This is getting tiresome. I am being assailed by economists who protest that they can boil health care down to supply and demand, and that demand creates supply. True on its face, but the economic devils are in the details. And they don’t want to hear the details, or they want to ignore them, or they’re just so smart ….well, clearly that’s not it.
The problem with health policy today is that too many people who style themselves as economists (including one commenter on a previous post), and therefore experts on everything, make flat out wrong statements like “Adding supply does not increase demand. The increased supply of health services over the last forty years is due to an increase in demand (due to Medicare).”
How simplistic. The reason health care costs are increasing is an aging population, medicine’s position as more art than science, a lack of control over new and expensive technology and medicines, and the US subsidizing much of the world’s pharma research. But back to demand and supply.
Here’s healthcare 101. Some may have heard of John Wennberg, MD. Here’s an excerpt from his seminal study on hospital utilization in Boston and New Haven. (Lancet, May 23, 1987)
” The populations of New Haven and Boston are demographically similar and receive most of their hospital care in university hospitals, but in 1982 their expenditures per head for inpatient care were $451 and $889, respectively. The 685,400 residents of Boston incurred about $300 million more in hospital expenditures and used 739 more beds than they would have if the use rates for New Haven residents had applied. Most of the extra beds were invested in higher admission rates for medical conditions in which the decision to admit can be discretionary. The overall rates for major surgery were equal, but rates for some individual operations varied widely. These findings indicate that academic standards of care are compatible with widely varying patterns of practice and that medical care costs are not necessarily high in communities served largely by university hospitals.
Why was utilization higher in Boston? Because they had more hospital beds, and admitted more patients with conditions such as COPD than docs in New Haven did (may not be in an economics textbook, but known to we morons in health care as chronic obstructive pulmonary disease). The supply drives demand in health care.
And that is but one reason health care is NOT like any other good or service.
Here’s another quote from a more recent Wennberg article on variation in medical utilization:
“Medicare spending varies more than twofold among regions, and the variations persist even after differences in health are corrected for. Higher levels of Medicare spending are due largely to increased use of “supply-sensitive” services-physician visits, specialist consultations, and hospitalizations, particularly for those with chronic illnesses or in their last six months of life. Also, higher spending does not result in more effective care, elevated rates of elective surgery, or better health outcomes.
There are many other reasons so-called economists’ simplistic opinions on health care are naive and ignorant – there is little to no accurate data on what procedures, facilities, or providers provide optimal outcomes so buyers don’t know what to buy; it is often impossible for the layman to determine if a symptom or set of symptoms is an indicator of something serious; the most expensive patients cost far more than any deductible anticipated by the CDHP advocates, thereby eliminating any price sensitivity on their part; poor folk can’t afford basic insurance anyway so their care gets covered under EMTALA, and on and on.
Economists talking health policy are like priests talking safe sex. They know all about it in theory, but their knowledge is purely academic, as is their understanding of the basic concept and sensitivity to the potential positive and negative outcomes. And the visual is decidedly unappealing.
I wish I could bill for this.

Loyal reader TrapierMichael (Trapper to his policy friends) questioned the source of a quote used in a post here earlier today attributed to the McKinsey study on CDHPs. Trapper could not find the quote in the article, but did locate it in another report, done by the folks at the Employment Benefits Research Institute, a well-respected industry group.
The EBRI study, entitled “Early Experience With High-Deductible and Consumer-Driven Health Plans: Findings From the EBRI/Commonwealth Fund Consumerism in Health Care Survey” was out in December of 2005; six months after the McKinsey report.
One of the key points in the original McKinsey document was this statement:
“it remains to be seen whether CDHP plans with HSAs inhibit the appropriate use of maintenance drugs and treatments for behavioral conditions…”
The EBRI study points directly to this issue, as Spike noted in his quote, albeit mis-cited. This is in conflict with the McKinsey study’s finding that “One striking finding was the increased likelihood of CDHP consumers with chronic diseases to report that they were taking greater responsibility for their health.” CDHP partipants were over 20% more likely to “carefully follow their treatment regimens.”
