Heath Without Price
by John Goodman
Issue 108 - May 28, 2008

The biennial Dartmouth Atlas of Health Care (http://www.dartmouthatlas.org) is out and the findings are as eye-popping this year as they have been in the past.

Among chronically ill patients in the last two years of life:

• New Jersey patients spent almost three times as many days in the hospital as patients in Utah.
• Patients in Manhattan had 3½ times as many hospital days as patients in Bend, Oregon.
• Among teaching hospitals, the variation in the amount spent was more than four to one.

So what impact did this wide variation in care have on the health of patients? Not a whit.

• There is no evidence that extra care and extra spending produce better outcomes, and some evidence that they produce worse outcomes.
• Further, variations in care correlate with variations in supply: the more hospital beds, the more bed days; the more CT scanners, the more scans; the more cardiologists, the more cardiac care, etc. [See Associated Press Article] http://www.examiner.com/a-1324494~Hospital_Capacity_Drives_Costs.html

Is this the whole story? I'll shelve that question for another day. For the moment, what do we make of all this?

Before anyone launches into another bash-the-American-health-care-system tirade, be forewarned. Researchers have found wide variations in medical practice from doctor to doctor, town to town, region to region - all over the world. The type of health care system doesn't seem to matter very much.

So what's going on? I'll start with the conventional theory. Then add four of my own.

1. The Venal-Mercenary-Doctor Theory. The conventional theory is "supply induced demand." Providers convince patients to want whatever health resources are available. Why would they do that? Fee-for-service payment is often blamed. Providers make more money if they can convince patients to demand unnecessary care. Anyone who has spent much time around doctors will recognize this theory as mainly poppycock.

2. The Doctor-as-Altruistic-Agent-of-the-Patient Theory. In case anyone hasn't noticed, we have made health care free (or almost free) to patients all over the developed world. Now if you were a physician advising patients and the perceived cost of virtually every resource was zero, what advice would you give? It's a no-brainer: Use every resource in sight as long as there is some marginal benefit, no matter how small. With willing patients, the only thing restraining usage will be limits on supply and the occasional (managed care) limit on demand.

3. The Patients-Acting-as-Their-Own-Doctors Theory. Who needs doctors to induce demand? Any curious soul armed with a computer can find all kinds of ways to spend (other people's) health care dollars for his or her own benefit. In fact, 113 million Americans have searched the Internet for health information. http://www.pewinternet.org/PPF/r/190/report_display.asp

4. The Misguided-Donor/Misguided-Legislator Theory. Why do resources differ from place to place? It usually comes down to arbitrary decisions by donors and politicians (far removed from real patients). Suppose a donor pays for an MRI scanner and also pays for the technical staff and the radiologists. Treating these costs as fixed, the marginal cost of a scan is almost zero. So it makes sense to run the scanner around the clock. If a second scanner becomes available, it makes sense to run that one around the clock as well. Ditto for the third. And the fourth. You can do an awful lot of scanning before the marginal benefit gets all the way to zero.

5. The Medicine-As-Art-Rather-Than-Science Theory. Imagine three ways of approaching your job. First, as an artist - relying on experience and judgment but also wafting wherever the spirit moves you, with no bad consequences. Second, as a business manager - being forced to compare profit and loss on every decision with bankruptcy always a threat. Third, as a scientist - being constantly under the scrutiny of your colleagues, with professional reputation hanging in the balance.

Our system (and, indeed, the health systems of all developed countries) gives doctors the freedom to choose approach number one.

Years ago, a RAND study found widespread variation of medical practice and concluded that one-third of all care was unnecessary. Yet as explained in Patient Power and again in Lives at Risk even among RAND's expert panels there were wide differences of opinion. Absent economic and scientific pressure, conformity of treatment modes is unlikely to ever occur in medicine.

Bottom Line. I believe theories 2, 3, 4 and 5 explain 80% to 90% of everything we observe, while the conventional explanation (theory 1) explains a small part of the remainder. Wide variation in the use of health care resources is not a surprise. It is the natural and inevitable consequence of a system in which normal market forces have been systematically suppressed and nobody ever faces a real price for anything.