive Hail Mary passes.

    • The problem with value-based insurance is:

      1) The cost of prevention is paid now, the cost of the disease is in the future, and probably not paid by the same insurance company, unless the patterns of insurance change dramatically. According to the CDC, in 2011, the median age of a measles patient was 14.

      2) In most cases, the cost of the issue is far worse for the individual. Birth control is the classic example. Most couples are willing to pay for birth control, as the cost of an unplanned pregnancy is far higher than the cost of an abortion or childbirth. How much am I willing to pay to live my life, rather than a life like Michelle Duggar? A hell of a lot more than the medical cost of the 18 more pregnancies.

      But the misery of having a kid crippled with polio is far worse for the parents than the medical cost of dealing with it for the insurance.

      So, the profit issue for insurance is not whether the intervention cost less than whatever it’s intervening against, but if enough policy holders will skip the intervention because of cost to make it cheaper to provide first dollar coverage.

    • I thought John’s design of an an ideal health plan was on target and what I noted was his reliance upon the people in the plan (the market) to make decisions with regard to what type of risk abatement they would prefer. That is the best of all worlds because it is those same people that want the best product for the best price and since there are many of them it is most likely that in concert with the insurer they will be able to reasonably eliminate the snake oil salesman while getting a great price. Likely by being in control of the insurer they will also prevent the insurer from gouging and be able to use the resources of the insurer to access knowledge from the health care industry. 

      That is a much better idea than central planning for 300+ million people. 

      • Except it doesnt work that well in medicine. Too many procedures are a one time thing. You only get one splenectomy, appendectomy, cholecystectomy or (unless you are unlucky) chemo regimen. You cannot take it back. You cant use that experience to help you choose more wisely the next time you have your appendectomy. There are very few things we ever buy that work like this. Many of these decisions are made under a degree of emotional distress not seen with most commodity purchases. Almost every mother cries when they hand their baby off to me to go to the OR. I never see people cry when they buy potatoes.

        The information asymmetry is real. Ahhh, most people dont know how their computer works either you say. True, but most of us buy a new one every five years or so. If you get a lemon, you take it back. That crappy AICD lead? You have to hope a big chunk of heart doesnt come out when it is extracted. Bad choice of chemo? You can’t take it back. In the case of our older patients, they also have cognitive dysfunction, along with the emotional issues, that make it difficult to process the information.

        Where the market should or could work, is in primary care settings where you make mre frequent visits. Routine care for lesser illnesses. I think some diagnostic testing could be amenable. However, John needs to lay out the cost numbers more precisely. As he noted before, spending above the deductible is not as amenable to market influences. Spending on major procedures is not amenable on economic or behavioral principles.


        • Steve, you may only get one splenectomy, but one doesn’t rely solely upon one’s own experiences, i.e. how many cars did you buy this year? One seeks the advice of a multitude of others and from this information sorts through the information to find those things most meaningful to him and then makes the purchase. Your splenectomy is not sitting in a dark room alone. It is observed by the hospital staff, the regulators etc. How many splenectomies did you provide anesthesia for that were not necessary? A splenectomy is an emergency procedure where one doesn’t have adequate time to research. Most of medical care is quite different. Time is not the problem.

          Information asymmetry exists, but we need not know every detail of everything we purchase. If that were a necessity we would never do anything. Instead we rely upon metrics that reflect the information we need and not necessarily the information itself.

          Despite the above you focus almost entirely on information asymmetry, and to some degree though to a much lesser extent than you I focus on it as well and thus I look towards some degree of regulation, but that is different from choice. I would rather choose or have my agent choose what is necessary for my health than a Washington bureaucrat who doesn’t know a thing about me and that seems to be your sole solution to information asymmetry.

          • This is an example of a frequent phenomenon in discussions of health (or any) policy. Various participants express concerns. Others explain why those concerns shouldn’t be paramount. And yet, the concerns don’t go away. Telling someone 1,000 times that their concerns are not that important or are wrong will never change someone’s view. (I’m not singling out Al here. This is very common.)

            Instead, it’d be impressive to see all significant concerns (as in, fairly widely held) put on the table and then participants try to craft reforms that are sensitive to all of them. To the extent that is not possible, then some concerns might not be addressed as thoroughly as others. But, I bet there are many cases for which addressing concerns does not present a mutually exclusive choice.

            Wouldn’t it be interesting to move in that direction, rather than continue to talk past each other?

            • @Austin: “Telling someone 1,000 times that their concerns are not that important ”

              Austin, I hope you noted that information asymmetry was a concern of mine as well and that I had particular solutions to relieve some of the problems information asymmetry might create. Along with that I pointed out that if we all had to be totally educated before purchasing anything the economy would cease to exist. That is why we use different types of metrics as a shortcut to help us evaluate our purchases. The solutions I rely upon are not perfect, but certainly better than being frozen waiting for information asymmetry to disappear.

