Victor Fuchs, a long time deep thinker (no sarcasm intended) about medical economics has a perspective piece in the October 23 issue of the New England Journal of Medicine that presents three “inconvenient truths” about health care. His analysis is likely to represent that which will be applied to medical care over the next several years. Smart and experienced as he is I think he misses the mark.

His first truth is actually understated. Healthcare, he says, has been rising faster than the rest of the economy for 30 years. Actually, it’s closer to 50 years, but the point is indisputable. The toll on our economy of out of control medical costs is ruinous and will only get worse if left unchecked. Fuchs correctly points out that focusing on providing medical insurance to those without it will do nothing to control costs. He further notes that “waste”, “fraud”, and “abuse” seem to be targets immune to attack. In addition to the usual suspects – high administrative costs, insurance companies, and overutilization he observes that reducing costs is so hard because so many middle and low income workers depend on the healthcare industry for their livelihoods.

He believes that more regulation won’t reduce administrative costs or overutilization. Instead, he thinks they’ll increase costs. Here he gets lost a bit because his next truth ends up calling for more regulation. The second “truth” is that technology is the main reason costs are rising so fast. As I’ve mentioned here several times this high cost of technological advances is true only of medical technology. And the reason is that there is no price competition lowering the cost of new technology. Thus electron beam tomography costs $100 a pop while an MRI costs up to 40 times more. Medicare and conventional health insurance cover the latter but not the former. The complexity and sophistication of both technologies are about the same. It’s the presence or absence of insurance which sets the cost. I’ll come back to this later.

How does Fuchs advise we deal with new technology? Establish an organization that will evaluate new technology and make recommendations about whether it should be adopted. If this organization is to be effective it must have regulatory power which he thinks is futile. The contradiction escapes him. Fuchs is opaque as to how such organizations would actually work. Imagine the lobbying that will go on when a new technology comes up for review.

The last truth posits that universal health insurance requires subsidies for the poor or those too sick to qualify for traditional health insurance. That it must be compulsory. And that higher taxes will be required to fund health care.

Thus we are still left with high costs, likely even higher than we now have. We need more regulation which Fuchs thinks won’t work while simultaneously thinking that it will. I agree that his truths are inconvenient, but I don’t see how they get us out of the mess we’re in. Using his analysis the only way to control costs will be to ration health care. The only way liberal democracies have succeeded in rationing medical care is by delay. The rich buy their way out of the system while everyone else does the best they can.

Let’s consider a treatment that is medically an unalloyed triumph – cataract surgery. To begin with who gets cataracts? People on Medicare. So who pays for the cost of the surgery? Medicare. Cataract surgery is now a 30 minute outpatient procedure not much different from going to the dentist (provided it’s performed by an ophthalmologist who knows what he’s doing. Likewise you wouldn’t want your teeth worked on by someone not expert at dentistry.) But what does it cost? About $10,000 an eye. So if there are one million patients who get their eyes fixed annually the cost to Medicare is about $20 billion. I don’t know exactly how many patients actually get cataract surgery each year. Use whatever number you like and pro-rate the cost to Medicare. Why does it cost so much? The surgeon gets a relatively small fraction of the charge. It’s the outpatient facility that accounts for most of the cost.

This facility, often run by a hospital, operates exactly the way a hospital does. Which is to say that it is overstaffed, inefficient, and under no incentive to be frugal. In fact, the incentives are all towards waste. The more you can jack your “costs” up the more you’re likely to squeeze out of Medicare. If through a miracle the facility became more efficient Medicare would cut its reimbursement. There is no competition among facilities providing their service. They all receive the same compensation. How can this service paid for by the government be provided at a lower cost? The answer is it can’t.

The only inconvenient truth here is that there is no way that is politically acceptable to cut medical costs. Politics raises costs it never lowers them. The pain has to be a lot worse than it is now before we perform the major surgery required to control costs.