TCS Daily

Grey-Area Medicine

By Arnold Kling - August 31, 2005 12:00 AM

"If people 'go to the doctor grudgingly, because we're sick' -- i.e. because we conclude we're sick -- you'd think we could also conclude rationally when we're more sick and when we're less sick, when we really need of a doctor's visit (and never mind the copay) and when we have a cold we'll get over soon enough (so let's save the $20)."
--Mickey Kaus

"Is that toothache REALLY so bad that you'll pay $100 to have it looked at and fixed? Many times people will live with the pain over going to a dentist."
-- Ruminating Dude


Not all health care decisions are black-and-white, as the examples above illustrate. In between health care procedures that are absolutely necessary and those that are utterly worthless, there is a "grey area" of procedures for which the benefit exists but is not sufficient to motivate the individual to pay the full cost for the procedure.


Economists suspect that comprehensive insurance, which insulates people from having to pay for procedures, leads people to over-consume health care in the grey area. Malcolm Gladwell attributes this suspicion to the theory of "moral hazard," which he denounces. I call it the Law of Demand, which is about as worthwhile to denounce as the law of gravity.


In general, people who believe that there is no need to fear overconsumption of health care make two arguments:


1. There is no grey area, so people either need medical procedures or they don't.


2. People won't consume too much health care, because no one likes going to the doctor.


This essay will address these arguments in turn.


Defining the Grey Area


What I call the grey area consists of procedures that are neither absolutely necessary nor absolutely worthless. My essay on the cost-benefit analysis of routine colonoscopies describes an example of a grey-area procedure. It has clear benefits in preventing cancer. Therefore, if a colonoscopy cost nothing, then it would be a no-brainer for a health maintenance organization to cover the procedure. However, because it is expensive, the cost-benefit analysis for a routine colonoscopy is actually a rather close call.


Here are some more examples of grey-area medicine:


-- your eyeglass frames are corroded and out of style, so you want new glasses

-- you hurt your back lifting furniture, and the doctor sends you for a precautionary MRI

-- a terminally ill patient is admitted to the hospital for tests and is seen by several specialists

-- a heart patient who could be followed reasonably well with annual checkups is given monthly checkups


Services that fall in the grey area are services that offer some benefits but which are not absolutely necessary. It is possible to illustrate the grey area in quantitative terms, based on the relationship between benefits and costs for a health care service. Consider this classification scheme for a service that costs $100:


Black Region
(unnecessary care)

White Region
(essential care)

Grey Area

The service provides $0 in benefits

Reasonable estimates of the benefits of the service range from $150 to $10,000

Reasonable estimates of the benefits of the service range from $0 to $150


The figure of $100 is just an illustration. The boundary for the Grey Area should be set around whatever level represents the true cost of the service. If the service costs $1000, then the boundary for the Grey Area should be set near $1000.


It is obvious that services in the Black Region are wasteful. It might be in the narrow self-interest of providers to provide services in the Black Region, but it is not in the interest of health care consumers.


It is obvious that services in the White Region ought to be performed. Treatment for a broken arm or a heart attack is sure to fall within the White Region.


To know whether a service in the grey area ought to be performed, careful analysis is required. Some services have positive benefits, but those benefits are so small that resources would be better used on other things.


If there were no grey area in health care, and everything were black and white, then the only policy challenge would be to make sure that people obtain the services that they need. However, the fact that there is a grey area means that there is some uncertainty about which health care services are cost-effective. That makes it important to be able to place a dollar value on the benefits of health care services.


In theory, insurance companies and government health care financing agencies could try to manage the use of health care procedures that fall in the grey area. In practice, third party payers face enough of a challenge in policing the Black Region, where providers attempt to profit from services that are totally unnecessary. It is considerably more difficult for third party payers to decline to cover procedures that offer definite positive benefits, however small.


Non-Monetary Costs


The second argument suggests that even if there is grey-area medicine, there is no need for cost-benefit analysis. This is because people are already reluctant to obtain health care services.


