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Is the Veterans' Administration a good health care model?
Last week Paul Krugman defended the VHA as a model for national health care policy; Brad DeLong has some critical excerpts. I am skeptical for a few reasons:
1. It is widely acknowledged that this system did not work well for a long time. If we are going to cite examples, should we judge them by lifetime performance, or by performance-right-now? In this case I view the relative efficiency of the now-moment as the exception, and not as a readily available constellation that national policy will replicate.
2. VHA saves a great deal by bargaining down prices of prescription drugs. If done on a national level, this will cause the supply of such drugs to contract, perhaps significantly. NB: Supply elasticity can be high even with (especially with?) evil, scheming, profit-soaked monopolists. And don't forget "current cash-flow" models of investment, which are eagerly invoked by the left in other contexts, such as tax policy.
3. For a variety of reasons (see the excellent comments on Brad's post), VHA pays doctors much less than usual. I am more than willing to consider the hypothesis that doctors at the national level earn too much. But I cannot imagine a healthy process by which a federal single-payer or nationalization plan will bargain down this sum significantly without all hell breaking loose. Do not forget what neo-Keynesians tell us about the morale effects of nominal wage cuts, much less large real and nominal cuts bundled together.
4. In general, local or restricted health care plans can bargain down prices with less loss of quality and innovation than if that same bargaining were done at the national level. That follows from the economic theory of high fixed costs and segregated markets.
I do think the VHA warrants further study. But I would like to see these questions answered before regarding it as a positive model for reform. Comments are open...
Posted by Tyler Cowen on February 3, 2006 at 05:06 AM in Medicine | Permalink
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» The Veterans Administration Model from EconLog
Tyler Cowen and Brad DeLong cite a recent Paul Krugman column that praised VHA health care. I think that it's... [Read More]
Tracked on Feb 3, 2006 9:13:51 AM
» Defending the VA from Ezra Klein
Tyler Cowen's a smart guy with a history of perceptive writings, so its sad to see his reflexive skepticism of the VA rest on such weak grounds. Stung by recent columns, posts, and studies lauding the VA's quality and [Read More]
Tracked on Feb 3, 2006 10:13:23 AM
» Paul Krugman and VA Health Care from Different River
Several blogging economists seem to have made a cottage industry debunking the New York Times columns of (formerly-respected?) economist Paul Krugman. Now, I guess it's my turn. Krugman writes:
I know about a health care system that has been hi... [Read More]
Tracked on Feb 3, 2006 4:53:25 PM
Comments
The VHA is braodly similar to hte NHS. A single payer, single provider system. I really don’t see this as a good model as any perusal of the UK papers or blogs on how the NHS actually operates wil lshow. Currently three months before an appointment for radio-therapy after a cancer diagnosis, for example.
Posted by: Tim Worstall at Feb 3, 2006 6:58:47 AM
Well...reguardless...I can't say that the current model we have now is any good. I've been without insurance for long periods of time. And now that I have it, I can't afford to use it.
Posted by: UberIcarus at Feb 3, 2006 7:20:02 AM
Can anyone advocate for the VHA system who has visited VHA hospitals? Yikes! I'm thinking especially of times when I've hit two relatives in one day - one at Vanderbilt and one at the VHA hospital in the same complex of hospitals. NOT a nice contrast.
Posted by: Michael Tinkler at Feb 3, 2006 7:43:43 AM
Among veterans, the VA is known as the second chance to die for your country.
Posted by: Mark at Feb 3, 2006 8:11:16 AM
The VA getting lower price drugs is a good example of price decrimination.
Are you assuming that the US industry with the highest profit margins of any american industry would be destroyed if the government bargins?
Why. The US governement is a major buyer, but it is not a monopoly buyer.
Second, can you cite a single industry that has been destroyed by governemnt buying at such low prices.
I keep here this assertion about govt bargining, but I have never seen one bit of analysis that supports it.
In general, the major critism against govt buying is that the industry is able to capture the process and get the govt to pay too much. So why will the drug industry go in the opposite direction of essentially every other example we have of govt being a major buyer.
Isn't the aerospace industry the best example of govt monopoly buying and that is one of the highest profit margin industries around where the govt waste massive ammounts.
I am not saying you are wrong, I am just asking for a little analysis to support the assertion.
Posted by: spencer at Feb 3, 2006 8:44:38 AM
One of the reasons that the VA does a little better than others is because there is an active and vocal voting contituency whic keeps an eye on it: the American Legion (of which I am one), the Veterans of Foreign of Wars etc.
When things aren't up to snuff, so to speak, we pound on them.
But it still isn't great.
Posted by: Mike Doherty at Feb 3, 2006 8:48:58 AM
It's my understanding that one reason the VA is so cost efficient is it outsources much of its back-end office work. If that cost is added in, it does no better than other healthcare system.
