• Priceless: Chapter 5

    Chapter 5 of John Goodman’s book Priceless is about why we spend so much on health care in the US. In comparison, it feels as if John was only toying with readers in prior chapters, which I found a bit light on evidence. (Our reviews of them are under the Priceless tag.) In Chapter 5 he lowers the boom, citing 66 references in about 27 pages.

    I’m going to review the chapter backwards. It concludes with a sketch of John’s vision:

    Let patients pay for all routine primary care and all diagnostic screening tests from a Health Savings Account that they own and control.

    Create special HSA accounts for the chronically ill and encourage providers of integrated, coordinated care to compete in an unrestricted market for their patronage.

    Let all elective inpatient care be subject to a type of value-based insurance involving domestic medical tourism—with the third party paying only what the care would cost at low-cost, high-quality facilities and with the patients paying all the additional costs if they choose to seek care from other facilities.

    A full analysis of this vision would include all the virtues and all the potential limitations and concerns that a skeptic might voice, of which there must be some. Anyone serious about such a reform would respectfully consider the limitations and concerns and attempt to build in countermeasures and safeguards to address them. I look forward to seeing whether and, if so, how John handles this task.

    Earlier in the chapter, John makes an interesting claim.

    The conventional wisdom in health policy is that the United States spends far more than any other country and enjoys mediocre health outcomes. […]

    Indeed, the reverse may be true. We may be spending less and getting more.

    On the spending side, John says a lot of things, but winds up telling us something that is well known. The US spends a lot more than other wealthy nations but doesn’t use more resources. What does that mean? Well, it’s the prices, stupid, which every health policy wonk knows. On the outcomes side. John says the evidence is mixed. That’s perhaps slightly more optimistic than many. But, did you notice that John leaned on survival rates as evidence of better outcomes? Survival rates! (I’ll say no more here. Follow the link.) Putting together what he’s written about spending and outcomes, and knowing what we know about survival rates, I fail to see how John has shown that the conventional wisdom is wrong. Prices are high and outcomes are, at best, mediocre. How is that spending less and getting more?

    The chapter includes a section on Medicare’s administrative costs. He claims that their accounting “ignores the cost of collecting taxes.” Nope. The chapter contains a section on whether Medicare’s costs (spending, really) are growing more slowly than those of the private health sector. He makes an argument the limitations of which I’ve addressed. (For more on public vs. private cost control, see the FAQ.)

    This is all part of John’s attempt to dismantle any shred of respect the reader might have for anything the government has done or is contemplating doing in the realm of health care. Though, in parts, John condemns private insurer’s too, he cites many studies purporting to show government experiments in cost control have failed. But what about those copied by private insurers? (I’ll get back to that.) I cannot possibly check up on all his studies and read all the other relevant ones. However, there are a few things I can easily react to.

    1. John says ACOs have been rejected by the nation’s leading health plans. I guess this hinges on what “leading health plans” means. But there are private plans pursuing ACOs. Condemning ACOs isn’t just an anti-government or even anti-ACA stance.

    2. John says that there is no reason to be hopeful about ACOs. Perhaps he should check the latest issue of Health Affairs. No, I’m not saying every ACO has or will deliver stunning results. But some have saved money and others may. Shouldn’t we be hopeful about that? Surely we cannot expect every experiment to succeed everywhere.

    3. John says the “health policy community is dead set against discussing fundamental incentives.” I see nothing but talk about changing provider incentives. Just Google ‘provider incentives healthcare’ and you’ll see what I mean. Heck, there’s a lot about patient incentives too. Go on, Google it.

    4. Here’s what John wrote about a Medicare demonstration relating to heart bypass surgeries:

    Value-based payment demonstrations consisted of four programs in which Medicare made bundled payments to hospitals and physicians to cover all services connected with heart bypass surgeries. With respect to these, the CBO finds that “only one of the four . . . yielded significant savings for the Medicare program” and in that one, Medicare spending only “declined by about 10 percent.”21

    Reference 21 is a CBO blog post, which actually says,

    Only one of the four demonstrations of value-based payment has yielded significant savings for the Medicare program. In that demonstration, Medicare made bundled payments to hospitals and physicians to cover all services connected with heart bypass surgeries, and Medicare spending for those services declined by about 10 percent.

