How to Make American Health Deva Cheaper and Better

James and Robert Rebitzer are identical twins who enjoy each other’s company. “We talk. We talk a lot,” Bob said in a video interview I did with the two of them recently. “We’re kind of like the Three Stooges. Once we get going we just amuse each other.”

One day, Bob told Jim on the phone that there was no money to be made in finding ways to reduce costs in health care. Jim said he found that hard to believe. Then he said, “There’s maybe a book in this.”

And so there was. The book they wrote together is “Why Not Better and Cheaper? Healthcare and Innovation,” and it was published in June. Jim is a management professor with a focus on health care at the Boston University Questrom School of Business and Bob is a former health care executive who became a top consultant.

The book goes to a place that most other books on this topic don’t try to go. “Health care is usually assessed with three ‘vital signs’: cost, quality and access,” Jim wrote to me in an email after the interview.

Those three concerns so dominate the policy discussion that trying to change the subject even a little is almost impossible, the brothers said. Jim compared them to the ruts in a dirt road that a wagon’s wheels keep getting drawn into.

“We want to add a fourth vital sign, innovation,” Jim wrote in his email. “A healthy system should produce innovations that provide increasing value to patients and society at a lower cost.”

To promote the right kinds of innovation, they favor an approach that’s close to the hearts of economists, namely changing the incentives of the various players — doctors, patients, hospitals, insurers, pharmaceutical companies, regulators and so on — so they’re motivated to do the right things for society.

Development of better antibiotics to replace ones to which bacteria become resistant is a case in point. “Saving lives by developing new antibiotics ought to be a profitable business, but this turns out not to be true,” they wrote in their book. Wise stewardship says that you don’t start prescribing a new antibiotic as long as existing ones remain effective. So for drugmakers, there’s a risk that the new antibiotic won’t be sold until its remaining patent life is short or gone. That helps explain why as of 2021, only four major pharmaceutical companies had antibiotic research programs, they wrote.

In contrast, the patent system works just fine for improvements — sometimes minor — of existing pharmaceuticals. The improvements restart the clock on the patent life, giving the drugmakers more time to earn profits. There’s a term for this: “life-cycle management.”

Solutions? One idea is a subscription model that would pay drugmakers for the availability of new antibiotics rather than for their use. Louisiana successfully used a sort of subscription model to ensure access to antiviral drugs against hepatitis C for people on Medicaid and in prison, the Rebitzers wrote. It wasn’t aiming to promote innovation, but the subscription plan ensured patients’ access to innovative treatments that otherwise would have been prohibitively expensive. And for the drugmakers, some revenue is better than none.

Patients’ incentives to restrain health care spending are limited to whatever they spend on deductibles and co-pays. Doctors have even fewer incentives to look for cost-saving solutions. Health care is one of the only parts of the economy where “slightly worse but much cheaper” is not even on the mental map, the Rebitzers wrote. For example, Europe used cheap antigen tests for Covid long before the United States, which relied on tests that were more accurate but cost up to $150 each and took days to produce results.

Equally problematic are treatments that are expensive but provide little benefit. The Rebitzers laud Choosing Wisely, a campaign of the American Board of Internal Medicine’s ABIM Foundation, which has identified more than 700 tests and treatments that are of little or no value to patients.

The adversarial approach to health insurance, in which insurers spend huge sums scrutinizing claims, is enormously wasteful, the Rebitzers wrote. A lot of costs could be saved if insurers simply paid bills as they came in. But they would naturally worry about being cheated. Standardizing and simplifying benefits would reduce the paperwork. Another idea: “Trusted third parties could manage and attest to the validity of payments, as with credit card payments.”

The Rebitzers acknowledge that in health care, especially, economic incentives don’t always work. So they also call for changing the norms and narratives that sometimes produce dysfunction. They told me that when economists read drafts of the book, they said that norms and narratives were “outside of their professional competence.” Which, if true, is unfortunate. Robert Shiller, a Nobel laureate economist at Yale, wrote a whole book about the importance of the stories we tell each other, “Narrative Economics: How Stories Go Viral and Drive Major Economic Events.”

Norms and narratives can be helpful or harmful. They’re harmful when they lead physicians to ignore cost-saving innovations. They’re helpful when they lead those same physicians to do the right thing for patients even when it doesn’t help the physicians themselves. As an example of the latter, the Rebitzers recount the story of Diane Meier, a geriatrician, who with foundation money started the Center to Advance Palliative Care.

Palliative care is better for patients and their families and saves money, but it took a concerted campaign to change medical norms so that it became a subspecialty at hospitals across the United States. Economic incentives weren’t the key. Palliative care caught on “despite poor reimbursement and physically and emotionally arduous workdays,” Meier wrote in a 2009 article for the Journal of Palliative Medicine.

I asked the Rebitzers about the Biden administration’s program to lower what Medicare pays for 10 widely prescribed drugs, which I wrote about last week. Jim said the right question to ask is, “Are there better ways to reward innovators that cause less distortion?” The patent system isn’t perfect, but neither are price controls. One idea in the book is for the government to buy out patent rights to medical innovations at their estimated private value and then release them to the public license-free.

Buying out patents might work, or it might not. I’m just glad to see fresh thinking on the many problems plaguing the American health care system.

Elsewhere: Are Profitable Banks Riskier?

You might expect that the most profitable banks would be the safest. In fact, the opposite is often the case, according to a new working paper by Ben Meiselman of the Treasury Department, Stefan Nagel of the University of Chicago Booth School of Business and Amiyatosh Purnanandam of the University of Michigan Ross School of Business. Judging banks’ risks by the profits they report could be a simple and effective tool for regulators.

There are two main ways for a bank to raise its return on equity, which is the profit divided by the money invested by shareholders. One is to bolster the numerator by making loans at high interest rates. But that’s risky because those high-interest loans are more likely to go bad in a crisis. The other way is to shrink the denominator by relying less on money from shareholders. But that’s also risky because it requires depending more on money from depositors or bondholders, who may yank their funds at the worst possible time. “High profits in good times should be indicative of a systematically risky asset portfolio that is likely to suffer in bad times,” they wrote.

In an interview, Nagel said the failure of Silicon Valley Bank this year, which occurred after most of the work on the paper was done, was consistent with their thesis. He acknowledged that their new measure isn’t perfect. For example, he said, the largest banks may have high returns on equity without being especially risky, possibly because of strong market positions. That would need to be taken into account. (He also said the views in the paper don’t necessarily reflect those of the places the authors work.)

Quote of the Day

“An unusual outbreak of cross-disciplinary collaboration began on Twitter recently, when @halvorz made the provocative claim that every academic discipline has at its core a ‘word of power’ that everyone has given up trying to define.”

— The New Scientist (June 1, 2022)

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