Health Economics with BDM

Pre-Med & Medical School Pre-Med Topics
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<p>Hi All,</p>

<p>With an attempt at major health reform on the horizon, I thought now might be a good time for me to talk a little bit about the fundamentals of health policy and health economics. Obama hasn't yet announced a plan -- or at least not one that I've seen -- and each of the major parties has proposed plans with major flaws.</p>

<p>President Obama is undoubtedly right about one thing, however: the status quo is unsustainable. It will lead to a steadily building unhappiness with the American health care system, and eventually reform will come. If we miss this window to do something, or if we do something counterproductive, things will be that much worse down the line.</p>

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<p>A bit about me: while a premedical student, I saw firsthand that limitations in medical care today are chiefly economic, not scientific. Scientifically speaking, we have AIDS on the run; we have cures for some kinds of cancers; there is no reason that any child in America should suffer from lead poisoning or asthma or Type II Diabetes. For that matter, there is no reason why any child in the world should suffer from polio, malaria, or tuberculosis. But they do--and these diseases thrive because of *economic *gaps in our scientific capabilities.</p>

<p>As an economics major, medical student, and eventually a law student, my interests have always been at the intersection of medicine, policy, and economics. As an undergrad, I concentrated specifically in health economics, wrote a capstone paper on financial incentives in pharmaceutical research, and TA'd for labor economics (e.g. how people decide careers). I went on to teach my medical school's medical economics course, and over the years, my relevant research projects have included looking into international physician workforce issues, medical bankruptcy laws, and emergency department overcrowding. I currently serve as editor-in-chief of the nation's top health law journal, which has really been an amazing opportunity.</p>

<p>At some time over the next few days, I'll hope to start building a ground-up model of how health care is delivered and why the system got to be such a mess. Solutions are harder to come by, of course, but who knows? Maybe we'll think of something together.</p>

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Dude that’s like 3 potential majors. I’m listening.</p>

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<p>I didn’t know you did law school BDM - very cool. As an EMT and future EM doc, I’m looking forward to the analysis of ED overcrowding.</p>

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<p>This thread is going to be money.</p>

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<p>This thread will save the world, and we can say we helped. Good for college apps.</p>

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<p>Looking forward to this thread as well.</p>

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Will you go into law school after graduating from med school? :confused:</p>

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<p>MD/JD students (whether combined or at different schools) do it between their 2nd and 3rd years of medical school, I believe.</p>

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<p>Well let’s get these thoughts going!</p>

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<p>BDM are you a JD/MD student, or are you going to go to medical school and from there go to law school?..</p>

<p>I know I am going to hear “You should want to become a doctor to help others, and shouldn’t care about money”, but how much do you guys think the average doctor’s salary, which I think is 200k, will be cut if health care reform does happen? The thing about healthcare reform is that not only will doctor’s salaries be cut, but they will be paying more in taxes as well (assuming that most doctors will continue making 150k), this is because healthcare reform may be financied by taxing the “wealthy” even more…</p>

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<p>well, that’s the general idea. but still, I don’t think anything has been really put out on display yet. One possibility is that lower payed doctors, such as your regular internal medicine family doctor, will actually get paid more, at the expense of the high paid specialties.</p>

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<p>Health insurance is a complicated field. It makes the most sense to start with something we’re more familiar with: fire insurance. We’ll scale up our model from there.</p>

<p>Term of the day: expected value.
This is a simple one. If there’s a 10% chance of winning $50, your expected value is 10%*$50 = $5. If there’s a 20% chance of losing $30, then your expected value is -$6.</p>

<p>What’s the point of fire insurance?
So that if your house burns down, you don’t have to pay for it.</p>

<p>Well, obviously. But insurance is more expensive, on average. Your expected value HAS to be negative, because insurance companies make money. That must mean they’re ripping you off, right?
It’s true that they make a profit, but there’s not necessarily a rip-off involved. The goal of fire insurance isn’t to make money off the insurance company. The goal is to reduce your risk, even though you know that on average, you’ll lose some money. You are buying a product, and the product is risk reduction.</p>

