It’s hard to go to the doctor without seeing myriad examples of economics in daily life and some of the quirky incentives in modern U.S. health care.
Last Saturday morning, my gastric feeding tube pulled out and I went to the hospital to get a new one inserted. I have had the tube since late June, when radiation treatments for a throat cancer so damaged my mouth and throat that eating was becoming near impossible. After five months, the inflatable balloon on the inner end sprang a leak and it fell out. So I wanted another one.
To economists, the important question is whether my getting another tube made society as a whole better off or worse off? Did the total “social benefit” of the tube exceed the “social cost?” How could one determine this?
Start with accounting costs. I don’t know what the bill presented to our insurer will be. But since the procedure involved a full hospital admission, an M.D. and three other highly skilled professionals, an “interventional radiology” room with lots of expensive imaging equipment and a full array of surgical drapes, instruments, swabs, masks and gowns, I’ll guess that it will exceed $2,000.
Is that the cost to society, however? Will it even be the cost to my wife’s employer (who also provides my health coverage)?
No. First, our system involves insurers negotiating discounts from nominal prices set by providers. So while the bill to the insurer might say $2,000, the actual payment made will be less, perhaps only $1,200 or so. But an uninsured patient would get a bill for the full $2,000.
That reflects what economists call “price discrimination,” in which a seller charges different prices to different buyers with varying willingness to buy quantities at different prices.
The disturbing outcome is that uninsured people — often those with the least ability to pay — face the highest prices. That can mean bankruptcy, but it also means some uninsured patients simply will never pay their bills.
Thus the list price and the negotiated bill the provider will accept from insurers must be calculated so that total revenue covers the cost of the service provided, given that some patients will never pay.
Economists will interrupt to say that these list prices and negotiated fees are irrelevant. What is the marginal cost to the hospital? In other words, how much will the total costs of the hospital increase as a result of me getting a new feeding tube? And is society as a whole affected in any way beyond this?
The marginal cost to the hospital probably is fairly low.
They already had the facility. The weekend on-call team already was there, attending to a much sicker emergency patient. So the marginal cost was whatever additional time put in by the doctor and helpers on me, plus the expendable supplies like masks, gowns, instrument tray and the tube itself. The nurse who prepped me worked for 15 minutes, the doctor was in the room less than five. So the marginal cost was much less than the amount billed.
However, the hospital does have to pay for its expensive facility. It is a “lumpy input:” You either don’t have one at all or you lay out millions of dollars, the amortization of which becomes a fixed cost that does not vary with how much you use it. As with new drugs, jetliners or modern mega-dairies, these fixed costs are high relative to the variable ones. But if all the costs don’t get paid eventually, the operation will go broke, regardless of the margin cost-marginal benefit intersection economists make to determine optimality.
There is another angle. As someone who has spent a lot of time in developing countries, I cannot help but wonder if all the technological rigmarole used to put my tube in was really necessary. The old one had been out for only a few hours. I had inserted a length of clean plastic tubing to keep the hole open and taped a clean dressing over it. All that was needed was to pop the new tube in and inject saline into the balloon. I am sure that in a poor country, a nurse could have done it in less than five minutes.
Yes, doing it high tech must minimize the chance of complications. The doctor inserted a probe, checked its positioning with the X-ray, then inserted the tube and checked that. Without this machine to verify correct positioning, there must be some tiny chance that it could be pushed between my abdominal wall and the wall of my stomach so that my liquid food would go in the wrong place. And without the sterile gowns, masks, drapes and scrubs, a somewhat higher statistical risk of infection must exist. But these risks of mispositioning and infection must be very low.
Did I have the whole kit and caboodle because it was the best medical practice? Or was there an element of avoiding any chance of a malpractice suit? And, since the site is very expensive, does the hospital have a financial incentive to use it on as many patients as possible, regardless of actual need?
What if I had pled indigence and said, “I am broke, can’t a nurse just put it in?” What if I had asked the price, then called around to other hospitals? Would anyone have given me a price in the way my auto parts store can tell me what a carb kit for a ’49 Chrysler would cost? These questions all bear on our national health funding dilemma.
In such cases where the extra cost, even of only salaries and supplies, is high relative to the benefits of fewer complications, who should decide what protocol to follow? Must we always insist on the absolute best medical procedure, even at high cost, or should we have “death panels” to weigh the marginal benefits of high-cost treatments?
As a further complication, the amount paid by my wife’s employer is not entirely irrelevant to social cost-benefit calculations. The marginal costs of my new tube include the medical ones described above. But if her employer — a foundation — has less to spend on its programs, the value to society of these programs also is part of the cost to society.
What about the benefit of my tube, either to me or society? Back in mid-June, when I had open sores in my throat, eating had become a painful struggle and I was losing four pounds a week at a time when radiation and chemo accentuated my need for healthy nutrition. Getting the tube may not have been a matter of survival, but it my promoted my recovery.
Now, however, with much effort and some discomfort, I am able to get about half my nutrition by mouth. I hope that in another month or two I can get rid of the tube. It still makes my life easier, but do I really need it?
Already up to our annual out-of-pocket maximum, the marginal money cost to me is zero. That is why many economists, and some elected officials like Rep. Paul Ryan, R-Wis., stress that to control health spending, consumers should always face some of the cost of treatment. In principle, they are right.
Economists would approach the marginal benefit to society question by asking, “What would you be willing to pay for the new tube out of your own funds?” I’d certainly be willing to pay $200 and perhaps a bit more, but certainly not the $1,200 that my wife’s employer may have to fork up. So it’s a bad deal for them.
In a libertarian dream world of perfectly functioning markets, I could go to them and offer to split the difference. They could save some money and I perhaps could buy a new TV. It would be a “Pareto-optimal” outcome in which both parties are made better off by a reallocation of resources. But that is not the real world.
The “contingency value’ of the tube is an additional consideration for me. Just four days earlier, I had been in the hospital because an infection suddenly overcame my suppressed immune system and made my neck swell up so much that even swallowing water hurt. A day of intravenous antibiotics fixed that. But if it occurred again, the tube would be useful.
This is exactly the same as Minnesota farmers who buy bigger combines than they need most years because having the extra capacity in the occasional fall with adverse weather has a big financial payoff. But what would I pay for this? Not too much.