A Conversation With Uwe E. Reinhardt, PhD: Health Care Deserves More Respect

The internationally known health care economist says we have been heading in the right direction all along — we just have to tackle problems in the right order

Health care economist Uwe E. Reinhardt, PhD, is bullish on health care. The decline in the growth of health care costs looks as if it is permanent, and the innovations being developed in information technology are exciting, says Reinhardt, the James Madison Professor of Political Economy and professor of economics and public affairs at Princeton University. He suggests, however, that the industry tackle prices and administrative costs before putting any more pressure on hardworking doctors and nurses, and that insurers take over wellness programming. It’s a safe bet that people are listening. A member of the Institute of Medicine and the National Academy of Sciences, Reinhardt has advised organizations such as the World Bank, the Physician Payment Review Commission, the Veterans Administration, and the United States Department of Health and Human Services. He is a member of the Kaiser Family Foundation’s Commission on Medicaid and the Uninsured. Reinhardt contributes to the New York Times Economix blog and is on the editorial board of Health Affairs. He previously served on the editorial boards of the New England Journal of Medicine and the Journal of the American Medical Association, among others. This publication, in fact, is one of those others. Reinhardt is on the board of Boston Scientific, a medical device company, and is a director at two mutual funds: the Hambrecht & Quist Life Sciences Fund and the Health Care Fund. He received a bachelor of commerce degree from the University of Saskatchewan and earned a PhD in economics at Yale University. He spoke recently with Managed Care Managing Editor Frank Diamond on the campus of Princeton University (see the unabridged version below).

Managed Care: Professor, everybody knew something had to be done to fix the health care system, and everybody knew one of the main problems with the system was costs. Does the Affordable Care Act address the problem of costs?

Uwe E. Reinhardt, Ph.D.: The Affordable Care Act doesn’t really address directly the issue of costs. In fact, it would add expenditures. Other things being equal, it raises annual health spending by 5 percent — for the extra insured. But it developed a lot of instruments that could be used for cost containment. It actually happens to be true that starting in 2002, the rate of growth of health care spending in America started falling. So when you draw a graph, you see a steep decline in the annual growth rate of health spending per capita. Economists have looked at it; the bulk of it is recession-driven. There is a fairly close relationship between health spending per capita and GDP per capita, but with a lag. It doesn’t hit all at once. Some of it hits in the first year, but it has about a four-year lag effect. The Altarum Institute and Kaiser Family Foundation did some research, and it tracks quite closely. And then there are some additional things like increased cost-sharing by patients through higher deductibles, and so on. A variety of things started to lower the growth in health spending. It used to be that health spending annually grew 2 percentage points faster than GDP grows. That’s down below 1, sort of .5, so — GDP plus a half percent. It might go to .8 when the economy recovers fully. So something happened long before the Affordable Care Act was passed. But the Affordable Care Act offers, for example, comparative-effectiveness analysis. Unfortunately, not cost-effectiveness — that was ruled out by Congress — but at least you could say which drug works better than another. There are attempts at payment reform — bundled payments rather than fee for service or capitation. The accountable care organization, that’s a more iffy bag. The idea there is essentially to build something like Kaiser Permanente but without going all the way that Kaiser did. It could be just contractual with hospitals and doctors. But notice what already happened. Only about half of the physicians in America are still self-employed. There has already been this movement, and it predates the Affordable Care Act, of buying doctors and building larger systems where you can have integrated care. But the Affordable Care Act accelerates that and gives incentives for that. There’s a lot in the bill that could help cost containment, but for President Obama to claim that it was an instrument of cost containment, or that what we have seen is because of the Affordable Care Act — I don’t buy that.

MC: The managed care industry has lobbied to allow health insurers to sell insurance across state lines, basically become national health care insurers. Is there any credence to that?

