In Crisis of Abundance: Rethinking How We Pay for Health Care, economist Arnold Kling argues that the way we finance health care matches neither the needs of patients nor the way medicine is practiced. The availability of premium medicine, combined with patients who are insulated from costs, means Americans are not getting maximum value per dollar spent. Using basic economic concepts, Kling demonstrates that a greater reliance on private saving and market innovation would eliminate waste, contain health care costs and improve the quality of care. Kling proposes gradually shifting responsibility for health care for the elderly away from taxpayers and back to the individual. The idea of matching the health care funding system to needs is very simple, Kling writes. The very poor and the very sick need help paying for health care. The rest of us do not.

CRISIS of Abundance

RETHINKING HOW WE PAY FOR HEALTH CAREBy ARNOLD KLING

CATO INSTITUTE

Copyright © 2006 Cato Institute
All right reserved.
ISBN: 978-1-930865-89-1

Contents

Acknowledgments..........................................viiPreface..................................................ixIntroduction.............................................11. The Rise of Premium Medicine..........................72. Three Health Care Narratives..........................193. Dollars and Decisions.................................334. No Perfect Health Care System.........................455. Insulation vs. Insurance..............................516. Matching Funding Systems to Needs.....................637. Markets and Evolution.................................778. Policy Ideas..........................................85Conclusion...............................................95Notes....................................................97Index....................................................105About the Author

Chapter One

The Rise of Premium Medicine

Here are five key points to consider:

Over the past 30 years in the United States, the practice of medicine has become more expensive. Compared with the past, today's medical care might be termed "premium medicine."

Premium medicine utilizes both more physical capital (such as MRI machines) and human capital (specialists).

Premium medicine reflects cultural expectations that call for a high level of effort to diagnose ailments correctly and treat them effectively.

Premium medicine clearly has increased the cost of health care. The evidence on whether it has increased the benefits of health care is mixed.

Because we have conquered many infectious diseases, to increase longevity further we must tackle degenerative diseases, the treatment of which brings less bang for the buck in terms of life extension. This will reinforce the trend toward more visible cost increases and less visible benefit increases.

On April 11, 2005, a Weblogger writing under the pseudonym Quixote published a long, dramatic account of her experience of obtaining treatment for an inflammation around her eye. She vividly described her ensuing odyssey, from the opening trip to an emergency room through her frustration with her expenses and with private health insurance. Her story seems to touch on every aspect of our health care system, from hospital food to emergency services. The sidebar excerpts only those parts that deal with actual attempts to diagnose and treat her ailment.

My guess is that 30 years ago, a patient with similar symptoms would have been treated "empirically," a term doctors use to describe a situation for which they do not have a precise diagnosis and treatment, so that instead they must use guesswork. A layman's synonym for treated empirically would be "trial and error." In this case, the patient might have been sent home with an antibiotic and perhaps a prescription for Prednisone, a steroid used to reduce inflammation. There would have been nothing else to do. In 1975, computerized medical imaging technology was new and exotic, with limited applications.

In contrast, in 2005, over the course of a few days Quixote was given a computed tomography (CT) scan, referred to a specialist, sent to a different hospital, referred to a specialty clinic, seen by a battery of specialists there, and given yet another CT scan. Ultimately, however, she was sent home, as she might have been 30 years ago, with an antibiotic, Prednisone, and no firm diagnosis.

Compared with 30 years ago, Quixote received more services, in the form of specialist consultations and high-tech diagnostics. However, the ultimate treatment and outcome were no different.

This does not mean that medicine is no better today than it was a generation ago. The CT scans and specialist consultations could have turned out differently. They might have been critically important, depending on her actual condition. Under some circumstances, treating Quixote empirically with an antibiotic and Prednisone could have been a mistake, perhaps costing some or all of her sight in one eye.

Such is modern medicine in the United States. Doctors are able to take extra precautions. They can use more specialized knowledge and better technology to try to pin down the diagnosis. They can perform tests to rule out improbable but dangerous conditions. But only in a minority of cases does the outcome deviate from what would have been the case 30 years ago.

Figure 1-1 shows the growth in specialized medicine from 1975 to 2002. Over this period, the total population of the United States rose by 35 percent. Meanwhile, the total number of active physicians more than doubled, even though the number of general practitioners only increased by 55 percent, slightly more than the rate of increase in the population.

The United States has perhaps the highest ratio of specialists to general practitioners in the industrial world. However, in aggregate data, it is very difficult to find a significant effect of specialist supply on health care outcomes.

The United States also tends to be an outlier in its use of expensive medical procedures. Heart bypass surgery is about three times as prevalent here as in France and about twice as prevalent as in the U.K. Angioplasty is more than twice as prevalent here as in France and about seven times as prevalent as in the U.K.

Specialization represents the human capital component of premium medicine. The other component is physical capital, particularly diagnostic imaging technology. Todd A. Gould points out that "As late as 1982, there were but a handful of MRI scanners in the entire United States. Today there are thousands. We can image in seconds what used to take hours."

According to the marketing consulting firm IMV, more than 24 million MRI exams were conducted in 2003, and more than 50 million CT scans were performed in the same year. Each represents a 10 percent increase from 2002. Combining this information with data from radiology researcher Dr. Fred A. Mettler and colleagues provides the following graph for the growth of high-tech diagnostic imaging in the United States (see Figure 1-2).

In March 2005, Mark Miller, Executive Director of the Medicare Payment Advisory Commission, testified that "Diagnostic imaging services paid under Medicare's physician fee schedule grew more rapidly than any other type of physician service between 1999 and 2003. While the sum of all physician services grew 22 percent in those years, imaging services grew twice as fast, by 45 percent." More detailed breakdowns showed that "Spending for MRI, CT, and nuclear medicine has grown faster than for other imaging services. Thus, these categories represent an increasing share of total imaging spending. MRI spending grew by 116 percent between 1999 and 2003, nuclear medicine by 104 percent, and CT by 84 percent." Miller's testimony noted that there is wide variation in the usage rate of diagnostic imaging service across regions, but it is difficult to find a relationship between health outcomes and usage rates.

American Cultural Expectations

The term "premium medicine" is meant to describe this heavy usage of specialist consultations and advanced medical technology. I believe that it embodies American cultural considerations, including our can-do spirit, our high expectations as health care consumers, and the high standards to which...