Most people do not like to go to the doctor, undergo medical procedures, or stay in the hospital. Medical services are time-consuming, inconvenient, and uncomfortable to patients. An economist would call these the non-monetary costs of obtaining health care services.


It is true that non-monetary costs of health care act as a restraint on demand. Non-monetary costs would be sufficient to keep us from going berserk and rushing to get colonoscopies just because they are "on sale."


However, the fact that people face non-monetary costs does nothing to alleviate the inefficiency that arises when we are insulated from the direct monetary costs of health care services. The cost-benefit analysis that people perform is still distorted by incorrect incentives.


In doing cost-benefit analysis of medical services, the total cost should be arrived at by adding together monetary costs and non-monetary costs. Non-monetary costs belong in the equation that determines whether or not a service ought to be performed.


Suppose that the fee for a procedure is $500, and the non-monetary cost amounts to the equivalent of another $500. If the health benefits from the service are only $750, then the service is a bad deal for the patient. The fact that the health benefits exceed the fee is interesting, but it does not justify having the patient suffer through the service.


Suppose that you were due for a colonoscopy, which would cause you to miss two days of work because of the preparation and recovery involved. Imagine that another procedure became available that took no time, involved no risk, and required no unpleasant preparation, but the procedure cost $100 more than a colonoscopy. Most people would opt for this alternative procedure rather than for the colonoscopy, even though from the standpoint of the insurance company the colonoscopy is cheaper. What this hypothetical example illustrates is that service suffering is something that consumers would pay to avoid, and justifiably so.


It may be the case that consumers sometimes overstate non-monetary costs. Perhaps people avoid going to the dentist because they act as if non-monetary costs are high, but in the long run they would be better off if they went to the dentist. Whether people in fact overstate non-monetary costs is an empirical question. Perhaps at some point research in behavioral economics will lead to an approach for adjusting downward short-term subjective estimates of non-monetary costs. However, there is no reason to believe that the right way to make health care decisions is to treat patient inconvenience and discomfort as nonexistent, thereby ignoring non-monetary costs altogether.


Policy Implications


Ignoring the grey area in medicine has serious consequences for policy. Those who ignore the grey area suggest that individuals should not have to confront the issue of price when they make health care decisions. Our current insurance model of reimbursement for services encourages consumers to treat the cost of a service as if it were zero.


Treating the cost of a service as if it were zero means that health care cost-benefit analysis will default to the rule that whenever the benefits of the service are greater than the non-monetary costs, consumers will obtain the service. However, if you obtain a service for which the benefits just compensate you for the time and inconvenience of undergoing the medical procedure, without also covering the cost of the supplier, that is overconsumption of the service.


If Americans are going to make rational use of health care, instead of over-consuming services, then our culture is going to have to change. One way it might change is by adopting a centralized health care budget, as in Canada. There, government policy determines the supply of physicians, the availability of medical equipment, and so forth. If the budget does not provide for enough skilled personnel and equipment to do routine colonoscopies for the recommended population -- and it does not -- then so be it.


The other alternative is to scale back medical coverage to real health insurance, meaning some form of long-term, catastrophic coverage that only pays off if unusually high expenses accumulate. This, too, would represent a culture change, but in the direction of individual choice and markets, rather than centralized rationing.


My guess is that neither change is forthcoming. Instead, we will remain deadlocked on health care policy, and the share of GDP that this country spends on health care will continue to be bloated by over-consumption of grey-area medicine.


In the context of these policy discussion, proponents of government health insurance bring up a litany of alleged victims of our allegedly capitalist health care system: the poor, the uninsured, and those who have difficulty paying medical bills. To me, those are separate issues, that require more complex analysis. In previous essays, I have already addressed the bankruptcy issue, the subject of poverty and health care spending, and health insurance do-nots. Beyond what I have written before, all I can say is that if you are still worried about the victim groups, then try to come up with policy proposals focused on solving their problems. I fail to see how it will help the victim groups to force the rest of us into Medicare.


Arnold Kling is author of Learning Economics.


TCS Daily Archives