Longevity and the Distribution of Health Care Costs

Marty goes to Doctor Lewis for a check-up.  After extensive tests the doctor tells him, “I’m afraid I have some bad news for you, Marty, you only have six months to live.”  Marty is dumbstruck.  After a while he says, “That’s terrible, doctor.  And I must admit to you right now I can’t afford to pay your bill.”  “Okay,” says Dr. Lewis, “I’ll give you a year to live.” From Heideger and a Hippo Walk Through Those Pearly Gates.

Photo by: Ronn Ashore

The power of incentives…Even in life or death situations, doctors, nurses, and patients all responded to bad incentives.  In hospitals in which the reimbursement rates for appendectomies ran higher for instance, the surgeons removed more appendixes.  The evolution of eye surgery was another great example.  In the 1990s, the ophthalmologists were building careers on performing cataract procedures.  They’d take half an hour or less, and yet Medicare would reimburse them $1,700 a pop.  In the late 1990s Medicare slashed reimbursement levels to around $450 per procedure, and the incomes of the surgically minded ophthalmologists fell.  Across America, ophthalmologists rediscovered an obscure and risky procedure called radial keratotomy, and there was a boom in surgery to correct small impairments of vision.  The inadequately studied procedure was marketed as a cure for the suffering of contact lens wearers.  “In reality,” says Burry, ” the incentive was to maintain their high, often one- to two-million-dollar incomes, and the justification followed.  The industry rushed to come up with something less dangerous than radial keratotomy, and Lasik was eventually born.” The Big Short, pp. 43-44.

The Lifetime Distribution of Health Care Costs – Principal Findings: Per capita lifetime expenditure is $316,600 (using year 2000 dollars), a third higher for females ($361, 200) than males ($268,700).  Two-fifths of the difference owes to women’s longer life expectancy.  Nearly one-third of lifetime expenditures is incurred during middle age, and nearly half during the senior years.  For survivors to age 85, more than one-third of their lifetime expenditures will accrue in their remaining years…After the first year of life, health care costs for the elderly are approximately four to five times those of people in their early teens.

I am not a math guy.  So, I am going out on a limb with this post, which is why I am keeping it short and asking a lot of questions.  If the little bit of analysis that I conduct is based on a faulty understanding of the math, then do not hesitate to correct me in the comments.

The authors of The Lifetime Distribution of Health Care Costs, repeatedly refer to the amount of medical resources consumed by the elderly.  But, couldn’t this also mean that more medical resources are marketed and sold to the elderly?

Furthermore, there appears to be an implied assumption that, after a certain age, you must spend more money on medical resources in order to live longer.  Isn’t it possible that, after a certain age (e.g. 85),  there could be less of a correlation between money spent on medical resources and the probability of surviving to the next year than we are being led to believe?

Even with my limited understanding of the math behind probabilities, I know that a certain number of people over the age of 85 will survive to the next year.  If a significant portion of the people over the age of 85 consume medical resources, then the providers of medical goods and services can take credit for their clients’ survival, without worrying about those who don’t survive asking for a refund.

For me, this raises a few questions:

(1) How does consuming medical resources impact the probability that you will survive to the next year?

(2) Which medical resources have the greatest positive impact on the probability that you will survive to the next year?

(3) Of these, which provide the greatest positive improvement in the odds for survival for the least cost?

Treating individual patients is a complex problem.  I do not mean to suggest that simple recipe type solutions will work.  But, I am skeptical that any good incentives can be found in the current market to limit frequent and expensive medical interventions or to develop inexpensive protocols that achieve similar improvements in the probability of survival.  Rather, I suspect, we are collectively responding to the bad incentives that come from buying and selling expensive medical goods and services.



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2 responses to “Longevity and the Distribution of Health Care Costs

  1. Great article. It definitely makes you think.

    • stoffainkorea

      Thanks Robin! There are bad incentives on both sides of this equation…consumers that don’t want to hear bad news and profits to be made by selling expensive goods and services. Opaque market information + bad incentives = fraud in many other contexts e.g. fine art, old wines, sub-prime mortgages…

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