Consumers Should Drive Medicine

David Goldhill on America's deadly, dysfunctional health care system

In 2007 David Goldhill's father was admitted to a New York City hospital with pneumonia. Five weeks later, he died there from multiple hospital-acquired infections. "I probably would have been like any other family member dealing with the grief and disbelief," says Goldhill, a self-described liberal Democrat who now serves as CEO of the Game Show Network.

But then Goldhill read a profile of a physician named Peter Provonost, "who was running around the country with fairly simple steps for cleanliness and hygiene that could significantly reduce the hospital-acquired infection rate." Provonost had been having a hard time bringing hospitals aboard, which the TV executive found surprising.

"I had helped run a movie chain," Goldhill says, "and we had a rule that if a soda spilled, it had to be cleaned up in five minutes or someone got in trouble. And I thought to myself, if we can do that to get you not to go to the theater across the street, why are hospitals having such a hard time doing simple, cost-free things to save lives?"

That's how Goldhill first became interested in the economics of the American health care system. In 2009 he published a much-discussed feature story on the subject in The Atlantic under the provocative headline "How American Health Care Killed My Father." He has now expanded that article into a book.

In Catastrophic Care (Knopf), Goldhill decries a system of incentives that puts most health care purchasing power in the hands of insurance companies and bureaucrats, while cutting patients out of the equation. There's a direct link, he argues, between the way we pay for health care and the estimated 100,000 patients in the U.S. who die every year from infections they picked up in the hospital.

Reason TV contributor Kmele Foster sat down with Goldhill in October to discuss how turning patients into customers would go a long way toward solving the problems of American health care. An edited transcript of their conversation follows. For a video version of the interview, go here.

reason: In your book, the word incentives comes up a great deal.

David Goldhill: The fundamental argument I make is that removing us as the real consumer in health care and putting someone between us and providers-whether it's insurers, whether it's Medicare or Medicaid-has completely turned the incentives in the system on their head. What we see now is that the best way to make money in health care is to price high; provide excess service; be sloppy about safety; underinvest in service, which includes information technology; and lack the type of accountability we see in anything else.

reason: How did health care and health become synonymous?

Goldhill: You'll hear, "The United States spends so much on health care and lags behind other countries in health measurements." Well, we don't really measure the outcomes of health care. We measure how long we live, how vigorous we are through old age, how many of our children are born healthy. We measure those types of big things. Unfortunately, all of them have almost nothing to do with health care. The things that drive health are all lifestyle. Nutrition, exercise, stress, income, education, public safety-all of these things drive health results far more than health care.

The most dangerous thing we do in health care policy is we imply that making sure that everyone has the maximum amount of health care is essential to health, when one could better argue that diverting 18 percent of our GDP into health care has made us significantly less healthy as a country. I always like to turn that little thing on its head and say, "You know what's amazing? No developed country's health seems to suffer, no matter how little it spends on health care." It may be the least important factor in health, and yet it's the one we emphasize.

From there a lot of things go wrong. From there, we have a system where much of the debate is about money: How do we pay for all the health care people? And we miss a big question: If we pay for health care in such a way that we take the individual out, are we going to subject people to excess care and excess treatment, which is a major cause of harm and injury and poor health in itself?

reason: There seems to be a real desire on the part of many Americans to not think about their health care costs.

Goldhill: The foundation of health care economics in this country is an article written by Kenneth Arrow. He said that health care can never be a normal industry, because you'll buy whatever your doctor sells you. He's got all the expertise. You're desperate, you're sick, he's gonna tell you how not to be sick. You'll buy anything. There can't be any normal marketplace transaction.

So now we never ask them what it costs, and we buy everything. It's almost what I would call Arrow's revenge, although I don't think he would take that very kindly.

There's a terrific website called theNNT.com. Every American should look at it before taking a pill or having a treatment. TheNNT takes all the numbers that you see and translates it into a single number. How many people need to take this pill for one person to benefit? How many people need to have this operation? It's astonishing. I'm taking a statin for cholesterol. If you look at theNNT-admittedly, I'm contradicting my own point-it's a few people who benefit for every 100 who take it. And roughly the same number are hurt because of other risks that come from taking this pill.

It's extraordinary how removing the consumer from health care has caused us to buy everything. And because we've taken ourselves out, we've taken out the major incentive for keeping prices down. Health care should be unbelievably cheap, right? It's a capital-intensive, almost zero-marginal-cost business. Instead we've done everything we can to keep their prices high.

reason: Most of the conversation about controlling health care costs has centered around cost and not price.

