A Conversation With David M. Cutler, PhD: Efficiencies, Jobs, and Staying the Course

A Harvard health economist and presidential campaign adviser says cost increases are on the right downward trajectory and will remain that way — as long as we keep pushing

When David M. Cutler, PhD, predicted this spring in Health Affairs that a slowdown in health care cost increases could mean $770 billion in reduced spending over 10 years, he recognized that the long-term reality could go either way. “We chose the wording in the article very carefully,” he says.

“This is a hard issue and there’s no right or wrong.” Still, he believes the road to continued cost savings is now clear — through payment reform, increased efficiencies, greater investment in technology, and a gradual reduction in the growth of the health care workforce — and that the government and the private sector need to keep heading in the right direction, only faster.

Cutler is the Otto Eckstein Professor of Applied Economics at Harvard, where he previously served as associate dean of the faculty of Arts and Sciences for Social Sciences. He participates in a wide range of public policy work. He is a research associate at the National Bureau of Economic Research, a member of the Institute of Medicine, and a fellow of the Employee Benefit Research Institute.

He served on the Council of Economic Advisers and the National Economic Council during the Clinton administration and has advised the presidential campaigns of Bill Bradley, John Kerry, and Barack Obama. Cutler is the author of Your Money or Your Life: Strong Medicine for America’s Health Care System, published by Oxford University Press in 2005 and a forthcoming book, The Quality Cure, due out this fall. His bachelor’s degree is from Harvard and his PhD in economics is from the Massachusetts Institute of Technology. He spoke recently with Managed Care editor John Marcille.

MANAGED CARE: You predict that if the current slowdown in health care cost increases continues, we will spend $770 billion less over 10 years. What will that mean for the economy and for health care?

David M. Cutler, PhD: It is going to mean quite a lot, probably more for health care than for the economy. For health care, it’s obviously going to mean less revenue for health care providers. For the economy, it will probably matter less. When health care is growing rapidly, there are lots of new jobs created. When health care grows slowly, jobs are created elsewhere as people spend their money elsewhere.

MC: Is that bad for health care?

Cutler: At the end of the day, what we really want to do is spend money on health care if we are getting good value and not spend money if we are not getting good value. It is like asking, Should we build another bridge to cross the river? Well, if a lot of people are going to use it and it’s going to significantly shorten delays, then yes. But if you are just building a bridge to hire people — and if we are not in a recession, when you want to hire people — then let them do something more productive.

MC: We have been pushing for cost savings in health care for quite a while.

Cutler: As this happens over time, we need to ask, Are we getting rid of things we want to get rid of, in which case it’s great, or are we getting rid of things that we would like to have? Here’s an example: Suppose that we reduce our readmission rates because hospitals get better at discharge planning and insurance companies get better at helping coordinate care among providers. Readmissions are pretty common, so if readmissions go down, overall use of hospitals will go down, and that means we will need fewer nurses, fewer orderlies, and fewer people in billing offices. Is it good or bad to get rid of those readmissions and not employ those people? The answer is that it is very good because you don’t want to waste your money as a society supporting a bunch of services that you just don’t need.

The Affordable Care Act takes a big step forward on the public side, but we need to do more…. The same is true for private insurers.

MC: But many sectors in the industry seem to thrive on high costs.

Cutler: A lot of this is going to depend on the payment system. We have seen that with readmissions. Hospitals are eliminating readmissions because the government is penalizing them and because there are promises of even bigger changes in terms of episodic, bundled payments. If you make something financially undesirable, you get less of it. If you make it financially desirable, you get more of it.

MC: You say that one-time occurrences such as the recession played a role in the slowdown of health care cost increases. Where else is the slowdown coming from? Are payment reforms having an effect already?

Cutler: Yes, and we are seeing more efficiency improvement. Hospital readmissions are down, hospital rates of infection are down, and a variety of indicators of poor care are doing better than they were. There has also been a slowdown in new technology, which I am sure health plan medical directors have seen. There is nothing on the horizon like massive sellers such as Lipitor or Prozac. That’s neither good nor bad by itself, it has just meant less spending. Another explanation is that people’s cost sharing is very high. The typical individual has a deductible of $1,000, and that is higher for families. That’s more money than most people have in the bank, which is discouraging a lot of utilization.