Posted by: Ted Craig at Feb 3, 2006 8:49:18 AM
I like Robin Hansons idea about health providers being the same people as life insurance and disability insurance providers. Let's do that.
Posted by: joshg at Feb 3, 2006 9:25:22 AM
As someone who spends part of his time at a VA and part at an academic medical center, I can tell you that the VA generally provides very good care. It lacks some infrastructure niceties - the hospitals tend to be older and don't always look as nice, they don't always have the staff to see patients immediately, and care is regionalized - meaning that you have to travel some distance to get certain types of specialty care. Despite all this, satisfaction with VA care is generally very high. This is probably somewhat biased because without the VA, most of the people who are seen there would have no regular source of care (or would pay high out of pocket costs, particularly for drugs).
More interesting than satisfaction, however, is that there is a growing body of research that shows that the VA provides better quality of care than the private sector, particularly for chronic diseases like diabetes and hypertension. This is true despite the fact that the VA has a more severely ill, less educated, and poorer population than most other health systems. In fact, of all measured health systems, only the VA clearly provides better care; other systems all seem to do about the same.
Part of this is due to the centralization of information - the VA electronic medical record system is the best around, you can get information instantly from any prior visit to any VA in the US. The best thing is that you can query the system to get information on how well you're doing on any particular quality measure - you can relatively easily pull blood pressure levels for all those diagnosed with hypertension, for example. That's something that very few systems can do. In addition, the VA is organized in a team structure that provides excellent and systematized support for care of chronic disease. The VA also funds a lot of research on how to best implement quality improvement systems.
For the economists, an interesting research finding: the evidence suggests that the primary reason that the VA does better is because hospital leaders are provided monetary incentives to improve quality. Areas that are incented improve, those that aren't don't. The care structure and information systems allow this to work (it's hard to improve care if you can't measure it quickly and accurately), but the incentives provide the motivation.
Posted by: policydoc at Feb 3, 2006 9:26:28 AM
Nobody was making flu vaccines because there was only one buyer, the gov't, who kept forcing it's hand, so everyone left the business. I'd rather not have a reduced supply of health care, ie Canada.
Posted by: cb at Feb 3, 2006 9:29:39 AM
The biggest thing that the VA has going for it is the ability to see it's own gains from preventative medicine. No system in America does that right now, and learning from that is important.
Tyler's point on doctors is an important one, and I think it calls for a movement to shorten the length of medical school. I saw a great graph once which plotted doctors and lawyers in various countries. The correlation was positive and basically a perfect correlation except in the United States, where we have a much higher percentage of lawyers. I imagine it is because of the length and difficulty of law school. We could probably sacrifice small amounts of quality for large amounts in cost gains if it were as easy to get through med school as it is to get through law school.
Tyler's 2nd point argues for prizes for drug advances. There is clearly a conflict between the profit incentive and the legitimate goal of government to provide whatever services it does cheaply. Where possible, government established prizes would be created for drugs, allowing government to purchase new drugs at marginal cost (the size and the goal of the prize could be determined using information markets to get around some of the Hayekian problems with price information).
Posted by: Joel W at Feb 3, 2006 9:34:29 AM
policydoc - Thanks for the very informative post.
Posted by: jult52 at Feb 3, 2006 9:40:17 AM
Marketing costs are a large part of the drug company expenses. A single buyer might save on those. It might even provide an alternative channel for the smaller companies that currently have to go through the big companies to gain access to the market. There is surely some middle gorund between no negotiation and abusive monopsony.
It is unfair to judge the NHS purely as a system because it is also a budget and coverage decision. The budget is small and coverage huge. Newspaper stories are a sample biased towards scandal. It is also worth considering what the system looks like for those who have private insurance too.
Posted by: Jack at Feb 3, 2006 9:47:16 AM
The VA health care system has bugged me for a long time. Wouldn't it make more sense to give veterans a medical card/plan they could use in the private sector? Obtaining arguably better and cheaper care? Seems like it would be better for veterans and taxpayers than maintaining a duplicate and possibly substandard health care system imho.
Posted by: Chris Meisenzahl at Feb 3, 2006 9:58:00 AM
I haven't been in a VA hospital for a number of years, but in the 60s and 70s they were hell holes.
Posted by: Patrick R. Sullivan at Feb 3, 2006 11:12:46 AM
While the argument that the U.S. gov't bargaining with drug companies for lower prices could result in less drugs being brought to market may be a valid one, it's hard for this poor student who lacks prescription coverage to understand why *I* ought to be the one to subsidize the purchase of Rx drugs by a millionaire in (insert non-U.S. Western Democracy of your choice). I don't doubt that more profitable companies will be able to develop better products, I just have a hard time understanding why I ought to be the one doing the subsidizing and not someone in Canada, Germany, France, etc. This seems like a free rider problem.