    See what John did there? There were not four demos pertaining to heart bypass surgeries, only one of which succeeded. There were four demos of value-based payments. The only heart bypass one yielded substantial savings. John could have still have used what CBO really said to support an argument that few demos have saved money. What’s wrong with the truth? Does it hold out too much promise that at least in the area of heart bypass surgeries, we have evidence of a government demo success?

    5. John lauds outpatient surgery centers as successful, private entrepreneurial innovations. However, outpatient and ambulatory surgical care is the single largest driver of excess health spending.

    To all this, I’ll add one more thing. Chapin White has connected the gradual slowdown in Medicare’s spending growth to the program’s payment reforms. To a large extent, these reforms have been copied by private insurers. Nobody forced them to do so. Is the private sector the locus of innovation or not? (Truth is, sometimes yes, sometimes no.)

    Let me be clear about what I’ve done in this post. I have not shown that Medicare or the status quo health system is ideal. I have not argued that the ACA cannot be improved. I have not claimed that John’s vision is flawed. I have, however, illustrated that John’s reading and reporting of the evidence is incomplete. I’m not sure how that furthers his aim. In my view, one need not eviscerate government or the status quo to argue something else would be better. John would get little argument that our health system needs reforms. He’d get little argument that the ACA should not be the final one. To me, that’s enough. I look forward to reading more about John’s vision, and I hope to read less one-sided presentations of the evidence.

    In two posts between now and Monday, I will cover Chapters 6-9.


    • I’m traveling and can’t give the links, but my Health Affairs piece on Medicare was written with former Medicare Trustee Thomas Saving, who knows the program better than most. Bottom line: there is no credible evidence that Medicare is controlling costs better than the private sector. But why would it? Medicare is actually run by the private insurers. Both public and private sectors are dominaged by bureareaucracies — often the the same bureaucracies. There is a lot of evidence, however, that the Medicare Advantage plans are much better than Medicare.

      On that last point, the CBO has produced three separte reports saying that the pilot programs and demonstration projects ARE NOT WORKING. But what is working are some of the very same ideas in the Medicare Advantage plans. What’s the difference? Whether the exercise is designed in Washington or in the private sector.

    • On the international comparisons, Austin muddles the point. There are no real prices in health care. That’s why my book is titled “Priceless.” But if every price is a phony price, when you add up all those prices what do you have? One big phony totlal spending number. That’s why no nation really knows what it is spending on health care.

      The only thing that counts, however, is real resoures. We use fewer doctors, fewer nurses, fewer admissions, fewer bed days, etc. than the OECD average. And our outcomes appear to be as good or better.

      This is nothing to brag about, however. We’re still probably wasting one of evey three dollars we spend. The other countries. are also very wasteful.

      • Those “phony” prices are what we pay. If the “real”spending is much lower, then the problem with health care costs is those “phony” prices. Why not target them?

      • We have fewer days in the hospital than the OECD average, 5.6 vs 6.9, but pay about 2 1/2 times as much.


        We have 2.4 physicians per 1000 people. The OECD average is 3.0. We pay them much more.



        • Steve, maybe we are doing things right and they are doing things wrong. Perhaps a lot of our cost and inefficiencies is because we are trying to copy them.

          • If you read through Aaron’s entire series on why US health care costs so much, I think you can see that we spend more across the board, but there are certain areas like outpatient care spending where the gap is even larger.


            • That does not demonstrate that the other nations are doing things correctly. Maybe they should be spending more? We don’t know based upon what you are saying. What we do know is that the US spends more on most things such as TV’s yet I don’t hear any complaints. Certainly health care is more important than another TV, right?

      • Unfortunately, the use of hospital admissions, bed days, number of nurses, number of doctor visits etc. are all poor surrogates for the “use of resources” in the US.

