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It is not hard to cut waste in health care

January 27, 2021

Topics: Quote of the Day

By Amy Finkelstein
The New York Times, January 22, 2021

Cutting waste while preserving critically important treatment is the holy grail of health care policy.

One of the pandemic’s startling effects is that despite the overwhelming need for Covid-19 treatments and vaccinations, health care spending in the United States has declined sharply.

This indiscriminate reduction in spending closely resembles the unfortunate effects of an array of policies over the past half-century intended to reduce unnecessary medical care. These too cut essential and inessential care alike.

Excessive administrative costs, high prices and inappropriate medical care are the three major culprits in wasteful spending, driving insurance premiums and taxes without helping patients.

For decades, the driving principle behind reducing needless medical care has been that if patients or their providers have financial “skin in the game,” they will make prudent decisions.

The economic theory is simple: If something becomes more expensive, people will buy less of it. And the empirical evidence is overwhelming: When patients have to pay more, they use less medical care.

To encourage only essential care, there has been a widespread shift to paying a fixed fee for a patient, regardless of what treatment is provided. A hospital might be paid $25,000 for a patient’s knee replacement. Or a network of health care providers might be paid $10,000 a year for all of a patient’s health care needs.

One reason it is so hard to trim waste is that physicians and regulators have already eliminated so many demonstrably harmful or useless treatments.

Low-value doesn’t mean no-value-ever.

But most medical procedures are different. They are a matter of judgment.

That doesn’t mean we should stop trying to cut waste. But a simple, miracle cure for excising most unnecessary medical care? Don’t buy it, with or without insurance coverage.

Amy Finkelstein is the John and Jennie S. MacDonald professor of economics at M.I.T.



By Don McCanne, M.D.

The United States has the highest per capita health care costs of all nations, yet we are often receiving only mediocrity for our spending. For this reason, measures are often taken to reduce demand for care by making it more expensive, especially through high deductibles and other cost sharing. But excess demand is not the reason our costs are so high compared to other countries, rather it is due to high prices and, especially, excess administrative costs.

Using cost sharing is detrimental because it causes patients to forgo beneficial health care because of the out-of-pocket costs, especially if the cost sharing is truly unaffordable. We need to look at other methods of reducing spending – especially methods that have been successful in other countries with more reasonable levels of health care spending.

Also inappropriate medical care has been blamed for some of the excess spending, but that is not a feature specific to our nation. Much of it is low-value care, but that is not the same as no-value care. Forgoing a scan that has a low probability of detecting a serious problem for which effective intervention is available can be disastrous if diagnosis is deferred until intervention is not effective. It is for this reason that it would be difficult to reduce spending by forging low-value interventions and procedures. We cannot be expected to save money by cutting out what is considered waste only retrospectively.

High prices? Yes, we can use government administered pricing to pay legitimate costs plus fair profit margins. This should ensure that services and products would be available without spending exorbitant amounts. The primary objection to government administered prices is not based on economics, but rather it is based on politics. Other nations are effective in overriding politics; we can be too.

But the most important reason for our high spending is excessive administrative costs – a feature relatively unique to the U.S. health care system. We are heavily dependent on private commercial insurers. Not only are they responsible for tolerating the highest health care prices, they are also responsible for selling us excessive administrative services that they use to try to shift more of the costs to the patient – the exact opposite of what insurance should be doing. Not only do the patients pay more, but many of these administrative services are used to prevent patients from having the care that they should have.

This leads to the problem expressed in the title of Professor Finkelstein’s article: why it’s so hard to cut waste in health care. The fact is, it isn’t hard. The biggest waste is unneeded administrative services which we could dramatically reduce merely by getting rid of private insurers and enacting and implementing a well designed, single payer, Improved Medicare for All program. We could save literally hundreds of billions of dollars that could be used for unmet health care needs.

You don’t need to be a professor at M.I.T. to understand how simple that would be.

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About the Commentator, Don McCanne

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Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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