Reinhardt: What is it actually that is being sold? What is being sold is in states with very lax regulation of the insurance industry. If you go to New Jersey or New York, they really tightly regulate the insurance companies. You go to other parts of the country — Iowa, maybe, or Texas, where there is not that much regulation — there is not all of this mandated coverage of wigs and this and that. So what you are selling is insurance with less regulatory protection. That’s what is being marketed. Because when an Iowa or a Texas insurer insures a New Yorker, they have to buy the health care in New York at New York prices, which are high. They are not like Iowa prices. So therefore an Iowa company selling insurance to an Iowa person can quote a much lower rate than an Iowa company could selling insurance to a New York person, because they would have to pay Mount Sinai and Columbia-Presbyterian prices. So the only reason they can be cheaper than a New York-based company is the less burdensome regulation of the state. If you look internationally and ask why do we spend twice as much as most European countries or Canada per capita, the answer is almost all prices. Name anything, and our price is twice as what it would be in Germany or in Canada. Even for the same drug or the same procedure, and so on. It’s prices. We wrote a paper, Gerard Anderson and I and some others — it’s quite famous now — called, “It’s the Prices, Stupid.” It’s in Health Affairs. Because we realized, if you actually look, we have far fewer hospital days per capita than Germans or Canadians, we have fewer doctor visits, we eat fewer pills. The only thing where we consume a little more is some high-tech procedures like imaging, and in some heart surgery and cancer care, we are more aggressive. But in most other stuff, the kind you shoot at with cost sharing, we are already very dainty consumers. Americans don’t flock to the doctor. We have the lowest physician visit rate per capita in the world.

MC: Does that perplex you? Is it one of those problems that seem insolvable?

Reinhardt: Have you ever seen a perplexed economist? We have an answer for everything! Here’s my answer: In all of these countries — Canada, Germany, etc. — the demand side, the payment side, has a lot of power. In Canada, it has what we economists call monopsony power — single payer. There’s only one payer. And so the doctors and the hospitals, they negotiate with one payer. The power of the market is all on the payment side. The supply side is splintered. With us, it’s exactly the other way around. Particularly as the hospitals increasingly consolidate. The insurance companies are splintered. You could say that Aetna is big, WellPoint is big. They are big nationally, but in any given market, they don’t dominate. They may be relatively big, but something like Partners in Boston or Mount Sinai in New York, you couldn’t write insurance without them in it. And Mount Sinai knows that. And therefore they have market power over even a big company like United. I wrote a paper called “Divide et Impera” — divide and rule. And I said, what we have done, we splintered the payer side into thousands of little payers, against the increasingly consolidated supply side, particularly in the hospital area, that has market moxy, and that is what drives these prices so high.

MC: It seems that insurance companies have made stupid decisions in the past, and you just mentioned that their power is waning. Have they learned lessons on management and how to get people not to view them as the bad guy anymore?

Reinhardt: I don’t view them as the bad guy or as stupid. I’ve never thought they were stupid. No, it’s just simply that they were weak because they were splintered. Even their administrative costs are caused in good part by this pluralism. We have so many thousands of different insurance policies, each with their own rules. It’s an attempt to please the customer, but the more choice you have — choice is expensive. And that is why — I have seen papers — our hospitals spend twice as much on administration as any hospital anywhere in the world because of all of this complexity. Stupidity cannot explain very much at all in our health system. Mind you, a Martian who would land here would say, “Why the hell did they set it up this way?” But everyone within it is quite clever, et cetera. It’s just that when you are splintered, like the insurance industry is, each guy sitting on the other side of the table of a consolidated hospital system is weak. Even in Boston, Partners just owns that town. They are willing to negotiate. They will give you a little bit, but not a lot. Their prices are high.

MC: Do you see an evolution toward a single-payer health care system?

Reinhardt: No. That’s what some people claim; I see it go the other way. If anything, we would go to a three-tiered system, where it might be that our kids — the ones I teach now — they might say, you don’t have to be 100 percent equalitarian in health care. You give everyone a guarantee to something. And so we’ll have public clinics and public hospitals, and we’ll budget them, and if you’re poor, instead of being in Medicaid, you’ll go to that hospital. Then for the middle class, you and me, you would have what is called reference pricing. Insurers negotiate prices with different hospitals, and tell their insured, “If you go to this hospital or this hospital and have your baby there, we’ll pay 90 percent. If you go to another hospital that is more expensive, you pay the whole difference between this reference price and what they charge you.” WellPoint has just introduced that for Cal­PERS personnel, the state employees in California, only for two procedures — hips and knees — but it lowered the prices by something like 20 percent. And everyone else came down. And then boutique medicine for the elite, which they already have. I personally never begrudge them that. I mean, why should a corporate CEO, when he gets sick, be in a ward when they never mix with humanity as you and I know it? They have their limos, their jets. They have mansions and presidential suites in the Ritz when they go to Washington. It would be almost cruel to say, “When you get sick, we stick you in a ward.” I don’t mind that they have a little suite — every hospital in America has that.

