Demand drives health care economics

By Thomas Morrow

I am a board-certified family physician, trained during the Dr. Welby era, who now works for a large bio-pharmaceutical company. I am skeptical of claims that we can provide health coverage for all — and reduce costs. Consider the economics.

The cost of medical care can be calculated by adding up the cost of each unit of care, multiplied by the cost per unit. If an appendectomy costs $8,000 and you need to perform 100 appendectomies a year, the total cost would be $800,000. To add up the total costs of all care you have to calculate this for each procedure, office visit, X-ray, drug, etc., and add them together.

Once you understand this concept, it’s easy to figure out how to cut the total cost. You reduce the payment for each service, or you reduce the number of (unnecessary) services used in a given year, or both. But how many readers have had an unnecessary service in the past year?

Adding roughly 50 million people to the insured pool will not reduce either of these factors. It will only increase the total number of services demanded and hence the total cost — unless we can reduce the availability of services or reduce the payment per service.

Medical care in the U.S. is driven by the increased demand for services. Demand has been rising because our population is aging, and older people need more things done to them. There are more treatments available (and demanded) due to a rapid increase in medical technology. Since few people actually shop for care, the prices can rise with little push back from patients.

Elected officials may push suppliers of medical care to cut their costs or at least reduce their annual cost increases. But they haven’t addressed the other factors, the aging population and the increase in technology.

Thirty years ago when I was in medical school in Philadelphia, the MRI machine did not exist. If a patient had a serious heart attack, we asked the family to call in a priest because we lacked even the basic treatments taken for granted today.

Serious peptic ulcer disease was treated with surgery; the drugs to treat ulcers did not exist. Implantable pacemakers were yet to be invented, and advanced neonatal care was not even imagined. A gall bladder removal resulted in a scar that looked like it was done with a machete. Cancer was a death sentence. Genetic diseases such as cystic fibrosis were basically untreatable. Wet macular degeneration rapidly resulted in blindness as the current treatment of choice was not available. But care was cheap.

Some would have us return to that earlier phase of medical technology or arrest the development of future technology all in the guise of “controlling” costs.

Remember, you can only control costs by reducing the number of services or the cost per service. Physicians can only give up so much income before they decide to go into some other business. Hospitals are only able to cut costs so far as their primary cost is labor and I don’t see nurses looking for a pay cut. That leaves reducing the number or types of services.

As a medical director for a number of health plans during the 1980s and 1990s, I cannot count the number of nasty-grams I received from physicians and members as I attempted to reduce the number of “unnecessary” procedures, services, drugs and admissions. Managed care caused a public outcry to our politicians, who promptly passed laws preventing us from performing these functions. Now they are demanding that politicians do the exact same thing!

So how can the politicians reduce the cost of medical care? They can control costs by limiting the number of MRI machines, limiting the number of specialists or surgical rooms, thus allowing people to wait for care or ration the care to those deemed to “need” it. They could also deem some people not worthy of care due to age, poor health or some other measure. They could outright deny coverage for some therapies based upon “cost-effectiveness” studies. They could price out of existence future medical advancements as the profits dry up. They could just allow people to die young.

But Americans want it all. In every scenario, costs escalate because new technology is better (in most cases) than old. Medical technology costs a fortune to develop and in a capitalistic society a return on investment is required to stay in the business of developing new technology.

What about prevention? We cannot prevent death, we can only delay it. If a person is destined to develop a disease due to genetic inheritance, it will develop. We may delay it and call that savings, but eventually the disease will progress and the costs will accrue. Sure we can prevent some illnesses through lifestyle, but the ability to actually control lifestyle is limited. Just look at the average weight of Americans.

Until people are willing to forego therapy or the hope of future technology advancements, costs will continue to climb. Is the cost worth it? We will never know until people accept the fact that they can either make that decision or allow another independent — and most certainly more bureaucratic — third party to make that decision for them. But Americans rebelled when managed care tried to do just that.

The current, nonmarket-based solutions being proposed by our politicians can only reduce costs by reducing access and choice. They cannot allow the physician and patient the freedom of making a decision, as those discussions will inevitably drive the demand for more care. If we want choice, we must be willing to accept the cost. If we want cost control, we must be willing to accept rationing by a third party (or ourselves).

We do not know how our medical system would operate in a free market. People have not paid for their own care for so long we cannot even imagine how they may act. I can predict that people would appreciate their care more and see that medical care (or at least the ability to pay for it) has limits. And they might also learn to make better medical decisions, seek preventive care and practice a healthier lifestyle.

Dr. Thomas Morrow of Waleska is medical director for a major American bio-pharmaceutical company.