Just before Easter weekend, Paul Krugman – the Nobel Prize-winning economist employed as a commentator by The New York Times – published a piece entitled “Patients Are Not Consumers”.  We were so struck by the implications of this commentary that we intended to respond right away, but were unavoidably delayed.  As a result many others have already weighed in with their own commentaries.  A tip of the hat to Megan McArdle at The Atlantic, Jeffrey Grossman at JG, Caesarea,  Steven Spear at The High Velocity Edge, Aaron Carroll at The Incidental Economist and others.  But even after reading these we believe that the necessary analysis of Mr. Krugman’s commentary is still not complete.  Moreover, we believe that Mr. Krugman’s piece is, in the broad scope of things, even more important than even he might have realized.  More about that in a bit.

So let’s go ahead and visit the entire Krugman piece, and see if we can tease out the critical points.

“Last week, The New York Times reported on congressional backlash against the Independent Payment Advisory Board (IPAB), a key part of efforts to rein in health care costs.

 

 

But something struck me as I looked at Republican arguments against the board, which hinge on the notion that what we really need to do is to “make government health care programs more responsive to consumer choice.” 

 

 

How did it become normal to refer to medical patients as “consumers”? The relationship between patient and doctor used to be considered something special. Now politicians and supposed reformers talk about the act of receiving care as if it were no different from buying a car. What has gone wrong with us?” 

These three short paragraphs contain two separate thoughts.  The first is that it is somehow morally, ethically or socially reprehensible to think of patients, i.e, people who are ill, as being “consumers”.  Coming from an economist like Mr. Krugman, this seems a bit bizarre.  As Megan McArdle correctly observes:

“I found it very odd to see Paul Krugman complaining that “patients are not consumers” as if “consumer” were some sort of horrible, low-status role that should never taint the sacred realm of health care.  In my economics classes, “consumer” was not a value judgement; it was a descriptor.  A consumer is someone who consumes, just as a producer is someone who produces and a distributor is someone who distributes…  Patients consume health care resources.  Providers provide them. And the system through which labor and resources are allocated in our society remains money–an arrangement that I’m pretty sure that Paul Krugman doesn’t want to change.”

On its face it’s clearly ridiculous not to consider patients “consumers”, so to be fair Mr. Krugman must be using this language to mean something else.  The obvious implication then is that, although patients are “consumers” in the technical sense, they are also something more than that by virtue of their illness and vulnerability.  Perhaps something to be especially protected; to be given more options, opportunities and consideration than the average person might be.  This must be it because of Mr. Krugman’s next observation that: “The relationship between patient and doctor used to be considered something special.”  And indeed it was, and should be.  The historic purpose of the physician-patient relationship is to educate patients about their disease and guide them through the sometimes tough decisions that have to be made.  And, one might add, to specifically serve as an advocate for the patient when offering those choices and fighting, if necessary, with the patient’s insurer.

Just as clearly, Mr. Krugman believes that treating patients as people who must make consumption decisions for themselves based partly upon financial considerations is a bad idea.  There are two possible reasons for this.  The first is that they are vulnerable and somehow at risk for making bad decisions by virtue of their education, mental capacity or debilitating condition – thereby harming themselves.  The second is that they are likely to make bad decisions that will harm society or others.  Apparently both possibilities are of concern to Mr. Krugman, starting with the second one:

“About that advisory board: We have to do something about health care costs. We can’t maintain a system in which Medicare essentially pays for anything a doctor recommends. That’s especially true when that approach is combined with a system that gives doctors and hospitals a financial incentive to engage in excessive care.

 

 

Hence the advisory board, whose creation was mandated by last year’s health reform. The board, composed of health care experts, would be given a target rate of growth in Medicare spending. To keep spending at or below this target, the board would submit “fast-track” recommendations for cost control that would go into effect automatically unless overruled by Congress. 

 

 

Before you start yelling about “death panels,” bear in mind that we’re not talking about limits on what health care you’re allowed to buy with your own money. We’re talking only about what will be paid with taxpayers’ money.” 

Ah.  So the most important problem here is that patients will make decisions that are too costly, in part because they are given bad advice by doctors and hospitals who stand to benefit by urging them to choose more expensive options.  One should note that patients will be particularly indifferent to the cost of their care if these decisions have few or no financial consequences for them personally.  This is the case with Medicare Part D (whose “doughnut hole” was closed by ObamaCare), Medicaid, high-end insurance of the type given to many state and federal workers and union members, and many Medicare Advantage plans.

But let’s pause here.  We would be terribly negligent if we did not mention one out-and-out error or misconception that Mr. Krugman mentions in the last paragraph quoted.  The one about bearing in mind that “we’re not talking about limits on what health care you’re allowed to buy with your own money” when it comes to the decisions of the IPAB.  In fact, we are.  And the fact that many of our political and economic leaders do not appear to know this is both discouraging and a bit frightening.

