Expenditure on health is rising as a proportion of GDP everywhere.
It takes about 17 per cent of America’s GDP and it is said that, on present trends, 100 per cent of America’s GDP will be spent on healthcare by the end of this century. In other words, everyone will either be a patient or a healthcare service provider. This is joke, but it makes a serious point.
But conventional economics would stop the conversation right there. If markets are working, then the people of the US have decided that this is the amount they want to spend on doctors, nurses and medicines. Competition can increase efficiency and allocate resources more optimally but that’s that.
Those that lament that rising healthcare costs is increasing income and welfare gaps have a right to their opinion, of course. But that’s a political matter.
Economics has been sidelined in the intense American debate about the way healthcare is produced and financed. Legislation establishing what is now known as Obamacare was passed in 2010. It is the subject of partisan contention between those that oppose any extension of government intervention and champions of state action to reduce income differentials. The views of economists are often unheard.
This is a pity. Healthcare is not an abstraction. Everyone needs it. Economics should have something to say.
One approach involves quantifying the effectiveness of health spending. Every study shows the high US healthcare expenditure does not result in matching outcomes including in life expectancy and avoidable hospital death. America spends more than $8,000 a head on healthcare but on average a woman is as likely to die during and after childbirth in the US as her counterpart in Mexico where per capita health spending is about $1,000. The Commonwealth Fund’s report ranked the US the worst in terms of outcomes of the countries it studied.
This conclusion can be dismissed. But is there a better way for economists to analyse the economics of health?
Economics2030 suggests an alternative. The theory presented on this site divides value-creation in services it into two parts.
The first is the value-creation itself. In healthcare, this is exclusively the result of the interaction between and among patients and healthcare service providers, including nurses, paramedics and non-medical staff working in doctors’ surgeries, clinics and hospitals. It encompasses the clinical interaction and contact between health workers and patients after diagnosis and treatment.
The second is the supporting processes including the buildings, equipment and information systems used by the service providers in their value-creating interaction with patients. The processes do not create value. They facilitate the value-creation interaction.
The theory argues that value-creation is maximised when the supporting processes are as widely and freely available as possible.
Now let us look at healthcare in practice.
The principal operational expenditure in healthcare is payment for labour. The NHShas more than 1.3 million employees, including more than 150,000 doctors and almost 400,000 qualified nurses. The principal limit on their capacity to focus on value-creation in their interactions with patients is difficulties in managing data.
In most healthcare industries, the bulk of health information is either kept in a paper form or not kept at all. Even in advanced economies, healthcare workers struggle to gather relevant information about patients. This problem has been compounded by the increasing mobility of the populations they serve.
There are two key datasets. The first is the clinical pathway which tracks the treatment of an individual from the initial interaction with a clinician. For many patients, this generates a comparatively simple data set. A record of someone seeking treatment for tonsillitis would probably cover the consultation with the doctor, the diagnosis and a prescription. Recurring tonsillitis will produce a more complex record that might encompass surgery.
But for complex conditions – including non-communicable diseases (NCDs) such as type-2 diabetes and cardio-vascular ailments – the record can be enormous. Clinical pathway data is particularly sensitive in hospitals. Only recently has this been automated in hospitals in advanced economies. In most hospitals in most parts of the world, the record is mainly in a paper form and, often, only in the imperfect memory of doctors, nurses and patients.
The second dataset, which is hardly ever available, provides a complete record of healthcare interventions for the entire life of an individual patient from birth. Ideally, this should encompass information from conception and before, since the health of a mother during pregnancy and the disposition of parents, grandparents and other family members to particular diseases can provide powerful clues about a patient’s health risks.
There is no clear evidence about how much time is spent gathering data about a patient during interactions with health workers. But it is obvious that the more complete the available dataset, the better the diagnosis and treatment. Doctors, nurses and other health workers are more effective when they have better patient knowledge.
The theory of value-creation argues that a decisive contribution to value-creation in health would be made through electronically storing and managing clinical pathway and life-health data and making it available to health workers. This would increase the efficiency of health workers and improve the quality of healthcare interactions.
Evidence from other industries suggests that value-creation in healthcare could be doubled through the elimination of bureaucracies needed for the management of patient data and the resulting increase in patient safety and healthcare outcomes.
In other words, twice as many patients could be managed using the same human and material resources; or healthcare workers could get a 100 per cent pay rise; or, even, healthcare workers could work half as long.
It’s an exciting prospect that could address the challenge of meeting growing healthcare demand in advanced economies, where increasing longevity and NCD are the main issues, and in emerging economies, where most can’t afford decent healthcare.
But how can such a result be secured?
The first step is to focus resources on systems that electronically gather and distribute health information. However this is done, it is obvious that institutional arrangements that limit the free availability of patient health data should be eliminated. This is where health-insurance based systems founder.
Private health insurers make profits through their ability exclusively to own health information about those they insure and those that they refuse to insure.
Private health insurers in effect participate in patient health arbitrage by “buying” customers with a lower than average risk of developing costly healthcare problems and “selling” those with above average risks. A company with more customers with better than average health — or those with health risks able to pay the required higher premium — will be more profitable than one with more customers with worse than average health or who lack the capacity to pay that premium.
Even systems where non-profit health insurers dominate will want to avoid those in the second category.
People with uninsurable health issues or those unable to pay insurance premiums will fall out of the system. These become dependent upon charity or whatever publicly-provided services may be available. Some are denied healthcare.
Even a public health insurance system based on assessment of an individual’s health risks will founder. Because any individual insurance system must lead to health data arbitrage and restrictions on the free availability of the information needed to maximise value creation. It will demand the creation of bureaucracies managing patient health data and directing medical interventions. Whether they serve private or public institutions is irrelevant. Value-creation in health will be constrained.
A freely available health data system in contrast will liberate health service providers and their patients to interact constructively without central direction. This will allow more effective interventions and treatments including hospitalisation. It will also radically reduce the process costs and, in total, make it easier for healthcare to be financed whether through taxation or through a direct payment system.
Value creation in any community depends upon people being able to interact constructively with each other. The better the health of the community, the greater the potential for constructive interaction and the lower the process costs.
Conventional economics treats this as a political issue involving value judgements. It’s evidence of the extent to which the discipline is failing to understand the economics of value-creation in services generally; and in healthcare in particular.