        While all those are in fact low by international standards, the use of surgical and other procedures, use of high tech care in general, use of high end imaging and high end lab, and use of more expensive proprietary drugs more than make up for them in cost, which is what sends us to the top — by at least half again — of the list of costs of care. There is no comparison between the cost of a patient lolling for an extra day of rest in a French hospital and the rapid fire expenditure of resources that characterize inpatient and outpatient contacts in the US. The difference is literally orders of magnitude.

        All this is complicated further by the fact that many of these uses of resources are at best scientifically questionable, at worst outright harmful to patients.

        The US uses much more in health care resources than almost all developed countries, not because of how many days we spend in hospitals but because of what we do when we are there. Only Japan has comparable use — or overuse — of resources, and Japan keeps costs very low by use of a strict government board setting all fees at what, by our standards, are levels so low they would be ridiculous to talk about.

    • So, who is going to rate the quality in these “low-cost, high-quality” facilities? Given a choice and knowledge, patients will chose high-quality care. If people aren’t choosing it now, it’s not the system, it’s lack of knowledge.

      I’d like to see some data on price/quality differentials in a given area, showing that there’s potential that steering people to “low-cost, high-quality” is going to reduce costs.

      • I have had the experience of telling a doctor that I will be paying out of packet and having them change to a much cheaper course of care. I have friends who have had the same experience. I could imagine that if we were paying more directly for where a major part of a GP’s job would be knowing were to get cheap but effective care for their patients.

    • This post of Austin’s is difficult to interpret for it makes a lot of generalities without focusing on any proofs. It reminds me of the Wendy’s commercial “Where’s the beef?” I didn’t see anything that satisfactorily rebuts anything in John’s book. I am not saying things shouldn’t be rebutted, I just want to see a little more of what the rebuts are. We get off site citations, but very little clear information that has examined both sides of the coin. We can always find a study to dispute almost anything but that leaves us where we started. I’ll make only 3 points out of the dozen or so that should be made.

      Take ACO’s, Austin would like to have us think that they are a big deal or maybe not. Tell us Austin how do ACO’s differ from HMO’s? We have a great deal of experience with the latter and they also failed to do the job..

      Outpatient costs are climbing. Is that a complaint. Is it not better to have certain things done as an outpatient rather than to use expensive hospital resources? Doesn’t that make health care more available and thus improve health care? Of course more health care increases cost. What else about cost should we consider? Let’s get to specifics. Medicare has recommendations for the performance of colonoscopy.  Who charges more? The outpatient centers or Medicare? Medicare, Medicare pays way more. My wife went to our local hospital for the removal of a cyst on her elbow. Price to the cash payor $7,800 but collected only $400 from our insurer. What does that tell you?     

      Medicare is wonderful you might say, or is it? In ~45 years Medicare has had enough time to get things right. They haven’t. Yet Medicare had near total control of one population group (is that akin to single payer?) and FAILED. Look at the costs. Ridiculous!                                       

      • You want me to pick a side. I don’t need to. Sorry. Sometimes a reaction isn’t a rejection, it’s just pointing toward more information. If you dislike that, stop reading this blog.

        I will confess to not particularly enjoying our exchanges since I have far less interest in playing your foil as you seem to want me to. That’s not what I do here. So, don’t expect much more in response to you in the comments.

        This may not satisfy you, but it is related to the HMO vs ACO point (though more focused on capitation per se): http://blog.academyhealth.org/acosnotcapitation/ .

        • Austin, I don’t need you to pick a side for one can be critical of opinions they agree with and as stated before I don’t know for sure what your opinions are nor is it necessary that I know what you believe. I was looking for a bit more data in the criticisms you presented. I want to hear all sides of the story.  I am sorry if I offended you as that was not my intent. When you asked me questions using my responses as a foil I didn’t take offense. I simply answered as best as I could. I find this blog fascinating and the discussion of “Priceless” to be of great interest including all of the various opinions so I will persist until the end of the book.

          With regard to your comment on ACO’s and HMO’s. Since they have very similar incentives we should believe they will have very similar results. I have seen no evidence that proves any differently.