The vast majority of healthcare providers who take care of Medicare patients do so “on assignment”.  This means that the clinician or other vendor agrees to take whatever Medicare will pay as payment in full for whatever goods and services are provided to the patient.  It is illegal for these providers to bill Medicare patients for any additional amounts, or in fact to charge patients anything for any good or service that Medicare itself covers as a benefit.  So what happens when a cost control organization such as the Independent Payment Advisory Board decides that they are going to cut costs by reducing the amount that they are going to pay clinicians for a specific healthcare good or service?  Well, if the reimbursement becomes so low that it is no longer economically feasible for the clinician to provide the service, (s)he has no choice but to tell the patient “sorry, I can’t do that for you”.  Can the patient then respond by using their own hard-earned dollars to pay that provider enough to cover the true cost of the service?  Nope. That would be illegal for any provider accepting assignment.  The patient’s money simply cannot be spent to purchase that service from that provider.  Medicare says so, and by manipulating prices the IPAB can effectively force many patients to forgo tests and treatments that they might otherwise desire and be willing to purchase with their own money.  Most Americans should know this, but they don’t.  Even a Nobel Prize winner like Mr. Krugman apparently doesn’t.

But let’s go on.  Back to Mr. Krugman’s original commentary:

“Now, what House Republicans propose is that the government simply push the problem of rising health care costs on to seniors; that is, that we replace Medicare with vouchers that can be applied to private insurance, and that we count on seniors and insurance companies to work it out somehow. This, they claim, would be superior to expert review because it would open health care to the wonders of “consumer choice.” What’s wrong with this idea (aside from the grossly inadequate value of the proposed vouchers)? One answer is that it wouldn’t work.

 

 

“Consumer-based” medicine has been a bust everywhere it has been tried. Medicare Advantage was supposed to save money; it ended up costing substantially more than traditional Medicare. America has the most “consumer-driven” health care system in the advanced world. It also has by far the highest costs yet provides a quality of care no better than far cheaper systems in other countries. 

 

 

But the fact that Republicans are demanding that we stake our health on a failed approach is only part of what’s wrong. As I said earlier, there’s something wrong with the whole notion of patients as “consumers” and health care as simply a financial transaction. 

 

 

Medical care, after all, is an area in which crucial decisions must be made. Yet making such decisions intelligently requires a vast amount of specialized knowledge. 

 

 

Furthermore, those decisions often must be made under conditions in which the patient is incapacitated, under severe stress or needs action immediately, with no time for discussion, let alone comparison shopping.” 

Here again in this selection, there are two separate ideas at work.  The first is that “consumer-based medicine” has actually been tried in the U.S. (and presumably elsewhere, although the author does not say where else “everywhere” might be), and did not work.  The second is the assertion that we mentioned previously that patients are incapable of making sound decisions about what which tests and treatments to select because they are rushed, incapacitated, ignorant or otherwise debilitated.  What Mr. Krugman really appears to be saying is not that patients are not consumers, but rather that they are lousy consumers.  Let’s look at both of these ideas; they are actually quite inter-related.

First let’s dispose of the time and incapacity issue.  It is a fact that the vast majority of healthcare goods and services are provided to patients (and their families) who are not mentally incapacitated or in an emergency situation, but instead seeking care for a problem that is not life-threatening, and often chronic in nature.  And where the patient herself is debilitated, their family generally isn’t.  So one should be hard-pressed to argue that severe stress or incapacity is the deciding factor (or even a deciding factor) in the majority of healthcare decisions made by patients and families in their capacity as consumers.  So what else could account for their poor and costly decision-making performance?

Well, to be a good, cost-effective consumer there are several pre-conditions.  The first one, as we mentioned previously, is that you absolutely must have your own financial skin in the game.  As an economist, Mr. Krugman should know this better than anyone.  How do we know?  Real world experience and common sense.  You’re a normal person. right?  Let’s say that we give you the option of getting whatever clothes you might need at either Target or Nieman-Marcus, all expenses paid.  You won’t have to contribute a dime.  Are you going to make any attempt to shop at Target, unless it’s substantially more convenient to do so?  Of course not.  If you have no personal financial liability, the actual cost of the clothes you choose will be immaterial to you.  Why should healthcare be any different?

What else does a consumer need in order to “be in charge”?  Three things: accurate prices, information about quality and performance, and “control”, (i.e., the ability to make the final decision about which course of action to take).  How do those stack up in the healthcare system we’ve known, and the one promised by the Affordable Care Act law?

Prices are the signals that the market sends to consumers and producers that tell them, other things equal, how eager they should be to buy or sell a given product or service.  If you don’t have accurate pricing, you’re not going to be in a position to judge the value of that good or service to you as an individual.  Yet it is practically impossible for any American patient to determine, in advance, the actual amount that both they and the insurance company will have to pay for nearly anything that is covered by insurance.  Just try it.  Their doctor won’t know.  There are so many combinations of coverage and co-pays and deductibles and write-offs that she’s not in any position to tell you.  Think your insurance company will tell you?  Try it.  Call them today and tell them you need a lumbar discectomy, and ask how much it will cost both you and them.  You’ll be on the phone for hours, and will almost certainly never find out.

