Waiting on Change

Nov. 1, 2006

Rarely do I trust anyone who promises to “revolutionize” anything. As far as I can tell, Massachusetts Institute of Technology (MIT) economics professor Amy Finkelstein never claimed her work would revolutionize anything, but in reviewing her work, a few external sources came close, including the normally stoic Business Week.

Rarely do I trust anyone who promises to “revolutionize” anything. As far as I can tell, Massachusetts Institute of Technology (MIT) economics professor Amy Finkelstein never claimed her work would revolutionize anything, but in reviewing her work, a few external sources came close, including the normally stoic Business Week.

Finkelstein became blog fodder over the summer when she released her study of data, 40 years worth, leading to her theory that the skyrocketing upsurge in healthcare costs over the last 40 years may be more attributable to increased availability of insurance than to increased availability of technology.

The layman’s nuts-and-bolts version goes like this: 1) Consumers tend to use more healthcare services when someone else (e.g., insurance) pays for the services; 2) Since Medicare—the granddaddy payer of them all—was introduced 40 years ago, covered employees and retirees alike have witnessed an enormous expansion of insurance vehicles and insurance availability; 3) Insurance provides a steady revenue stream for hospitals and doctors and often pays providers for services that use hot, new and costly technologies; 4) Hot, new and costly technologies are adopted by providers a lot faster if insurance payments are likely, rather than if consumers alone were paying the bills. It stands to reason, then, that healthcare spending and costs might dip in some proportion to increased consumer/patient payment responsibility, doesn’t it?

Three things are notable about Finkelstein’s research. The first is that technology alone—be it information technology or diagnostic and treatment technology—isn’t taking the lion’s share of the blame. Hallelujah—a reversal: Nearly 20 years ago, the Rand Corp. cited technology as responsible for about 50 percent of the upswing in rising healthcare costs, and costs rose mightily in the mid-1980s.

Secondly, Finkelstein used both paper records and technology—two inescapable symbols of healthcare today—to make her point. First, she rummaged through years and years of paper records gathering dust in MIT’s library, and found a substantial increase in hospital costs after Medicare coverage was introduced. Then, she had the paper records scanned and sent to an outsourcer in Cambodia that, over 18 months, turned the records into data.

Finally, Finkelstein analyzed the data and found that hospital costs in the South rose considerably following the appearance of Medicare, noting that elderly residents in the South were unlikely to have any viable forms of health insurance until Medicare appeared. But in the New England states, where seniors were more likely to have some other form of healthcare coverage, the appearance of Medicare seemed to have a much smaller impact on rising costs.

Maybe it is all ethereal chickens and eggs, or maybe it is the academic fodder of insomnia for MIT economics professors. Here’s what I think is significant: If Finkelstein is right, then healthcare in 2006 is poised on a precipice that could redirect trend. The introduction, acceptance and adoption of consumer-directed health plans—assuming that someday they genuinely get off the ground in percentages that are meaningful—may signal yet one more insurance vehicle on the horizon, but this time a vehicle that influences a downward trend in amounts of service consumption, spending and even treatment delivered. The application of information technology will support it, and perhaps drive it. Is that a good thing?

Finkelstein’s new challenge is to determine if all the additional insurance spending has resulted in better healthcare. Let’s wait for the second installment.

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