Here's an analogy that comes to mind:Were I a shareholder in a firm which needed to buy a large numbers of cars for its workers, I'd be very upset if I found out that they were buying cars individually at MSRP instead of doing a fleet purchase at a substantial discount. Should a shareholder care if this means a lower profit for Ford or GM? As a taxpayer I expect the gov't to get the lowest price that it can. Local and state governments probably buy Ford Crown Victorias for police use at a better price than I could get walking onto a car lot. What if Ford turned around and said to the gov't "if you guys didn't bargain the price down so much we could supply more and better police vehicles"? Would this be a valid argument? Should the gov't start paying MSRP? Or does this line of reasoning apply *only* to rx drugs and nothing else?
Posted by: mjrmjr at Feb 3, 2006 11:47:58 AM
Nice post. I wonder if Paul Krugman thought of any of those considerations...hey, didn't he used to be an economist?
Posted by: ed at Feb 3, 2006 12:58:39 PM
Actually the foreign buyers of drugs subsidise American users -- if they stopped paying for them the drugs companies would make less and indeed invest less, even if they are paying less than Americans.
The direction of drug development is also set to meet US needs so lots of ulcer, depression, heart and diabetes treatments and not so much for TB, malaria or affordable AIDS treatments.
It's like movies, maybe the US pays more for them but they are subsidised by cheap sales to other countries that don't have the critical mass and can't achieve it because of the cheap to buy expensive to produce US competition. As a result most films are produced to appeal to Americans (Memoirs of a Geisha now banned in China is a hilarious exception).
If the expenditure on drugs research were more evenly spread the research and capacity would be too. That wouldn't necessarily be bad but it is an important consideration.
In general I think that the network effect advantages of the US economy are underplayed.
R&D is not a huge part of pharma industry costs in any case, it is not quite coffee beans but there is a parallel. How much would the demand for coffee go down if there was a cap on the price of cup of coffee at 2$ a cup? Would people sell less coffee or would the rent on coffee shop space fall?
Posted by: Jack at Feb 3, 2006 1:05:20 PM
On point 1, it's not fair to compare the VA of 20 years ago to today's VA. In 1996, VA dramatically shifted the way it provides health care. They've moved from a large regional hospital-dominated system, to one with smaller health clinics to take care of most outpatient procedures. In the process, they've expanded eligibility, and are now providing health care for many more veterans than before.
The system, as constructed isn't perfect. Funding has been an issue, and VA has attempted to scale back by rationing health care -- cutting certain veterans out of the system, forcing others to wait months, etc. But patients who do manage to get appointments typically receive excellent care.
For what it's worth, on a per patient basis, VA provides care at a cheaper rate than does Medicare.
The one issue that flies under the surface of these issues is eligibility. Any veteran, even one who wasn't wounded or who didn't serve in wartime, is eligible for all health care at VA -- even if they fell off a ladder while painting their house, or caught a cold. The higher-income non-service connected veterans aren't allowed to enroll in the system anymore, but they have been grandfathered in.
Posted by: Chris at Feb 3, 2006 1:05:22 PM
The posts about US subsidization of other countries' pharmaceutical purchases brings up an excellent point. TC, when you argue #2, are you modeling the drug market as an international market? If not, perhaps you could comment on to what extent drug scarcity would be "exported," as drug companies demand higher prices from overseas buyers.
Posted by: mike at Feb 3, 2006 1:27:09 PM
A data point, the price of a cup of ciffee is regulated in Italy consumption there in both quality and quantity terms seem pretty strong.
Posted by: Jack at Feb 3, 2006 1:27:53 PM
Monopsony purchasing.
The Post Office doesn't deliver to new individual apartments in apartment complexes any more. Now you have to have a remote box area. These are provided free to the apartment complex builder by the Post Office, which uses it's monopsony power to force down prices. I do not say it is a bad thing, I'm just saying that that's what they do.
Deskilling medecine.
We could allow nurses to dispense antibiotics, etc, without a doctor around and only kick the hard ones up to doctors. We would want to make sure that the nurses weren't penalized by the doctors for doing so, like measuring them and making sure that at least every eighth patient was sent up the chain.
Posted by: wkwillis at Feb 3, 2006 3:39:33 PM
I'm a health economist who's looked at the VA and other military health systems as part of my job(s).
There's one "advantage" the VA has that other government health care systems don't have -- they get to pick there patients, and can limit the number of patients based on their budget. Contrary to popular believe, not every military veteran is in the VA system -- the VA sets eligibility requirements in order to make sure that the number of patients they have is limited to what thay can fit within their budget. In fact, only a minority of former military personnel are in the VA system.