So patients don’t have the price information they need to be good consumers.  How about information about the quality and performance of various different alternative treatments?  This is where a good doctor-patient relationship would come in handy.  Ideally your doctor will explain to you the purpose, nature, risks, benefits and alternatives for all of the different options that exist for your condition in a completely objective fashion.  He’d then answer any questions you might have and help you decide which alternative is best for you in your particular circumstances.

Unfortunately this is not the American healthcare system that we know, nor is it the one mandated by the ObamaCare law.  Clinicians in the U.S. are paid by the procedure, and the prices of those procedures are essentially fixed by the government.  So one potential source of bias is that doctors are given an incentive to recommend those tests and treatments they themselves perform and that the government has deemed to be most profitable.  But the problem hardly stops there.  Since the late 1980s, the government has decided that simply talking to patients will be one of the worst-paid and lowest margin services clinicians can offer.  As a direct result, talking and counseling time is a scarce commodity.  Still worse, insurance companies (including Medicare and Medicaid), have the final say about whether a given healthcare good or service will be paid for.  It is well established that doctors are reluctant to offer tests or treatments that they know are unlikely to be approved.  Therefore the information given to patients is highly likely to be skewed and incomplete.  And that’s well before we get to the issue of it being nearly impossible to find out which specific clinician or hospital is likely to be the best for a given patient’s particular medical condition.  The net result is patients are highly unlikely to have access to the unbiased and complete information that they are likely to need to make good consumption decisions.

This brings us to the final pre-condition for effective consumer choice: control.  As we’ve mentioned already, insurers are always the ones to have the final say about the options a given patient will have – and in the case of Medicare it may be impossible for them to spend their own hard-earned money to obtain the care that might be best for them.  This level of powerlessness is rarely encountered in any other aspect of the economy.  In healthcare it is an artifact of the system that the government and private insurers have been allowed, by law, to create.

Knowing all of this, let’s now return to Mr. Krugman’s dual claims that “consumer-driven healthcare” does not work, and that patients make lousy consumers.  What are we to make of them?

The first conclusion can only be that “consumer-driven” healthcare has never been tried in the United States on any large scale – especially for Medicare patients.  In fact, the only place where one might argue that American healthcare really is consumer-driven is in elective and cosmetic medicine, where patients pay cash for the goods and services rendered.  Contrary to Mr. Krugman’s assertion, the experience here has been quite promising.  Over the past ten years the real cost of cosmetic and elective procedures such as Lasik eye surgery, Botox, and laser treatments of the skin have steadily declined.  Prices are readily available, plenty of time is taken to explain things and clinicians and facilities market themselves based upon experience, convenience and a wide range of amenities.  In contrast, everywhere that insurance and government regulations have come between clinicians and patients the essential components of true “consumer choice” have been uniformly absent and prices have risen relentlessly.

The second conclusion is that perhaps Mr. Krugman is right about patients being lousy consumers, but it’s hardly their fault.  How are they supposed to make good and enlightened decisions if the healthcare system in general (and Medicare in particular), universally and systematically denies them the tools to do so?  Given the dysfunctional history of Medicare’s own rules and regulations to date, how is anyone supposed to have any faith that a new supremely powerful and self-funding IPAB is going to partner with the existing bureaucracy to make things better rather than even worse for individual patients?

We’ve spent a lot of digital ink on this analysis for good reason.  The relevance and importance of Mr. Krugman’s commentary goes well beyond his own credibility and that of The New York Times.  Many of the assertions that he’s made, and the arguments he uses, are that same ones that led to the creation of the IPAB by Congress and the Obama Administration.  If our political and economic leaders don’t understand the fundamentally flawed nature of the Mr. Krugman’s facts and analysis, our nation’s entire healthcare policy has been built on economic and medical quicksand.  The passage of the Affordable Care Act legislation ensures that inherently defective healthcare policies will be the law of the land for the foreseeable future.  The implications are truly chilling.

Which brings us to Mr. Krugman’s final paragraph:

“The idea that all this can be reduced to money — that doctors are just “providers” selling services to health care “consumers” — is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society’s values.”

We’d like to restate this paragraph in light of all that we’ve learned in this post:

The idea that this can all be reduced to money – that doctors are not neutral parties working solely on the behalf of patients, but paid agents acting according to a set of insurance and government-mandated incentives, rules and regulations about what healthcare patients may or may not know or be permitted access to in their capacity as self-interested consumers – is, well, sickening.  And the long history of support that so many of our economic and political leaders have lent to this situation is a sign that something has gone very wrong not just with this discussion, but with our society’s values.

What do you think?  Your comments are welcome.