              What are your solutions to information asymmetry? Stop buying cars?

            • One idea: search blog on shared decision making and read Jack Wennberg’s book. More on this forthcoming.

            • Jack Wennberg’s book might be a source of excellent information, but his conclusions are his and not necessarily yours or mine so referring to a book we all are quite aware of isn’t really helpful especially when many experienced people have voiced significant disagreement with many of his conclusions. It is some of those disagreements that we are debating.

              Exactly what is wrong with what I said above?

            • You just demonstrated it. You smack down good faith efforts to continue a dialog. It’s a bad incentive if you want to continue a discussion with me. I’ve learned my lesson. So long.

          • ” I would rather choose or have my agent choose what is necessary for my health than a Washington bureaucrat who doesn’t know a thing about me and that seems to be your sole solution to information asymmetry.”

            No. I want the information available so that informed decisions can be made, when possible. We need the EBM and CER that John opposes. Sometimes I feel as though he has never spoken with a physician. How are we supposed to know what works w/o evidence? How do we decide when information is obscured, like when you buy insurance policies? I dont need to know everything about my car or my computer because I can take it back or buy another. My aortic valve? That tonsillectomy? (Hospital staff often cover for surgeons who are not very good. Sad but true. Sometimes for financial reasons, sometimes loyalty.)

            Fair point on the spleen. However, it still applies to lap choles, chemo and lots of other procedures that do have some time, and geographic limitations. As I note, I think the market can work in some areas, but not in others. I dont see it working well in these big ticket areas w/o help. As I noted with Greg below, I think we can shift some costs and decision making to consumers, but only if we have the data to do so.


    • 5. A main concern about consumer-directedness is the snake-oil problem.

      I find the snake oil problem to be more complex that it at first seems:
      1. Snake oil is ubiquitous now. From acupuncture to mega vitamins to weight loss pills. You could even consider much of the nutritional information to be snake oil (low fat, low carb, low gluten etc).
      2. It seems much of conventional medical care is not much more than snake oil. I.e. heart bypass is far less commonly done in Europe but outcomes seem not differ that much, quixotic cancer treatment, stents etc. That is why we need those “death panels”.
      3. Most non-conventional medicine snake oil is non invasive and gives hope so maybe it is better than conventional which often just makes the end of life more miserable.

      That this necessarily would be so is unclear in a market that is not comprised of well-informed consumers. Health literacy is a real problem.

      Even in the current system, just telling your GP that you are paying directly often changes the treatment plan to much cheaper care so if most people were paying more out of pocket then an important part of being a GP would become looking for the most bang fro the buck care. We are not talking about patient select care with price in mind but GPs select care with price in mind. All the patient needs to do is choose an OK GP.

      Finally I think that a good policy goal would be to get the most capable people to pay as much as possible out of pocket while protection the least capable. (For example all college grads are intelligent enough to choose a wise health care path.)

      Here is my attempt to push in the direction of getting the capable to people to pay out of pocket. You may not like my plan so make your own.

    • I think the Triangles are completely misleading. Third party insurance should pay for all of the low probability expensive stuff that consumes so much of our health care dollars. Thus the one on the left should have a much larger top part of the triangle–that is probably about 70% of the total area (eg the top 10% sickest use 70% of the healthcare)

    • Don’t forget that only two developed nations – the US and New Zealand – allow direct to consumer advertising of drugs. There are good reaons why it’s banned in most countries.

    • “We could spend our entire gross domestic product on healthcare in useful ways.” Isn’t this impossible? Posit MediStan, a country where 100% of GDP is health care as broadly defined (It’s hard to imagine what life outside the health care facilities would look like, presumably no roads, only imported food,water and consumer goods, and no waste disposal system outside of hospitals.) This does not describe any nation on earth.

      Every dollar diverted from savings to health services increases GDP so additional spending on health services is required to reach the 100% target which creates more GDP, etc. This looks like the absurdity at the other end of the government financing debate – we need to keep reducing taxes because they pay for themselves by raising revenue. Ultimate answer: zero taxes. Math, anyone?

    • Don, you need to distinguish a rhetorical point from a factual claim.

    • Hi, Austin. Two thoughts —

      You wrote, “I have no problem with Dr. Salick or anyone else becoming a millionaire provided that reflects the value he has provided to society.”

      Are you quite sure you want to take this stand? If so, Hollywood is in big, big trouble. Seriously, it would seem the “providing value to society” is something only “society” can determine — not you, me, or a bunch of bureaucrats. How does “society” express itself? Through the market. I can’t think of any other way.

