Austin Frakt had an interesting post yesterday about how we could reduce Medicare costs through a competitive bidding process. I am neither an economist nor an actuary, and I can just barely follow arguments about this. But I find Don Taylor's argument for this approach appealing
The theory of competitive bidding is that since patients pay the marginal premium beyond the defined contribution, they will be incentivized to be wise purchasers of health insurance (and therefore networks of providers and benefit design) and that plans will have to deliver high quality to get customers.
This also, I think, captures much of what writers like Avik Roy and Reihan Salam are looking for in alternative health care plans. Alex Tabarrok points to Lasik surgery as a case where consumer choice has produced better outcomes at lower prices.
Laser eye surgery has the highest patient satisfaction ratings of any surgery, it has been performed more than 3 million times in the past decade, it is new, it is high-tech, it has gotten better over time and… laser eye surgery has fallen in price. In 1998 the average price of laser eye surgery was about $2200 per eye. Today  the average price is $1350, that’s a decline of 38 percent in nominal terms and slightly more than that after taking into account inflation.
Don Taylor suggests that you could have both expert decisions and market-driven decisions. I am ready to believe that there is a class of medical interventions where doing more to empower consumer choice would make all kids of sense.
But I also think there are other choices where it makes sense to have experts deciding what insurance should pay for. Suppose that you or your spouse has just delivered a very premature infant, and his lungs are failing. The doctor suggests that he try using inhaled nitric oxide (iNO -- this is different from nitrous oxide) in the air that your child is receiving through the ventilator. The use is off-label, meaning that the FDA has not approved it. But your kid is in trouble and the doctor thinks this might help. Would you say no? How would you know whether this is a good decision?
It happens that the rate of use of iNO has been growing across the country, as shown in the Figure. But this smooth line obscures the lack of standardization of use of this substance across the country. There is a twenty-fold difference between the neonatal intensive care unit (NICU) that uses the most iNO, and the NICU that uses it the least.
Importantly, iNO is expensive: the gas alone costs $125 / hour, or $3000 / day, and you can be on the therapy for many weeks. That does not include the cost of the time of the neonatologist who writes the order and reviews the results, or the repiratory therapist who administers it. The next Figure is my estimate of the total cost of the gas in a set of 36 children's hospitals.
I wouldn't have a problem with that cost, if there was evidence that the treatment works. (SERIOUSLY. If you want to cut health care costs, we don't need to start by denying treatments to new borns.)
You would imagine that the growth rapid growth in use of iNO must reflect neonatologists' experience of success with the therapy. There was, however, little experimental (RCT) evidence to support the use of iNO with very premature infants. This Fall, an NIH Concensus Conference concluded that "None of the individual trials included in the systematic reviews showed a statistically significant effect of iNO on survival in this population", and that
Taken as a whole, the available evidence does not support use of inhaled nitric oxide (iNO) in early routine, early rescue, or later rescue regimens in the care of premature infants <34 weeks gestation who require respiratory support.
The observational data are even more dramatic. I found an odds ratio > 4 (adjusting for many factors) indicating that patients receiving iNO were more likely to die than similar patients who did not receive it (OR = 1 means that the two treatments are equivalent, OR > 2 is considered substantial). This doesn't mean that iNO is poisonous. I believe it means that doctors were frequently deciding to use it as a therapy of last resort for dying patients, but that use was futile.
The point, then, not that I think that parents are too stupid to make these decisions. The point is that the physicians themselves were unable to see that the treatment was useless. The only way to determine whether iNO actually worked was through experiment and careful analysis of a large body of observational data; and we may not have the final answer yet. It is hard for me to imagine how parents can act as informed consumers for a choice of this kind.
In summary, I agree with Don: we need both more experts and more empowered consumers. The challenge is to design a system that promotes both.