Goldhill: The other day I was at a speech in which a politician said that if we could figure out a way to integrate care, we can reduce the number of MRIs performed, and that will bring costs down. He and I were sitting next to each other afterward, and I said, "That doesn't bring costs down. The marginal cost of doing MRIs is zero. You already have the machine; you already have the technician. You're confusing price and cost."

In health care, we never talk about prices. We like to believe that somehow there's some force that actually determines what something costs that is independent of economics. That has been devastating to prices in health care.

There was a terrific piece in The New York Times about asthma drugs. Way into the story, toward the back, the reporter did a terrific job at looking at high prices in health care, and she recognized that these are prices, not costs. One thing the asthma drug companies are determined to do is to avoid their drugs ever being sold over the counter. They want them sold on prescription, where the prices are high.

reason: Preventative care has been fundamental for folks who talk about controlling costs, that if we do more preventative care, that will bring down costs over time. What's your take on that? Is there much there?

Goldhill: Preventative care is an example of where the Affordable Care Act confused cost and price and visible cost. Preventative care was developing as a very competitive sector, because under most people's high-deductible plans they were paying for most of their preventative care. You saw minute clinics growing all over the country-the drug stores in Walmarts and what have you. The reality is that the cost of performing most tests is almost zero. There are a lot of technologies out there that will bring it down close to zero and, more important, let you do it at home. Why? Well, they had a chance to succeed because you were paying for it.

The supporters of the Affordable Care Act think preventative care should be free. The problem with that is all that incentive to price preventative care cheaply went out the window the minute you said anybody who's insured should never have to pay a penny for preventative care. The incentive to keep prices down was gone.

It's an interesting example of what's happened in all of health care. Look at Medicare. In 1965 the average senior spent 10 percent of his or her income on health care and was paying for all of it. Fast forward almost 50 years. The average senior pays only 5 percent of their total health care costs; 95 percent is paid through Medicare. That 5 percent is now almost 20 percent of their income. They're no better off financially. The extremes are less; fewer people have extreme examples. But all you've done is you've enabled my disguise, my not knowing what something costs me, my crazy belief that someone else is really paying for it to allow the providers to push up prices.

reason: People might think that's because of all the technology in health care, that technology is driving up the cost.

Goldhill: I once did a Google search seeing how many articles had been written in the previous year saying that technology had driven up the cost of health care. And then I tried to imagine how many of those articles were written on $400 laptops.

Technology does drive up the cost of anything-if you allow it to. If we said, "everybody should have a smartphone, but we know smartphones are expensive, so anything above $300 the government will pay for," well, your smartphone would be nuclear powered. It would have a can opener on it. It would do everything you can imagine. And technology will have driven up those costs in people's minds.

The issue with health care is: Do we have incentives for those technologies that bring down costs and prices? We don't. Do we have incentives for technology that seems to push up prices and costs to be adopted by providers? Yes. That's the difference. And that's what people miss.

The Reagan-era reform to bundle hospital payments had an enormous impact on hospital use in this country. Most people aren't aware of this, but the average stay per Medicare beneficiary in a hospital in terms of number of days has declined by 60 percent since then. In-patient care is totally transformed; most of it is short. What did the hospitals do in response? They cut their prices because demand declined by 60 percent? No. They invested it in things that push up their costs. So hospitals now say to Medicare, "Our costs are now seven times what they were 30 years ago. And the prices you pay us are now five times." That's not what other industries would have done.

If you go into a typical hospital, you see less information technology than you do at your Jiffy Lube. It's not because Congress pushed Jiffy Lube to adopt information technology; it's because they want to save money. Hospitals never had an incentive to save money. They had the opposite incentive. And that's why technology seems to be pushing up prices.

reason: What are the best and worst attributes of the Affordable Care Act?

Goldhill: The best part of the Affordable Care Act is basing Medicaid on income levels. One of the great dysfunctions of the Medicaid program is that it becomes the favored disease or condition program as opposed to what it needs to be, which is a safety net for those Americans who can't afford health care. I don't like the way Medicaid functions, but I think the idea of saying, "look, this is about helping people who can't afford health care, period," is a real positive. If we're going to have a safety net, it should be structured more simply.

