Waste

HPR 501: Economics of Health Care Delivery

Mark Pauly
 Variations, Value, and Waste:
• What we know (and don’t know)
– There are large “unjustified” variations in some (but
by no means all) Medicare procedure rates across
apparently similar local markets.
– The same procedures display large variation and the
same display small variation regardless of the economic
environment (Wales or Maine) or prices—so variation is
not due to FFS payment s
– High rate markets for one procedure are not
systematically high rate markets for all, and are not
related to fee levels. Also if specialists are the cause, why
not high cost everywhere?
 Interpretations of variations
• If doctors cannot agree on how frequently to perform a
procedure, how valuable could it be?
• Especially if outcomes seem unaffected.
• So higher rates (than some baseline) must represent waste
—about 30%. This is the primary (non-economics) source
of evidence for the proposition that there is inefficiency
• Variations are always a sign of inefficiency– physician
preference and patient preference procedures
• But if we do not know what causes variations how can we
be sure what to do about them? If anything?
See Folland, Goodman, and Stano, Chapter 15.
 Wennberg Variations II
• (Now mostly discredited): Areas have “practice
styles” displayed by all docs.
• Procedures done in high rate markets are not found
to be systematically less “medically appropriate”
than in low rate markets. Rand returns!
• But high rates are associated with higher spending
and not associated with higher health.
• And, fundamentally, we don’t know whether the
right rate is high or low.
• It’s a mess!
 Current Classification
• Needed care

• Preference sensitive care

• Supply-sensitive care
 Possible Explanations
• Probably wrong
– Substitution (Efficient or inefficient)?
• No negative correlation with substitute procedures
– Financial Incentives
• No consistent pattern, high rates of procedures are caused by high
referral rates.
• Possibly right
– Variation in demand due to patient “tastes" or
environment--but why? This much? They later drop out
“preference” or taste-based variations in treatments.
– Doctors cope with ignorance-- are there varying local
signatures? Recent research on spillover effects (Chandra
and Staiger)
 The Cost Conundrum*
What a Texas town can teach us about
health care
- Atul Gawande, The New Yorker,
6/1/09

“Providing health care is like building a

house…Imagine that, instead of paying a
contractor to pull a team together and
keep them on track, you paid an
electrician for every outlet he
recommends, a plumber for every faucet,
and a carpenter for every cabinet.
Would you be surprised if you got a
house with a thousand outlets, faucets,
and cabinets, at three times the cost you
expected, and the whole thing fell apart
a couple of years later?”
Content for this slide courtesy of David T. Grande, MD, MPA.
*
 A better story
• Looks like some areas for some
reason get access to better
management of new technology than
others.
• But areas with bigger increases in
MHP may not increase spending more
but still get better health.
• Limiting high increase areas to the
same new payments as low increase
harms high area patients. Good idea?
 Newhouse IOM Report
• Do not adjust Medicare payments down in high
spending areas (Senate bill)

• Penalizing all in a high cost area would harm low

cost suppliers unfairly

• And 73% of variation in Medicare spending is due

to post acute care and 16% to chronic care.
• Plus non Medicare spending inversely related to
Medicare spending—McAllen is low cost
See Skinner, Staiger, and Fisher, “Is Technological Change in Medicine Always Worth it? The Case of Acute
Myocardial Infarction,” Health Affairs Web Exclusive (7 February 2006), p. W44.
 Recent Results
• Health status explains more of the variation in
Medicare spending than previously thought, as do
“hard to measure, inter-related
demographic/economic factors in aberrant
markets.“
• Plus for something to be inefficient it must be
possible to change things. So far it hasn’t been.
• More changes with more government? More
market competition? Neither seem to work so far.
See Chapin White, “Health Status and Hospital Prices Key to Regional Variation in Private Health
Care Spending,” NIHCR Research Brief, No. 7 (February 2012), p. 3.
 The Current Bottom Line

• “The best available research does not provide a

solid basis for drawing conclusions about how
much of the variation in Medicare spending across
localities reflects inefficient or inappropriate
spending.” CSHSC, 2011
• So go back to the eternal truths: pay only for what
you want—and watch them!
 Supplier-Induced Demand?*

©2008 by Project HOPE - The People-to-People Health Foundation, Inc.

Brenda Sirovich, Patricia M. Gallagher, David E. Wennberg, and Elliott S. Fisher, “Discretionary Decision Making by Primary
Care Physicians and the Cost of U.S. Health Care,” Health Affairs, Vol. 27 (2008), Issue 3, 813-823.

* Courtesy of David T. Grande, MD, MPA.

 The Upshot
• You can’t control spending well just by starving
high spending/inefficient areas; they will respond
by doing less, inefficiently.
• Instead, you want to get them to stop doing
inefficient/ not cost-effective things.
• Mom would have told you the same thing.
• And who knows how to get people to become
efficient? Why are they inefficient? Your
experience in different settings?