<p>Just like buying a steak from a store can be a win-win – you get a steak and the store gets money – insurance can be a win-win scenario, too. There’s room here for everybody to win, including you.
**
I guess that makes sense. If I was in this to make a profit, I’d want my house to burn down. And that doesn’t make any sense.
**Right, exactly. If you own fire insurance, you don’t say “Drat! I didn’t get my money’s worth!” when your house doesn’t burn down. You still want your house to stay upright, even though it means the insurance company makes some money off of you.</p>

<p>No, even though it means you lose money, you’re glad your house doesn’t burn down. And you’re also glad that you would have been insured if it had.**</p>

<p>So, really, insurance companies are being paid to take on the RISK. It’s not that I’m expecting to make money off of them, or even “get my money’s worth.” They’re taking some of my money, and I’m purchasing protection.**
Exactly.
**
Why do people hate risk so much?**
Economists don’t have a very good explanation for this, or at least not one that I’ve seen. And of course different people like risk more or less. But on average, most people tend to prefer to lose $100 than to have a 1% chance at losing $10,000.</p>

<p>(FYI, risk aversion is a logical consequence of a phenomenon called “diminishing marginal utility.” But economists don’t have a very good explanation for where THAT comes from either.)
**
So if I want to avoid risk so badly that I’m willing to lose money on it, why is the insurance company willing to take it?**
Because for them, it isn’t very risky. They’re taking advantage of a very familiar statistical law known as the “law of large numbers.”</p>

<p>Hypothetically, let’s say that 2% of houses burn down every year. But you don’t know which house it is. If one house is in that 2%, it’s very hard to plan for. Even if you have ten or twenty or fifty or a hundred houses, it’s still hard to plan for.</p>

<p>But if you have ten thousand houses, chances are pretty good that you’re going to be around 200 houses. Maybe a little more, maybe a little less, but it’ll be a lot easier to predict than if you only had ten houses.</p>

<p>So insurance companies can make plans for it, but it’s a lot harder for any one homeowner to plan for. So that’s what you’re paying them to do.
**
So this helps explain insurance for catastrophes, like fires or car accidents. I can also imagine insurance for things like cancer or injuries. But doesn’t my health insurance come with lots of other things? Very predictable things like checkups, or treatments for diseases I already have?</p>

<p>What do those have to do with risk?**</p>

<p>Nothing. Let’s talk about them a little bit later…</p>

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<p>Well, actually, I would argue that some of those problems have more to do with sociology rather than economics, strictly speaking. Granted, some people try to fold sociology into economics as a subdiscipline such as socioeconomics, however, I still believe sociology retains sufficient distinction from economics to be considered its own discipline. </p>

<p>As an example, the rise of Type2 Diabetes within the general population and especially within children has very little to do with economics per se, as the US population has become wealthier over time, but has to do with social changes that have encouraged a sedentary lifestyle, combined with heavy marketing and proliferation of junk food. The US has largely eliminated diseases of malnutrition - hardly any Americans suffer from rickets or scurvy anymore - but what the US does suffer from are the diseases of abundance, such as obesity-related diseases such as Type2 diabetes and heart disease. More poignantly, everybody knows that the key methods of fighting obesity are diet and exercise, both of which are relatively cheap. But an insufficient number of Americans actually do so; the obesity rate continues to increase.</p>

<p>Similarly, there are strong social reasons for why AIDS is such a rapacious killer in Africa, even within relatively wealthy nations such as Botswana and South Africa. Social taboos surrounding the discussion of sexual practices combined with traditional social beliefs that encourage promiscuity, along with political resistance in confronting them, ensures that AIDS will remain pervasive. These nations lack not the economic resources to battle AIDS but rather the social incentives to do so. </p>

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<p>Free markets produce optimal transactions only when the transactors actually truly understand what they are buying - and that’s precisely the problem of complex products such as health insurance. Let’s face it, hardly any consumer really understands the package of benefits of any health insurance policy he’s buying. They don’t really know what current conditions and treatments are covered under any particular policy, and certainly won’t be able to keep up with future treatments. They don’t really know which providers are members of their network of coverage, especially if those providers are outside of their local geography. If they go on vacation, get sick/injured and require medical coverage, are they covered? Who knows? </p>