Of note, the companies implementing CDHPs that did not do so just to lower costs, but invested in employee education, communicated clearly, and provided access to data and information about lifestyle changes, had the most satisfied employees. The employer with the highest employee satisfaction even went so far as to start an employee fitness center, reward employees with cash for attainment of certain health goals, and extensively trained employees on the health plan itself as well as sources for health information.
The research methodology and cohort for each study was different, with EBRI using data from the Harris Interactive Study and McKinsey surveying individuals from specific employers with full-replacement CDHPs (where the old health plan was terminated and replaced in its entirety by CDHPs).
I’d like to get into more detail but I have to get some work done.
Compliments to Trapper for his research, and I’ll try to do a better job of vetting sources.

Spike has done his homework. UPDATE – well, Spike actually quoted a different report, not the original McKinsey one. I should have done some source checking, did not, and apologize for the oversight.) In response to a comment from another reader (Michael Trapier), he read the entire article by McKinsey on CDHPs et al. Here’s Spike’s quote from the article, which deserves its own post. (again, turns out this quote was from an EBRI research report), and read the comments below:
“While people reported using health services at similar rates across health plans, adults with CDHPs and HDHPs were significantly more likely to report that they had avoided, skipped, or delayed health care because of costs than were those with comprehensive insurance, with problems particularly pronounced among those with health problems or incomes under $50,000. The survey asked whether in the last year respondents had delayed or avoided getting health care services when they were sick because of costs. About one-third of people in CDHPs (35 percent) and HDHPs (31 percent) reported delaying or avoiding care, twice the rate of those in comprehensive health plans (17 percent).
Having a health problem made it more likely that people avoided or delayed care. Among people who reported being in fair or poor health or having at least one chronic health condition, those in CDHPs or HDHPs reported delaying or avoiding care at higher rates than those in comprehensive plans: 40 percent of those in CDHPs and 31 percent of people in HDHPs, compared with 21 percent in comprehensive plans. People with HDHPs and CDHPs in households with incomes of under $50,000 were also more likely to avoid or delay care: nearly half of those in CDHPs and more than two in five in HDHPs reported delaying or avoiding care, compared with one-quarter (26 percent) of those in comprehensive plans in that income range.
In addition to delaying or avoiding health care, people in HDHPs were significantly more likely to skimp on their medications than were those in comprehensive plans. The survey asked respondents whether in the last 12 months they had not filled a prescription because of costs. More than one-quarter (26 percent) of those with HDHPs said they had not filled a prescription because of cost, compared with 16 percent of those in comprehensive health plans (Figure 17). Having a health problem made it more likely that people avoided filling prescriptions, particularly those with HDHPs: One-third of those in HDHPs with health problems had not filled a prescription because of cost, compared with one-fifth (21 percent) of people in comprehensive plans.”
That’s a (rather lengthy) quote from the study you cited. In fact, that whole study talks about how total healthcare use is the same for each group, but out of pocket costs are way higher for those in CDHPs and that people in comprehensive group care found that their plan made it easier for them to incpororate costs into their decisions about treatment.
As for health economics, the reality is that as long as there is EMTALA, (which says that hospitals must treat patients in need of emergency care regardless of their ability to pay), creating systems where preventive pay is discouraged will only be more expensive for all of us. And I don’t see anybody having the political will to void EMTALA. We’re all in this together, whether you like it or not.”
That’s a lot of good work, Spike.
Notably, the time period for the study did not enable the researchers to identify changes in health care costs over time. One has to wonder if the failures to comply with drug regimens etc. would actually lead to increased health care costs over time. Actually, you don’t have to wonder.
BTW – the McKinsey report also notes that CDHPs did have a substantial correlation with participants’ awareness of costs; desire to seek alternative treatment, and likelihood of involvement in healthy behaviors. But I wonder if the latter was not an artifact, and if the participants’ healthy behaviors made it more likely that they would select CDHPs.
What does this mean for you?
More evidence that CDHPs will do nothing to reduce medical expenses.