Krugman says, the VA is "highly successful in containing costs, yet provides excellent care." True, but the do it by containing their patient load. Krugman also says something that is flat-out false: "Because it covers all veterans, the system doesn't need to employ legions of administrative staff to check patients' coverage ..."
On the contrary, it does not cover all veterans, and it does have "legions [pun intended?] of administrative staff to check patients' coverage." They have an entire web site ( http://www.va.gov/healtheligibility/home/hecmain.asp )devoted just to eligibility which states, in part "All Veterans are Potentially Eligible" (emphasis mine). There is an eight-level system of "priority" detailed at http://www.va.gov/healtheligibility/eligibility/epg_all.asp . It has categories like, "Veterans with service-connected disabilities rated 30% or 40% disabling" (priority 2) and "Veterans who agree to pay specified copay with income and/or net worth above VA Income Threshold and income below the Geographic Means Test Threshold" (priority 7 -- which has FOUR "subpriorities," only two of which are currently in use.
Does Paul Krugman really believe they can determine eligibility under such complete rules with fewer administrative staff than it takes another health system just to look at someone's ID card and take down their policy number?
I can confirm what "PolicyDoc" above said about their electronic medical record system. It's state-of-the art, and they actually do use it to save money. For example, if they get a deal on some drug (say, Nexium), they can switch nearly everyone on therapeutic equivalents (say, Protonix) within 90 days. All they do is send a message to every doctor who prescribed Protonix, given them a list of patients to whom they've prescribed it, and ask for approval to switch them to Nexium. It's not mandatory, since everyone knows that two "therapeutic equivalents" are not really equivalent for ALL patients -- but they say that about 95% of the patients switch.
Joel W. is also right about preventative care -- in the private sector, the "churn" of people in and out of health insurance companies makes it so that if an insurance company spends on preventative care, by the time the patient is around long enough to avoid a disease as a result, they are quite likely to be insured with another company. So you have a muted verion of the classic "tragedy of the commons" -- you pay for preventative care, and some other company benefits from lower costs.
Think about it: If it weren't for the "churn," health insurance companies wouldn't just cover preventative care -- they'd require it. And they'd probably even require (say) blood tests to make sure you're taking your preventive drugs (like blood pressure medicine). (Assuming preventative care is actually cost-effective, of course.)
Robin Hanson's proposal for "time-consistent health insurance" might be able to solve that problem if people couldn't shop around too much. You'd have to get around the fact that insurance companies would want to give discounts to people whose previous insurance companies mandated preventative care.
Posted by: Robert Book at Feb 3, 2006 4:22:58 PM
I think there are two tricky ideas regarding health care (and the VHA in particular) which are highly relevant but rarely discussed.
1) Are individuals working at all levels of the medical profession paid too much? I am not claiming to know the answer (so please don't just flame me out of hand) but if you look at incomes within the industry agaist the nation as a whole for the last twenty-five years the results are pretty dramatic. I think an argument could be made that tacit collusion is a potential distortion in the market. I suspect that most physicians would be surprised at just how rapidly incomes have increased (although I think they may well have mentioned to fellow doctors how much their younger colleagues get paid!). If you happen to have seen any work on tacit collusion and medicine I would be grateful if you would post a link!
2) Are consumers particularly bad at judging their own standard of care? Few consumers possess a background which qualifies them to evaluate their own treatment. I am often surprised at how difficult it is for most individuals in the United States to evaluate public policy and can only speculate at the gap between how the public and medical professionals distinguish good medicine from bad. As a patient I often wonder if my own biology makes it difficult for me to judge these things. It would seem too easy (subjectively) to conflate that which feels better with that which actually contributes to being healthier. (like placing a damp cloth on the neck, it makes me feel cooler but actually reduces the body's ability to maintain homeostasis but I feel cooler so it must be helping me right!) Do these issues lead to systematic distortions or just noise?
Posted by: C.B. at Feb 3, 2006 4:54:23 PM
Jokes at the VA
Why are bullets better than a VA nurse…
You can fire a bullet,
A bullet only kills once,
A bullet can draw blood,
Let me assure you that the VA is a great example of the potential for nationalized health care; however this is not an endorsement, but a warning.
While the physicians at our VA are the same staff physicians at the University Hospital, the healthcare at the VA is far worse despite their far larger budget per patient. This is due to the gross negligence of the rest of the staff, and the bureaucracy which arrests all effort by physicians to care for patients. No one I know who has been involved with a VA either as a patient or provider would ever want a nationalized health care system if the VA were to be the model.
Posted by: DJB at Feb 3, 2006 5:57:31 PM