<p>The fact of the matter is that the insurance industry’s business model, unlike that of traditional firms, is predicated on the notion of not providing services, that is to say, to pay out as few medical claims as they can get away with while still maximizing their premiums. This has led to the gnawing suspicion among many consumers, including myself, that insurance is, in many cases, a illusory product such that when the time comes to pay some expensive medical claim, the insurance company is going to invoke a double-footnote on page 223 of the policy that nobody has ever read, but that according to some obscure court decision that nobody has ever heard of and some twisted legalistic reasoning as provided by the insurer’s own legal team, they don’t actually have to pay your claim. This is a particular problem within the health insurance market as, when you’re sick, you probably don’t have the physical stamina to hire a lawyer and litigate your benefits, and even if you do, the insurance company may actually be morbidly running out the clock by hoping that you die before your case can come to trial. </p>

<p>A variant of this theme is for insurance companies, upon receipt of your claim, to investigate your past medical history to find some pre-existing condition - however small - that you failed to report so that they have an excuse to deny your coverage ex-post. For example, if you buy family coverage for your daughter and she becomes sick, then perhaps the insurance company’s private investigators may find evidence that she secretly smokes but you never reported it to the insurer (because she hid it from you, so you never knew about it), and that’s an excuse to deny her coverage completely, hence sticking you with the entire medical bill. </p>

<p>The upshot is that the uncertainty over exactly what coverage the insurer is really offering - if they’re actually offering coverage at all (and not just going to bail out under the excuse of some pre-existing condition) - means that the market is almost certainly going to produce suboptimal outcomes and that some people will indeed be ripped off. </p>

<p>A corollary problem is that the market for medical treatments that the health insurance market is supposedly supporting is also poorly understood by most consumers. Let’s face it: very few Americans are trained medical professionals. They can’t diagnose themselves. They don’t really know what medical treatments they need. If your doctor says that need you need the most expensive surgeries and medications on the face of the Earth, you don’t know any better. The asymmetric information between providers and patients ensures suboptimal market outcomes.</p>

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<p>BDM, can’t wait for what you’ll have to say about both parties’ plans for reform, the Republican side is using my rep (Tom Price, I assume they use him because he’s an MD) to advertise theirs. Overall this is already a great discussion.</p>

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While I agree that there are significant social roots to the problems BDM referenced, I think you’re underestimating the importance of economics in obesity and heart disease. These really only become “diseases of abundance” when people are choosing to spend more on junk food than vegetables, but those living in low-income neighborhoods don’t have that choice. Grocery stores are scarce in such areas and residents are instead inundated with fast food chains and convenience stores. Even in well-off residential areas where a grocery store isn’t close, as someone from a middle-income family, I can hop in the car and pick up groceries - someone from a low-income area has nothing close to that sort of transportation stability. I agree that the marketing of video games and junk food has contributed greatly to the rise of obesity and related health problems, but perhaps this holds more true amongst the rich than it does the poor, as studies have shown mothers from the latter income range will choose to buy fresh, healthy food over the alternative when given the chance. For these populations, such health problems are financially rooted.</p>

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<p>I disagree that this is an economic problem, strictly defined, as the implication of your logic is that there is a powerful, yet unmet demand for fresh fruits and vegetables within poverty-stricken low-income areas, but if that were the case, then that begs the question of why haven’t entrepreneurs stepped in to start companies within the inner city to meet this supposedly unmet demand. After all, neoclassical economics would have you believe that few demands will go unmet for long, as new firms will inevitably be formed to exploit the high profit potential of meeting those demands. </p>

<p>Let me put the issue in even harsher terms. You say that low-income areas have difficulty fostering grocery stores and other outlets to buy fresh fruits and vegetables, but, let’s be perfectly honest, those areas seem to have little difficulty fostering stores that sell liquor and cigarettes, as well as - let’s face it - burgeoning markets for drugs, prostitution, and illegal guns, all of which are far more expensive than fresh produce. If I’m out to buy a couple of grams of smack, I’m probably not going to the richest part of town, but rather to the poorest, because that’s where the market is. Yet those low-income areas can’t financially support a grocery store? Really? I think this actually speaks to a social problem rather than an economic one: not enough people there really want healthy food, such that those areas can’t support a proper market. As to the question of why they don’t want it speaks to social issues rather than (purely) economic issues.</p>