MC: Will that mean higher future utilization?

Cutler: We will have to wait and see. When you raise cost sharing, people cut back across the board. They cut back on services they don’t need, and they cut back on services they do need. People are not that good at figuring it out. On one hand, they get fewer images in situations where images aren’t that valuable, and on the other hand, they get fewer cancer screenings.

MC: What are you hearing from other health economists about your prediction?

Cutler: I went to a conference with economists, health policy folks, and others, and I gave them a survey. It’s not scientific in any way, but I asked whether they thought: A, it’s temporary and we will go back to where we were or costs will be higher because people will catch up on utilization they have postponed; B, we’ll go back up some, but maybe not to where we were; or C, we’ll stay where we are or may even fall lower because we’re just getting a handle on how to address efficiencies and payment reform. The vast bulk of people said B. My personal view is that C is probably more accurate.

MC: The popular press has been addressing the opaqueness of the system recently; it’s getting more attention.

Cutler: The Steven Brill article in Time and the articles on colonoscopies and pregnancies that ran in the New York Times are examples of stories that are highlighting how frustrating it is not to know how much something is going to cost. It strikes a chord for a lot of people. Even insured people can have very, very high cost sharing. Most insurers are under pressure to give people better information, particularly since they have been out selling these high-deductible policies. Their enrollees have skin in the game, but it doesn’t do any good to do that if they can’t figure out how to spend the money wisely.

MC: But what percentage of high-cost care is discretionary?

Cutler: Quite a lot. In almost any disease setting you can think of, there is some discretion about how much care to provide. I was talking to an oncologist about how his group did things. And it was, “Well, there are 12 protocols and we always follow those.” I asked whether there were ever situations in which the protocols were unclear. And the answer was, “Absolutely.” It turns out that the protocols are about what drug to give when a person has a certain type of cancer, but they are less clear about how frequently a physician should monitor a patient afterwards. Should they come in monthly? Should they get an MRI monthly? What should happen to them? And as a result of that uncertainty, you can spend enormously different amounts of money. Even if people have blown through the deductible, they may still have pretty high cost sharing and be at risk for a lot of the cost of an MRI.

MC: Providers come up with their own practice standards, then.

Cutler: Yes, and those norms are very much influenced by the money flow. So when providers are paid on a fee-for-service basis, the norm is to do an MRI every month. When they are paid on a global basis, the norm might be to do an MRI every three months or every six months. They are still going to provide the very expensive frontline drug because that’s what the literature says, but around the edges there is a lot of care for which the clinical evidence is not definitive.

MC: Are all of the incentives economic?

Cutler: There are several different incentives. There’s the economic one; There’s “do I feel at risk for being sued?”; There’s “what have I experienced in my own practice?”; And there’s “what summary of the literature struck me as most accurate?” All of which are malleable. We know that you can change doctors’ behaviors through money. We also know you can change doctors’ behaviors by having all of the oncologists sit down in a conference room and talk. Fortunately doctors want to do the right thing, and if you can show them that the right thing involves less of something or more of something, they will often really want to do it.

MC: We may save $770 billion from the slowdown in health care cost increases, but you’ve also said that we waste a very similar amount every year.

Cutler: That’s the best guess by the Institute of Medicine and others, that a third of medical spending is waste. That’s about that same order of magnitude, $700 billion or $800 billion a year.

MC: That is wasted from a societal perspective, but obviously the billing companies, the software makers, and others who have a stake in the overhead part of the business may disagree.

Cutler: One person’s waste is someone else’s income. The way I think about waste, though, is that if you decide you want to spend $800 billion less this year, you would have to unemploy a lot of people in health care. If you decide that 10 years from now, you want to spend $800 billion less than you otherwise would have spent, you won’t have to unemploy anyone. You just won’t add so many people in as many areas of medicine. For example, most hospitals are adding orthopedic surgeons pretty rapidly because there is more and more need for the surgeries that they are doing. If we got to a point where we agree that we don’t need to do as much surgery on backs and if we kept people healthier when they had arthritis, we wouldn’t need to replace as many knees and hospitals wouldn’t have to hire as many orthopedists.