Unfortunately, the rest of the Affordable Care Act is the opposite of simple. It takes a system that's already way too complex, way too hard for normal consumers to navigate through, and makes it ever more complicated. I don't think there's a lot of genuine market incentives in the Affordable Care Act. I think the people who wrote it think there are. I think most of them are so constricted, so narrow, and so manipulated-I think the exchanges are a good example of this-that we are as likely to see them depress competition and all the benefits that competition brings as to enable competition.

The ACA was most interested in insurance: expanding the amount of insurance coverage in both the number of people covered and the type of coverage itself. There are obviously positives in that. Unfortunately, the American system of insurance, both public and private, is unique in that it has no brake. The principle here is that any care you need should be paid for by your private or public insurance. No other country on earth does this.

reason: You certainly don't see that in places where there's single-payer insurance policies. They have to stop at some point.

Goldhill: Somebody somewhere gets to say no. And by the way, I don't think this is fixable. It's one of the reasons I think you have to have a greater role for the consumer; in the United States, the consumer is the only one who has the recognized authority to say no.

reason: What would a system that works look like?

Goldhill: I would like to see a straightforward, simple, truly universal safety net. It would insure against what insurance can actually do well without distorting the market, which is catastrophic care. We need to protect people from health care catastrophe. You can be born with it. You can destruct suddenly at any point in life.

Beyond that, we really need to unleash in health care those forces that work in everything else. Competition, incentives for innovation, incentives for value, need to satisfy a customer, need to be accountable to a customer. And the only way to do that is to take some of the $3 trillion we're going to spend on health care and give it back to the places it came from. Give it back to the individuals.

reason: Is that catastrophic coverage necessarily run by the government?

Goldhill: It doesn't have to be, but I think there's an argument for being single-pool. I think the more you limit it to catastrophe, the more efficiently it can be run. I think it needs to be single-pool because as we have found in insurance here, there is no way for a private insurer not to game insurance. And if you're going to make it tax-benefited, if you're going to make it the default way for people to pay for any part of health care, you are going to unfortunately incent for-profit behavior and skimming, which is really what our health care industry and insurance industry are, and we have difficulty relying on it.

I'm very attracted to what Singapore has done. Singapore has a very large environment for government health care. But it does one thing that no other developed country does. It says at every point of purchase that the individual is the customer. The effect is transformative. Not just on price, but on service and safety.

Singapore spends under 4 percent of GDP on health care, making it by far the lowest in the developed world. What's even more interesting is the average Singaporean-and this is a country with roughly the same income per person as the United States-is estimated to have enough in his health savings account after 20 years of the system to pay for 11 hospitalizations.

reason: Any good news on the horizon?

Goldhill: I think there is. I actually think we see it with our own employees here. We now have a significant percentage of our work force that really thinks about the price, the cost to them, of actually buying health care.

And we're starting to see new business models. We're starting to see new technologies take advantage of the fact that we have price-conscious consumers. This is an enormous benefit. It may end up being the biggest accidental result of the Affordable Care Act. To get subsidies on the exchanges, for companies to possibly offer insurance for less than the Cadillac tax [on high-end health plans], we're going to see more and more cost sharing.

On the island of health care, people are focused on, "Oh my God, does that mean somebody might not get health care they need?" In the real economy, what we know is going to happen is that, as you get a scale of cost- and value-motivated consumers, you then have a reason for providers and for business models to seek them out. There are tons of technologies in health care that would save cost.

You want to look at simple health care? Go to a clinic that serves the undocumented, or go to a concierge practice that serves the rich. The undocumented and the rich benefit from two things. They're both the only customer. There's no one behind them. They both opted out, either voluntarily or involuntarily, of the insurance system. And what do we see there? Simple, straightforward, price-conscious care.

We're going to see that in more of our economy. People say all the time, "Where are the Bill Gateses? Where are the Steve Jobses? Where are the FedExes? Where are the Walmarts?" Well, there's never been enough scale and customers to build those business models that emphasize value, true innovation, service, and accountability. I think we're going to get to a point where enough people pay the first $2,000 or $2,500 or even $10,000 out of pocket that the Steve Jobs of health care comes along. He's soon going to have a big enough market to actually build a better product and offer better service, and that's going to be great for health care.

We're already seeing hospitals advertise for safety. We're seeing cancer care centers advertise on service, convenience, comfort. In health care, these are all seen as waste. State-of-the-art health care can be a commodity. That would be a great thing. Differentiated on service and accountability and value? We could get there. We'd get there in opposition to public policy, but it wouldn't be the first time that has happened.