<p>Let me give you another example. The myriad Chinatowns throughout the country are bastions of poverty of the Chinese-American community, as they tend to be where the poorest and most recent Chinese immigrants tend to live. Yet Chinatowns are replete with Chinese grocers that offer a plethora of fresh Chinese vegetables and fruit that are necessary for traditional Chinese cooking. Why is it that low-income Chinese neighborhoods can offer fresh (ethnic) produce but other low-income areas can’t? The same can be said for many other poor immigrant neighborhoods: poverty-stricken Vietnamese neighborhoods are dotted with Vietnamese grocery marts. For example, the best Vietnamese fresh vegetables in the Bay Area are to be found in Little Saigon in San Jose, which ain’t exactly an upscale place. The fact that these low-income areas can support an extensive grocer network while other low-income areas can’t points to social, rather than purely economic reasons.</p>

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<p>I think from my knowledge of the problem that the health reforms are largely going to be a mute point for cost control. I gave a speech pertaining to healthcare for exempt competition and the major reasons for the increase in costs are:</p>

<ol>
<li><p>Rapid advance in technology which results in higher costs to preform the most modern procedures.</p></li>
<li><p>An older population that lives longer and therefore relies more on medical treatment over a longer period. This segment of the population also relies heavily on Medicare which is a flawed system in so far that it under pays doctors and therefore some doctors reject medicare and medicaid to reach solvency for their practice. Which also consequently limits the choice for older individuals.</p></li>
<li><p>A high driven consumer culture based in unhealthy eating practices. This consumption results in higher incidents of preventable diseases such as diabetes which also require the greatest amount of care over the long term.</p></li>
<li><p>Pay structure that provides incentives for doctors to preform procedures.</p></li>
<li><p>High cost of malpractice insurance which causes doctors to have to order multiple tests for defensive medicine so they don’t lose their license.</p></li>
<li><p>Lack of primary care physicians and avoidance of regular checkups which ultimately cause diseases to progress to the point where costly medication or interventional procedures are needed.</p></li>
<li><p>Lack of regulation of the pharmaceutical industry which results in HUGE profit margins on research drugs that have dubious curative effects.</p></li>
</ol>

<p>From the aspects of the bills that are coming through non of them seem to adequately address the actual rising COST of medical care and instead seem to focus on increasing the number of insured. The plans are bad and I would wager they are going not going to lower costs but rather result in insolvency of whatever system they will eventually set up and then from there they will have to reduce hospital pay for procedures in order to check for the inevitable mistakes. I feel this is a very bad plan and I hope more people speak out against it.</p>

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<p>I disagree with this one. Over the past 50 years, the pharmaceutical companies have developed much needed drugs/vaccines that have aided in treatment, prevention, and elimination of many diseases and illness. To name a few Merck’s Gardasil treats HPV, a human sexually transmitted disease and the MMR vaccine innoculates against Measels, Mumps, and Rubella. Tylenol, Advil, Aspirin, and other NSAIDS were all innovations from pharmaceuticals to alleviate pain, reduce fever, and help us recover faster. Yet despite these drugs, people like you are putting the blame on them because all you can equate with pharma is $. Have you considered that it takes approximately $1.5 billion and 10-15years to develop one drug before clinical trials? And let’s not forget that many of the pharmas participate generously in philanthropic efforts that include donating free drugs to third-world country and supporting start-up biotech companies. And recently, the Drug Association has come to agreement with the Obama Health Administration to cover $80 billion of the $1 trillion reform bill. Perhaps it’s not much, but at least the drug companies do not focus entirely on $.</p>

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<p>No I am not unduly blaming the pharmaceutical industry. The markup on drugs is extremely high and many of those drugs are targeted towards palliative therapy as opposed to cures. Which of course generates a healthy stream of revenue but also increases costs. Aside from that many times the side effects of the drugs can be detrimental as well.</p>

<p>I am not indicting the pharmaceutical companies over their economic model, if I was them I would probably do the same, but I am pointing out an aspect of why medical costs are rising. Something that the governmental infrastructure plans to redress by dictating which drugs will be bought. But that i and of itself is insufficient in so far as it restricts the diversity of drugs available to individuals because it inhibits a variety of medications. Medicare I think already does this.</p>

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<p>hahaha</p>

<p>this thread is hilarious…it goes to show you that people on the internet just want to yell at each other without actually listening to facts or information from someone who is knowledgeable. BDM just gave the rationale behind insurance…he hasn’t even said anything work all these super long posts (which i haven’t read btw). </p>

<p>BDM you should cut your losses and stop posting.</p>