Sunday, November 18, 2012

The Economics of Health Care - A Personal Perspective

While I'm receiving substantial health care the last few months I'm concurrently teaching a course on the economics of organizations. That has made me more reflective about the business practices entwined in health care provision.  There are many oddities in my view, looking at it with a lens from economic theory.  Let me give an example of a few of these, and then try to peel the onion a bit further.

Having been in the hospital and now receiving follow up treatment, I make no co-pay when I visit the doctor to have the wound cleaned and the dressing changed, every 3 or 4 days.  I am not sure why this is.  Looking at the HMO program plan document from Health Alliance, my provider, it seems that co-pays are part of the deal pretty much across the board.   Does the doctor's office play some game with the HMO to avoid patient charges in some cases?  My prior experience with more typical care is that there is a co-pay for office visits, even when the visit is a follow up that is specifically recommended by the doctor.  I'd be hard pressed to explain why a co-pay is required in this case from an economics perspective.

The normal argument for co-pays follows from patient moral hazard - a tendency to over consume health care when there is full insurance coverage.  The co-pay for the initial visit to the doctor falls in this category and make sense to me as an economist, though the amount my HMO charges, $15, is such a trifling that it would hardly seem to have consequence.  The subsequent co-pays that come with follow up visits are hard to explain from a moral hazard perspective.  One might explain them better as some attempt at cost sharing for care - keep the premiums lower by having the patient bear some of the cost ex post.  The cost sharing explanation makes better sense to me, for example, with that the hospital visit (which was initially supposed to be an outpatient procedure) itself has a co-pay.  If memory serves, that was $175.  A doctor must order a hospital visit.  A patient can't request this on his own.  So, again, there is no moral hazard, at least in the way I'm thinking about it.  Why have a co-pay present in the absence of moral hazard?

A non-economist patient who has been with the HMO for years probably gets used to the system and comes to understand that a trip to the doctor involves a co-pay, irrespective of why that is.   But a designer of the system would include co-pays or not by trying do aggregate social welfare across members and the aim for an approach that is best for the group in total.  If premiums are set in a sensible way to align with the expected payout of coverage, then there should be an inverse relationship between premiums and co-pays.  In the signup period that happens annually, my HMO competes with other plans.  It may be that co-pays emerge in the design as a consequence of that competition and the HMO wanting to attract younger and healthier members.

On the various prescriptions there is a yearly deductible that is paid on the first few prescriptions and then the patient bears some charge per prescription thereafter, with that charge varying by the drug, or perhaps by the category the drug is in.  We use the local Walgreens (a short walk from our house) as our pharmacy.  They seem to charge something other than what the published co-pay is, but the difference is small enough not to make a thing out of it.  By and large, the patient doesn't see the retail cost of the medicine.  For one rather expensive antibiotic, however, I did get to see the retail price as there was a snafu about getting approval for the drug.  Then  the Walgreen's billing system spits out the retail price for the patient, this as part of the explanation for why they aren't filling the prescription right away.  The number was an order of magnitude higher than I thought it'd be.  If my HMO is actually paying that number to the pharmacy and if the pharmacy as middleman is paying something close to that number to the drug company then (1) this year my HMO is losing a bundle on me and (2) how that number gets set should be an object of national discussion.  By the way, we did work through the issue and got approval for the drug for two weeks, which ends tomorrow, with our co-pay only $24.

Let me turn now to economics thinking on the care itself and what should count as fixed cost (overhead) and what should count as variable cost attributed to the specific care.  For the fixed cost there is the further issue of whether the resource congests and what should be done to mitigate that congestion.  And there is the question of how care is determined - what is the treatment, who will deliver the treatment, and where will that occur?

The operating room is a congestible resource.  For the procedure I had on Friday, I was told an approximate time in advance but that time was contingent on there being no trauma patient arriving in the interim.  I was in the OR, three different times during this visit and presumably that was the most expensive component of the hospital stay, given the various specialists who staff the OR and the specific facilities required for lighting, sterilization, etc.  They keep the temperature in the OR low, I'd guess around 60 or lower.  So one nice touch is that the have a blanket warmer so the patient can feel comfortable that way.

The last procedure was done Sunday morning.  Mine was the second of two procedures done.  Given that they did the other one, I'm glad mine was done then, but there needed to be a full crew there then.  So if one took the HMO's view on things would it have been cheaper to have waited till Monday to do this?  The call here was entirely made by my doctor.  The timing matched his schedule and I believe also reasonably matched his desire to see how my wound was progressing.

I had two different roommates during my stay, but the last two nights the bed next to me was empty.  I may have gotten more attention from the nurse and the tech as a consequence, the opposite of congestion effects.  Even when the place was full up, I got reasonably timely attention from the staff. 

I teach my students that moral hazard within organizations is best resolved when the members take ownership in the organization's well being.  Ownership here is a state of mind, not a contractual thing, so applies equally well to not-for-profits.  My doctor has certainly taken ownership in my care even after I left the hospital, for which I'm grateful.  But if he himself is a resource who can congest (since he is the doctor for the Illini Football team he does seem to be extremely busy) might it have been more efficient for him to delegate some of the care he is giving to me directly?  In particular, Carle has a Wound Healing Center.  Should my dressing changes have been delegated to them?

My doctor thought no.  He told an interesting story in this regard.  The upshot is whether the patient's pain during the dressing changes was an important consideration on how to proceed.  (The nurse informed me that I grimaced quite a lot during the first change, much less so during the most recent one,)  For my doctor it's at most a tertiary thing.  He'll say sorry, when I indicate it hurts, but he'll keep doing what he was doing to get the job done.  He said at the wound center they might very well stop.  So he didn't delegate in my case because he wanted to assure the right follow through.

At the last two visits, where I'm told there's been noticeable improvement, he has mentioned the alternative of sewing up the wound.  This is not his preferred alternative, but there is no doubt it would be more convenient for me.  So he does recognize tradeoffs in determining the course of action.  But these are tradeoffs the patient perceives in his welfare, not tradeoffs that impact the bottom line as considered by the HMO.

Let me close with one last observation.  The way my doctor acts vis-a-vis his health organization is very much as a boss, just the way faculty act at the university.  The decision to delegate my care or not was his to make. 

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