The Costs of Health Care. Part II: Value For Money

Quite a long time ago I promised to write a series of posts on the costs of the American health care system. I have made several attempts at starting the series but every time I end up writing econo-babble: I stuff too much into one or two posts. This is an attempt to take things from a different angle altogether, by asking a very simple question:

Are we getting value for money in health care?

Think about the possible answers for a while. See how difficult it is? Note that we need to define almost everything in that sentence to really come up with some tentative answers.

First, who are the "we" who are supposed to get value for money? All Americans? All people legally in this country? All people with third-party coverage (insurance or government funding)? People with all possible health conditions? People from all social classes? All races?

Note that a middle-class person with employer-provided family health insurance might be very happy with what she or he is getting. Someone without any insurance at all wouldn't even understand the question. Thus, the answer to the question will depend on how we define that two-letter word "we."

Second, what is the "money" we are talking about? Does that sentence only refer to out-of-pocket costs or to the total expenses that are charged to both the patient and various third-party payers? What if those charges don't actually match the true resource sacrifices to the health care system? This is fairly often the case, after all.

And whose money is this? Is our approach as wide as the whole economy or are we talking only about the private costs to the individuals themselves? These two concepts differ.

Third, what is "value" for money in a field such as health care? This question is an extremely hard one to answer, because the "output" of the health care industry is difficult to quantify and that would be a necessary intermediary step to come up with some measure of value. It's possible to give rough estimates of this output by assuming that good health care would make people live longer and healthier lives. Something like the average life expectancy or the reverse of various mortality figures could then be used as very rough output measures.

But this would assign too much blame for our mortality on the health care system. For example, the U.S. average life expectancy is considerably lowered by car accidents and violence, both causes which are not terribly easy to fix by building better hospitals, say.

The concept of "value" has another hidden dimension, partly embedded in the whole question I pose, and that has to do with the quality of care in general. One way to measure this is by consumer satisfaction. But patients are not always able to judge the quality they receive. Indeed, some aspects of the quality of medical care are not easily measured by even those whose job the development of quality measures is. It is the inherent characteristics of medical care: the uncertainty present in many treatments and the necessary participation of the patient in the process that make quality measurement so difficult.

Fourth, and finally, what is this "health care" we are talking about? Often lumping physicians, medications, hospitals, nurses and nursing homes all together into something called "health care" makes sense. It lets us talk about the big picture. But of course in reality the industry of health care consists of many different occupations and firms, and some of those may be giving some of us excellent (though poorly defined) value for money, while other consumers are getting nothing or rather poor care for their money or someone else's money.

It's time to ask why I posed that question and then went on nitpicking for several paragraphs. The reason can be found in the generally accepted idea that the U.S. health care costs are too high. In what sense are they too high, though? Note that if the total sales of the U.S. car industry were high (sadly, not a realistic example right now) we'd be pleased with how well the industry is doing. That the high sales of the U.S. health care industry are not seen in this light shows us that it's really the "value for money" aspect that we are concerned about, not the absolute size of the expenses themselves. Thus, it's necessary to address that aspect when trying to figure out how to lower the overall costs of health care. And "value for money" makes the study of fairness, access and the efficacy and effectiveness of treatments a necessity in this conversation.

My next post addresses some of those by looking at international comparisons of health care costs.