Why is health spending in the US high?

This terrific episode of Freakonomics is focused on End Stage Renal Disease (ESRD). The issue is a window into why we spend a lot on health care in the US and the dysfunction in the system.

Glad Freakonomics took it on

A thread (rant). https://twitter.com/Freakonomics/status/1380115563125563393

ESRD is on the rise in the US. In part, this is driven by the rise in diabetes in the US, which leads to ESRD. So, poor health management --> downstream problems.

A patient with ESRD can be 'cured' with a kidney transplant. While waiting for a transplant, they need dialysis.

Dialysis became available in the middle of the 20th century. But it was expensive. Individuals with ESRD who didn't have a transplant would die without dialysis. How do you scarce resources? Ultimately, the Medicare program took over funding of individuals with ESRD.

Today, because of this, ESRD is 7% of the Medicare budget and 1% of the entire federal budget.

The dialysis industry has been taken over by two large firms - DaVita and Fresenius. They have gobbled up the entire industry via mergers and acquisitions. Most of these deals went without antitrust scrutiny because they were under merger reporting thresholds.

Thomas Wollmann at @ChicagoBooth has amazing work on stealth consolidation in the dialysis industry. He has found the consolidation has led to higher mortality rates. https://www.nber.org/papers/w27274 

Other work by Eliason et al. in @QJEHarvard looks at what happens when DaVita acquires a dialysis clinic. They increase supply of profitable drugs, the de-skill their work force, they refer fewer patients for transplants. Overall, death rates increase. https://academic.oup.com/qje/article-abstract/135/1/221/5607794?redirectedFrom=fulltext

In short, consolidation in the dialysis industry has raised prices, lowered quality, hindered innovation, and ultimately increased mortality rates.

Then there's the bull the firms have done to exploit regulatory loopholes.

The Medicare program pays for the majority of ESRD care in the US. The Medicare program isn't the most 'dynamic' payer. Fresenius and DaVita have run circles around the payment rules established by Medicare to boost profits.

The big dialysis firms have been sued and fined repeatedly for various schemes to overcharge Medicare for drugs, for kickback to doctors for referrals, and for basically buying patients private insurance plans with higher commercial reimbursements.

DaVita and Fresenius are the main funders of the American Kidney Foundation. Why? The AKF buys patients private health insurance plans that reimburse more for dialysis than the Medicare program. So, a dollar donation to AKF nets the firms $3.

Why is this a window into high health care costs in the US?

There are pockets of health care that are unsavory, where firms can exploit regulatory loopholes. The returns from gaming regulations and what some would term fraud are higher than returns to good quality care.

With big profits to be had, more firms want to enter, so incumbents merge. They can then raise prices and lobby to preserve the regulatory loopholes that allow them to exist in the first place.

This is why PE invests in places like emergency medicine and addiction clinics.

The health care system is replete with these shady nooks and crevices. Surprise billing is an example. So is the dialysis industry. There are long term care hospitals that @nealemahoney has written about.

There aren't systemic fixes that would address all of these problems. We need to play whack-a-mole and keep fighting to reform each sector. This is where politics intersects with health care. Passing laws are tough and these firms can lobby hard.

This, in my perhaps naive view, is where research matters. Folks like Tom Wollmann, Paul Eliason, Been Heebsh, Ryan McDevitt, and James Roberts highlighted in rigorous journals, the crap in the dialysis industry. @nealemahoney has done it for LTACs. @timothyjlayton in MA

One growing strand of economics has to be studying firms and showing where 'fraud' is happening. We can also use economics to show the motivation for the behavior and propose solutions. This can really help the day to day lives of the American public.

A final note: one huge frustration I have is the MDs who work at these big public companies and try to portray the firms as MD led and patient focused. The episode highlights the Chief Medical Officers at Fresenius and DaVita basically saying there's not gambling in Casablanca.

In the ED industry, the 'physician' leaders at the big staffing firms tried to do the same thing. It's sad and it gives physicians a bad name. I thought @Freakonomics handled this well.

Zero shame working for a for-profit firm. For-profit firms are vital. They brought me the amazing Covid vaccine I took yesterday. But MDs in senior leadership positions at for-profit firms are not a guarantee that bad actions aren't happening. Incentives matter, even for MDs.