      You also wrote, “That this necessarily would be so is unclear in a market that is not comprised of well-informed consumers. Health literacy is a real problem.”

      We have encountered this concern a lot in the roll-out of CDHealth. People will say we can’t give people the power to choose until they are better informed. But this is putting the cart before the horse. People will not bother to become informed until they have the power to make choices. We have been trying to build “health literacy” for many decades in this country without success. Why? Because people aren’t going to invest the energy if they don’t have a direct interest and the ability to make use of the information.

      • Yes, I stand by what I wrote. Economic surplus is a flawed but reasonable measure of value in some instances, but not when markets fail in a severe way. Of course what is “severe” is subject to debate. And, no, I don’t mean to imply government always improves things. And yet, the concerns I express are real to me, if not others. I do not take them back.

        • Hmmm, that suggests you believe “government” = “society”. Yet there is a whole lot of society that is outside of government, no? Is government the best judge of what is good for society?

          • I don’t see where I’ve suggested government = society. I certainly don’t see how that makes any sense.

            • Okay. I was confused. We were talking about the value to society, but then you said ” I don’t mean to imply government always improves things.” I missed how we went from society to government. Sorry if I misunderstood the point.

            • I was short-circuiting the standard sequence: (1) point out market failures, (2) suggest government involvement, (3) be reminded that government doesn’t necessarily make improvements.

      • ” Because people aren’t going to invest the energy if they don’t have a direct interest and the ability to make use of the information.”

        How will they obtain that ability? If we adopt what I think John is advocating for, a nearly complete free market approach, I dont see how people obtain that ability in any meaningful, real time manner. You are losing weight. You to go see your doctor. He diagnoses a CA. Now you will become an expert on CA treatments? Given that it is our elderly using a higher percentage of medial care, and the cognitive issues inherent for much of that group, my call cases last night being wonderful evidence, how do we get around that?

        Why can’t we use a mix of economic incentives and evidence based medicine? To use the prostate CA example since that has been well covered, why not let insurance plans, including Medicare, pay for the cheapest treatment with quality outcomes, and let the consumer bear the cost differential if they want something else? Put insurance plans on exchanges where buyers can compare prices on products that are really similar, not just artfully marketed? For most major medical purchases, the patient gets just one shot. Why not help him/her out. Generate the CER and EBM data that can help make the decisions.


        • Steve,

          I don’t think John is proposing anything close to a “nearly complete free market approach.” In fact, the core idea is a universal tax credit provided by the government.

          How do we get around the issue you raise? By realizing that very few of us are isolated islands. Some of the elderly may indeed have cognitive difficulties, but almost all of them have family members, friends, neighbors, clergy who do not have the same difficulties.

          Think about how markets work. None of us is expert in everything. But there are “market makers” who are expert in one or two areas, and we rely on their opinions. For me, I know squat about computers, but I have a son who knows a whole lot. I know nothing about cars, but I have a friend who is an expert on them. On the other hand, I know a lot about carpentry and plumbing (and health policy). They come to me for help in those areas (though no one ever wants to know about health policy.)

          We should become more “health literate” but why would I spend a minute finding out about pediatrics? I have no need or interest in that. Now cancer is something I am concerned about, so I will pay attention to that.

          I think your idea for reference pricing is a fine one, but rather than “the cheapest” i would like the reference price to be an average — if I can spend less, I would get a portion of the savings, but if I spend more a pay a portion of the difference. This could work very well, istm.

          • Greg- I will venture out of the world of data and head into personal experience, so take it all with a grain of salt. That said, what I see is that we have smaller families. We are more spread out. Our friends and clergy are seldom especially knowledgeable about the specific health care issue we need to understand. The “market makers” are the same ones, or almost the same ones recommending the procedures and therapies, ie physicians. Sometimes, people will ask their PCP for their input. That is as far as it usually goes.

            All of which I think may reflect people reaching the collective decision, a market decision of sorts, that the downside risk to being wrong is so high, they are unwilling to risk not following physician advice. As an amateur carpenter myself, I know that most of the time I can fix my mistakes, or the mistakes of other people. It is mostly a matter of patience and know how. The right tools make it easier, or at least provide an excuse to tell your wife why you need something new. My son, minoring in computer science, can tell me what to buy or how to fix my computer, if I can put up with the eye rolling, but TBH, I make enough money that if he leads me astray, I can just buy a new computer.

            So, if we expect market mechanisms to make a big impact on costs, and to be clear I think there are areas where they may be effective, it will take at the least a massive change in our culture. I would not take it as a given that we can readily accomplish that.