      • @Al- Follow the link on ACOs. This blog has long written about the problems associated with them. They might help to control costs, but the devil is in the details. In short, who bears the risks?

        “Outpatient costs are climbing. Is that a complaint. Is it not better to have certain things done as an outpatient rather than to use expensive hospital resources?”

        Depends. If there are fewer inpatient procedures because they are moved to the outpatient facility and done there more cheaply, we have a win. However, that is not what we have seen. Inpatient spending has continued to grow while outpatient spending has grown even faster. There are a number of studies showing that physician utilization of procedures increases when they have financial interest in these facilities, which an awful lot of them do.

        “Who charges more? ”

        I was self-incorporated and did my billing for three years. I now run a 60 provider group, in charge of overseeing billing (my MBA accountant does most of the work). In general, private insurance > Medicare > Medicaid when it comes to how much they pay. I often joke that I could have retired by now if I had only private insurance patients. (In reality, the wife would just spend more, alas.) Cash payments are funny and I dont think I have enough space here to go over them.

        “Medicare is wonderful you might say, or is it?”

        I dont read anyone saying that. What I see is people saying it costs too much. More importantly, the ROI is poor. Its costs will eventually consume our budget if they increase at the rate they have been increasing. However, this is at least as true for private insurance. When you have to start getting way del into the weeds to try to prove that Medicare rates are increasing faster than private insurance rates, or voce versa, it tells you that there is not much difference. We face a health care spending problem, not a Medicare spending problem. I dont think anyone on the intertubes has shown this graph more than this blog. It is one we should all know.


    • Interesting, Austin. I hadn’t seen Aaron’s survival rate argument before. There is a lot we do that fails to move the trend line. I did a post for John’s blog about the latest uninsured numbers (at http://healthblog.ncpa.org/why-are-there-fewer-uninsured/ ) that shows over 25 years the rate of non-insurance has barely moved at all. For 25 years the portion of the population insured has remained at about 85% (and uninsured at 15%) in spite of all the work that has gone into addressing the problem.

      In outcomes, no sooner do we get some progress in, say heart disease, than along comes diabetes and autism. We get smoking rates down and up pops obesity. Kinda makes ya wonder.

    • Steve I have read a lot about ACO’s on both sides. Incentives matter.

      Outpatient costs are climbing, but that doesn’t mean that is bad. A lot of people are getting a lot of relief from outpatient services. Are costs climbing too fast? Yes and there is a lot of very marginal care being provided. Why? Poor incentives. Our government has been unable to manage this problem. Too much politics. Too much intervention. Lousy incentives.

      “(In reality, the wife would just spend more, alas.)” Thus the cure for the healthcare dilemma is to prevent doctors from getting married. 🙂 We have poor incentives from all areas, but the one area we neglect is the patient. They are not as dumb as we all think, yet we seldom talk about them. In the end it is their money because they pay taxes, but hospitals, government, advisors, etc. divide up the spoils. They even force individuals that can and would pay into the health care system. That is a collection of really bad incentives.

      When we say ROI is poor I sort of agree, but then I realize how important my life is to me and how much extra I am paying because of government intervention into the health care system. Government has destroyed the market place that brings prices down and is paying big time. How about letting the patient have some say in the ROI?

      • ” Our government has been unable to manage this problem. Too much politics. Too much intervention. Lousy incentives.”

        Again, private insurers pay much more than Medicare, and much, much more than Medicaid. As John frequently points out, there are concerns that docs might not take Medicare patients if fees drop much more.

        “how much extra I am paying because of government intervention into the health care system.”

        Essentially every other OECD country spends a lot less on health care than we do with similar or better results. They all have governmental involvement. It could all be coincidence. I would support more wide scale testing of market based systems. The ACA lets states opt out if they want to implement their own systems of reform. I hope some of them try a more pure market approach. I am skeptical it will work, but think we should give it a try. While I dont think patients are dumb, I dont think most know that much about medical care or its consequences. Unlike buying potatoes or clothing, you usually get just one shot at purchasing a major medical procedure. It is often a decision made under duress. Geographical limitations are more important than most economists realize. It would take a huge cultural change.


