Cut Costs in Health Care by Treating it Like Pollution

By: Evan Shellshear

We seem to have a problem. Health care costs are doubling every thirteen years in the US, (Regalado 2013). By 2030 they will devour a third of the US federal budget (Regalado 2013). In spite of this, the US was ranked last in 2011 by the Commonwealth Fund in quality of health care among similar countries (Wikipedia 2013). We can sense the impending disaster and it seems the hope is that our usual panaceas for all problems, policy, technology or better education, will someday deliver us from our pains. But how?

The current status is that health care costs have been increasing from 13.6% of GDP in 1995 up to 17.9% in 2011 (World Bank 2013). Policy solutions seem to be difficult to find because often they involve saving money at the expense of someone’s health. Paradoxically, technology improvements that should be reducing health care costs seem to be costing the health care system more money than they are saving it, (Skinner 2013). The few serious cost reducing advances have a hard time finding wide spread acceptance, (Cohen 2013). Better education is also failing to find traction; we know more about the foods we eat than ever but problems like obesity are still on the rise (Wikipedia 2013).

Since there seem to be no obvious solutions within healthcare itself to make care more affordable, I suggest that we look outside of healthcare to find an innovative solution. My suggestion is to look for appropriate solutions by considering how we have reached society’s goals in other contexts, e.g., pollution control. In particular, by equating health care costs with “pollution”, we could set a goal of minimizing “pollution” but at the same time demanding that such minimization does not negatively affect “economic activity”, i.e. health care professionals being able to guarantee the same quality health care for the lower price tag.

When it comes to pollution, there exist numerous methods to provide financial incentives to reduce it; cap-and-trade systems, carbon taxes, etc. Although each of these ideas has its merits, it seems difficult to apply any of them in a straight forward manner to healthcare. However, there is one method that has successfully improved pollution management which does seem promising for healthcare, technology forcing standards, (Goodstein 2011).

Technology forcing standards are a way of providing powerful incentives.

Technology forcing standards are a way of providing powerful incentives to firms and economic agents to improve the efficiency of their operations according to some standard (in the case of pollution it means reducing pollution per unit of output). The way the incentives are provided is by requiring the firms and economic agents to fulfill certain technological requirements by a fixed deadline.

As an example of a successful technology forcing standard, in 1975 Congress introduced the Corporate Average Fuel Economy (CAFE) and mandated that car companies had to achieve an average of 18 miles per gallon (mpg) by the 1978 model year, and 27.5 mpg by the 1985 model year. Corporations were to be heavily fined if they failed to comply (however, there was some leniency built into the system to ease the transition). When one looks at fuel efficiency over this period, the CAFE policies can be regarded as a success. Average fleet fuel economy increased to 28 mpg by 1987 and had legislation forced car companies to continue in this direction, then we could have seen major increases through the 1990s (the CAFE standards were only increased again in 2009).

Technology forcing standards could be used in a similar way in health care to reduce costs. There are numerous former expensive specialist based procedures which were disruptively innovated until they were inexpensive and simple enough for the average consumer to carry out without the help of a doctor.

Examples such as home pregnancy tests (which at the start of the 20th century involved a doctor sacrificing a rabbit to test for pregnancy!), blood glucose monitoring kits and infusion pumps demonstrate that technological improvements can reduce the costs of health care. The simplification of such procedures, once the realm of specialists, shows the effect innovation can have on reducing the costs of health care and at the same time maintaining quality.

Technological improvements are also continuing to benefit more complex and specialised areas of medicine, e.g., heart surgery. Initially advances such as angioplasty empowered non-surgeons to treat conditions that were typically treated by cardiac surgeons. This field is still presenting numerous opportunities for innovation and to see where improvements can be made we can look overseas, where local conditions sometimes allow more innovation. For example, in the US an artery clearing coronary bypass can cost more than $100,000, whereas in India the same procedure costs less than $2,000, (Gokhale 2013).

Technology forcing standards, properly implemented, should lead to the correct incentives to maintain high quality health care while also reducing costs.

It would of course be undesirable to create perverse incentives that merely result in medical service providers reducing costs by denying health care to yet more people. Technology forcing standards, properly implemented, should lead to the correct incentives to maintain high quality health care while also reducing costs. To achieve this, the government could first assess the costs of certain surgical procedures and demand that such services need to be carried out for a price less than or equal to some reasonable amount. Such a scheme should simultaneously guarantee the quality of operations. This could be done by statistically measuring and comparing outcomes with previous performance.

There are numerous advantages with such a transfer of expertise from pollution control to health care. First and foremost, such a scheme has the significant advantage that it leaves the cost saving strategies up to the relevant experts, i.e., doctors, hospitals and medical service providers. That these groups of people can achieve this has already been demonstrated.

Technology forcing standards would hopefully give medical service providers the incentives to demand cost-saving technologies which would then encourage innovators to develop more cost-effective solutions to meet the medical service providers’ needs. Another significant advantage is that technology forcing standards seem to be easier to legislate than other options such as cutting costs, reducing health care coverage or higher taxes, (Goodstein 2011).

By Evan Shellshear

References

• Regalado A 3 September 2013, “We need a Moore’s Law for Medicine”, MIT Technology Review. Retrieved 20 November 2013
• “Health Care in the United States.” Wikipedia: The Free Encyclopedia. Wikimedia Foundation, Inc. 12 November 20013. Retrieved 20 November 2013.
• “Health expenditure, total (% of GDP) “, The World Bank, The World Bank Group http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS. Retrieved 20 November 2013.
• Skinner J S 5 September 2013, ” The costly paradox of health-care technology “, MIT Technology Review. Retrieved 20 November 2013
• Cohen J 9 September 2013 “This Doctor Will Save You Money”, MIT Technology Review. Retrieved 20 November 2013
• “Obesity in the United States”, Wikipedia: The Free Encyclopedia. Wikimedia Foundation, Inc. 18 November 20013. Retrieved 20 November 2013.
• Goodstein E S 2011, Economics and the Environment, Wiley.com, 2011.
• Gokhale K 28 July 2013 “Heart Surgery in India for $1,583 Costs $106,385 in U.S.”, Bloomberg.com. Retrieved 20 November 2013.

Photo: Cost of health care by Shutterstock.com