MC: That is not jarring because it’s a slow process?

Cutler: It’s slow and nobody’s being fired. You’re just not having new people come in. That is happening in cardiac surgery today. Open-heart surgery is way down. Things can be done with minimally invasive surgery or with stents. So if you were coming out of medical school, you would have to be very careful before you decided to go into that. And that’s what will happen in other aspects of medicine, too.

MC: Is a robust primary care system something that we are going to see, or are the economics still not conducive?

Cutler: I hope we will, particularly when we really penalize going into a hospital. But primary care will probably look different. It won’t be all physicians. There is such a high demand for primary care that the key is figuring out how to find more of it. We need to think creatively about how to stretch resources.

MC: You often talk about health care being a service industry that doesn’t act like one. We can’t e-mail our physicians; clinics close at 5 p.m. Where are the opportunities?

Cutler: I have asked audiences, Which is more enjoyable, interacting with the health care system or buying a used car? Would you care to guess what they answered?

MC: They are both horrible.

Cutler: They far prefer buying a used car. This is totally unscientific, but the level of frustration with the inability to access medical care is immense. And we are entering an era when baby boomers are going to need a lot of medical care, and they have never stood for anything they didn’t like, so I would expect the pressure for better service quality to grow. One way or the other, the system will have to adapt to the demand for better service, or people are just going to explode at it.

MC: Have we seen evidence of improvements?

Cutler: We have seen lots of people hiring concierge physicians. We see people even with relatively low incomes going to MinuteClinics, paying $40 or $50 for the convenience of it. We see ratings services about physicians. It looks like people are starting to shop around, but nobody has quite hit on how to bring it to the masses. In the right payment environment, you can actually improve profit by providing better service quality in cheaper settings.

MC: Reducing administrative burdens on physicians could have a big effect, too. You cite studies that have found that doctors and nurses spend a good part of their time documenting care rather than providing it.

Cutler: Yes, the administrative burden is immense. And it’s a big source of waste. A lot of the new hiring in health care is going into administrative costs rather than into care processes. It’s not so much administrative costs at insurance companies, although there is certainly some of that. It’s administrative costs in providers’ offices as they have to deal with the many insurance plans that they have to respond to. That’s something that we need to really automate so that we get those costs down.

MC: Do you think that is an argument for a single-payer system?

Cutler: We could do that, but not enough people really want to do that. In most industries, we have reduced those costs not through a single-payer system but through technology.

MC: What are the best investments we could make in our health care system?

Cutler: The Affordable Care Act takes a big step forward on the public side, but we need to do more. Everything we have done so far has been half measures, and we need to do full measures. The same is true for private insurers. They recognize they need new computer systems, for instance, but are they really doing it on the scale that they need to as fast as they need to?

MC: Has the federal government done its part by setting the tone, or are there still things that need to be changed?

Cutler: Administratively, they need to keep pushing things as fast as they can. They also probably need some legislation because certain payment policies are set by Congress, and Congress has to change them. And private insurers have to be in the lead, not just be following.

MC: Which private insurers are in the lead now?

Cutler: Probably the most famous example is the one here in Massachusetts — the Alternative Quality Contract with Blue Cross Blue Shield of Massachusetts. It has gotten much more attention than anything else, partly because it has been studied, not because it is necessarily that far ahead of where other folks are.

MC: So a program like that should be replicated?

Cutler: Yes, and we should pay close attention to understanding exactly what impact it has.

MC: You are known for your early studies on evaluating technologies in health care to determine whether the investment has been worth it. How has your thinking evolved in this area, and what should medical directors and P&T committees be thinking about most right now?

Cutler: Technology is interesting because on the one hand, it does enormous amounts of good. On the other hand, we frequently overuse things. It is a real problem in the system if you develop something that is expensive but good only if done in the right people, because we waste a lot of money doing it on people for whom other treatments are actually better and cheaper.

MC: Like MRIs?

Cutler: Yes, like MRIs. We could significantly increase the value of technology by making sure it is used on the people who need it and not used on the people who don’t need it.

MC: Thank you.