    • Steve, you are confused. But you are not alone. The social cost of health care (or anything else, for that matter) is the opportunity cost of real resources used to produce it. That is what society as a whole must give up in terms of other services to obtain it.

      Since we have fewer doctors than other countries, we have more other goods and services that highly intelligent peole can produce. That means that we are “spending” less on health care from a social point of view than other countries. How income is split between doctors and patients and taxpayers may be of concern to you in one of these roles. But that is of no social consequence.

      The phrase “It’s the prices, stupid” should be replaced by the phrase “What we incorrectly call ‘prices’ are irrelevant.”

      • John
        Is it the unit of analysis (docs) that is most important when assessing opportunity and social cost?

        We have fewer doctors, but our medical industrial complex adorns them with physicians assistants, administrative support, and gobs of bells and whistles far in excess of OECD countries. I dont see how we are “spending less.”

        Do intelligent Americans produce more goods and services as you state. again, because we use less physicians? Maybe, but from my lowly perch, they live in a hospital and not in other places where we need them.

        Maybe I am misunderstanding?


      • I think there is more than one way to look at this. I am thinking of it as allocation of capital, ie money. If we spend on health care, we dont have it to spend elsewhere. I think money is the proper metric. In that case, the number of doctors is secondary to what we spend on doctors, or medical devices or catheters, etc. Also, since physician salaries are actually a relatively small portion of health care spending, isnt it the spending that results from what we order and what procedures we perform that matter more? X doctors doing 100 procedures may very well cost less than 1.2 X doing 50.


      • If I understand John’s point here, he’s accepting the labor theory of value espoused by Ricardo and Marx.

    • Let us see your proof that private insurers pay much more than Medicare. I know the numbers you will give, but then tell us what is included in the private insurer’s numbers that is not included in the Medicare numbers. Then tell us how the calculation is made.

      When suddenly you find out what is left out and how the calculations are made you will see the comparisons drawing much closer with a question of who spends more. At that point John’s better explanation should be looked at carefully.

      Don’t forget it costs private insurers a lot of money to prevent fraud and that prevention saves a lot of money especially on durable goods in Miami ;-).

      On your second point regarding OECD and the ranking of quality take a look at my other reply on chapter 5 ctd.

      • 1) You can ask any physician you know who has ever been self employed or not worked as an employee of a hospital. Fees for the same service are about 20% higher, on average from private insurers. At any rate, here are some quick, easy to read comparisons of Medicare fees to those of private insurers.


        2) For my specialty, Medicare pays about 67% less.


        So, when I do my CABG Monday, I would take home 3 times as much if it were a privately insured patient. My specialty is an outlier, so you really should be looking at the average difference, which is usually about 20%. Payments for identical procedures will net you about 20% more if it is covered by private insurance.

        3) What about total spending? It is here that you may have a point, but it is hard to get good data. If those 20% higher payments mean better service, it might be worth it. However, it seems like patients like their Medicare service better than that provided by private insurers.


        Waste, fraud and abuse (WFA)? I dont think anyone has claimed that Medicare has 20% WFA. Private insurers dont let us know their rates, so it is hard to compare. Plus, you forget (I sure dont since it costs me a lot) that the efforts of private insurers to stop these impose significant costs on providers. I spend much more time on private insurance issues than Medicare. Mistakes involving private insurers have cost my group in the 6 figures. Medicare is much simpler.


    • Amazing how one gets misinterpreted.

      I do not accept the labor theory of value. I’m as neoclassical as they come. I simply observe the obvious: there are no real prices in health care, so the spending totals are largely meaningless.

      Apparently, we use less of everything that people measure — fewer doctors, fewer nurses, fewer hospital services — except technology. That means we use less than average real resources to achieve results that are as good or better than the average OECD country. However, this is nothing to brag about.

      We do give more money to the providers of care. That’s why our spending total is so much higher. But suppose we put a 50% tax on the income of everybody on the provider side and gave the money to patients and taxpayers. Then our spending total would look like every other country’s, but it would not affect any real social costs (at least until the providers started quiting). This is Economics 101 folks.