MC: Or a Hollywood wing?

Reinhardt: Who cares, as long as they pay for it? It shouldn’t be tax funded. I don’t think people would begrudge people to have boutique medicine, other than if it really noticeably affected survival. I mean, if boutique people got the hearts before anyone else in transplant, that would bug people. But if they had butlers, I don’t think anyone would care.

Prices negotiated between hospitals and doctors are trade secrets. So if you don’t know prices, competition can’t work.

MC: Where do you see all of this going from here? The health care costs, the ACA? Where do you think that we’re going to be in five years?

Reinhardt: I am actually quite optimistic about health care. First of all, it never was that bad a sector. People always say it’s the most inefficient sector in the world. It’s just all bullshine. If you compare health care to education, health care towers over education in terms of concern about quality, concern about cost effectiveness, et cetera. Compare it to jurisprudence. Have judges ever worried how much time of the jury they pulverize? So I think the health care system actually is a lot better than people claim it to be. We keep beating up on doctors and nurses, and they work very hard. But actually where we should start — there was an Institute of Medicine study out that said we spend $190 billion more per year on administration than we should. It seems to me that should be attacked before I keep hounding more doctors and nurses. There is unnecessary stuff, and people always claim that. But you know I always joke about the vertical and horizontal economists. When we are vertical, we talk a tough game. “Don’t do marginally beneficial things.” When you are horizontal, even when you are an economist, on an operating table….

MC: You want all of the tests.

Reinhardt: Do the low-hanging fruit, the thing that demonstrably couldn’t hurt the patients if you went there. One hundred and ninety billion dollars a year would be much more than we need to cover all the uninsured — 100 percent universal coverage. So that’s what we should go after. For some reason, we talk about evidence-based clinical practice, but not ever about evidence-based administration. What we really need is evidence-based administration. Say, how could you run an insurance system more cheaply than we do? How much should we save? Whatever we are spending, cut it in half. It’s achievable with some ingenuity. On the other hand, there is going to be a lot of innovation coming, made possible for two reasons. One, computational capacity has enormously increased. We now increasingly know how to measure quality. Ten years ago, we really didn’t. And the labor market, tragic or not, is sluggish now. In the ’90s, the labor market was tight. Employers couldn’t do anything. Remember the managed care backlash? Managed care was a good idea. Now, labor is kind of on the run, and it is much easier for employers to impose networks on patients or cost sharing. It’s easier to innovate. I go to these venture capitalist meetings. Healthspottr, I was recently at, and you hear the energy of these young people dreaming up innovations — IT-based — in claims processing, in wellness — computerized wellness where you have some gizmo that speaks to your iPhone and in your iPhone you get a graph that tells you how your weight’s gone this month. Stuff that people need. Make a game out of wellness. There is going to be a lot of innovation coming down the pike. And even within biomedical research, I think you will have a lot of labor-saving innovation. For example, home care that you can do electronically. You don’t need a daily visit to these people if the metrics that get radioed to some center look OK. So I think first of all of the bending of the cost curve, and I am persuaded it’s actually more permanent. We always thought it would go up again when the economy improves. I don’t think so. It is still very expensive, but more under control than before. And there will be a lot of innovation. I love the kids I teach, I really do. The energy I see there. When I look at those 30- to 40-year-old entrepreneurs, and they are up at 6, running, making deals, I think they will change things. We are coming into a different era. These people are more open to change. Don’t forget, until now, the health system has been a cozy cartel. Everyone knew each other, we’re all in this together, and somebody pays the bill. I think those days are over. And you know, it’s always been said that necessity is the mother of invention. But for 40 years, invention was the mother of necessity in health care. Somebody invented a machine that went, “beep, beep, beep,” rather than just, “beep, beep,” and every doctor had to have the “beep, beep, beep” machine. No more. The way device companies and drug companies sell to hospitals isn’t anymore to the individual doctor and his or her desires, it’s to committees. Things are changing. I am actually far more optimistic than I would have been 10 years ago.

MC: Thank you.