2011 Pattullo Lecture 259 PATTULLO LECTURE

On the Much Used (and Abused) Word "Value" in Healthcare

Uwe Reinhardt, PhD, James Madison Professor of Political Economics,

Christi Lemak: Welcome to the 2011 Pattullo. I think it’s important that we understand why we have the Pattullo Lecture and its meaning. The Pattullo Lecture was established in 1983 to honor Andy Pattullo, an officer at the -Kel logg Foundation for nearly 40 years who had significant influence on both health administration education and health management practice. The lecture that we have today and every year at the Annual Meeting seeks to present an in-depth view of an issue that impacts how we teach healthcare management. The topic this year about value is certainly a timely, relevant, and important one for us as our speaker is an expert in this field. Let me tell you about our speaker, Uwe E. Reinhardt, the James Madison professor of political economy, as well as a professor of economics and public affairs at Princeton University. He teaches , comparative health systems, general micro economics, and financial management at Princeton and does a lot of research on health economics in policy both here in the US and abroad. I know that many of us in this room are very familiar with his amaz- ing CV and the many organizations of which he is a member. To highlight a few, he’s a member of the Institute of Medicine; he is a past president of the Association of Health Services Research which is now Academy Health; and he’s a past president of the International Health Economics Association. He has served on a number of government commissions such as the Physicians Payment Review Commission, which is now a part of the Payment

This is a modified transcript of the 2011 Pattullo Lecture delivered at the AUPHA Annual Meeting in Charleston, South Carolina. It has been modified for clarity and flow. A video of Dr. Reinhardt’s Pattullo Lecture, along with his slide deck, can be found on the AUPHA Network (network.aupha.org). Simply search for Annual Meeting 2011. 260 The Journal of Health Administration Education Fall 2011

Advisory Commission or MEDPAC. He is the commissioner of the Kaiser Fam- ily Health Foundation, Commission of Medicaid of the Uninsured, and he has been a trustee of and the Duke University . We are proud to include on Professors Reinhardt’s resume that he was the 2010 winner of the William B. Graham Prize for Health Services Research that is presented by AUPHA and the Baxter International Foundation. What I think is most astounding and most important about all of these wonderful accolades for Professor Reinhardt is how he engages a wide variety of constituents in debate thereby helping us to think critically about many things that we take for granted. From the speeches he makes to practitioner audiences to the practitioner panel we enjoyed yesterday. I said to one of the panel speakers, “I’m looking for some speakers for a meeting, who have you seen lately that you like?” and Dave Fox said, “Well, Uwe Reinhardt.” In addition to his speeches and the way he engages practitioner audiences and policy audiences, he has a way of connecting. While I was speaking to students at Michigan, several of them said, “I just love his blog in the New York Times. And that makes me think about issues and economics in ways that I’ve never done.” So he makes us think. He makes us develop new ways of teaching. And I’m sure that today he will engage us in and present to us some ideas that we can use.

Uwe Reinhardt: Well, thank you very much for this lovely introduction. The one addition that I would make to my CV is that I was honored and lucky enough about two weeks ago to receive an honorary doctorate from Drexel University. This was sort of a highlight, a wonderful day for these great stu- dents that they have. At Princeton, the truth is that 30-40% of the students go to Wall Street, but these kids from Drexel go out and shake the world. The other ones, I’m not sure what they do. Sometimes they destroy it, but, that was sort of exhilarating to see thousands of people who tomorrow will actually do a lot of good. But the degree awarded was a doctorate of letters of humanity, and I thought, “What a contradiction to give that to an economist.” To paraphrase Oscar Wilde, economists are people who understand the price of everything and the value of nothing. That can be applied it to a cynic, but we’re not cynics we’re quite the opposite; we’re blue eyed wonders I think. We believe all kinds of stuff that is true on Pluto, but not on Earth. This makes us look pretty stupid. It immediately makes all of you intellectually superior to the speaker. And that’s a good thing. That’s what you want, to come away and say, “I look better than that.” So mazel tov, feel good about it. When you’re in your human mode (as opposed to your economist mode which you switch on before you go to work in the morning and then switch 2011 Pattullo Lecture 261 off at night to become a mensch again) you realize that somehow the value of something must match the intensity with which a human being appreciates something. And I think everyone could agree—even economists could agree with that. The question is how to measure it. Now the truth is, God actually has a metric for that and psychologists like Danny Kahneman, a psychologist who received a Nobel Prize in Eco- nomics, have been trying to figure out what this is. Electrode caps now exist to actually measure electrically human reactions to things so that maybe 20 years from now one could actually measure utility. So, you have a util-meter and your date has her util-meter and, you know… if you scratch your head with a fork, then your util’s go down and you don’t do that again, right? We economists are too impatient for that so we decided to just measure it by the size of money prizes, the big prize. I teach freshman and usually I pick on some Chinese lady just from the mainland so that people not part of American culture could see the sport in it, and I say, “Imagine you have 2 boyfriends, you probably have 3, but suppose you only have 2. One gives you a diamond ring worth $25,000 and the other one $50,000. Wouldn’t you assume the second one loves you twice as much?” Invariably they look and say, “No.” And I say, “Good heavens, why not?” “He could be richer. Have you ever thought of that?” Usually we don’t have that in our theory. Then I say, “You just destroyed half of my course because all my lecture notes are based on the idea that this guy loves you twice as much, so what am I going to teach here?” And she feels bad—that’s the beauty. She actually says, “Oh, I came to America what do I to tell my parents? The professor’s mad at me.” This is a great way to introduce the destruction—the deconstruction—of the concept of efficiency and value in economics. So we apply this into social values as I’ll show. Speaking of which, I have a lecture which I’d be happy to share entitled, How Economists have Bastardized Benthamite Utilitarianism and Became Shills for the Rich. And that is a very sad story actually. Benthamite Utilitarianism...you may or may not like it... some people like Rawlsian thought better...but whatever it is, Bentham never thought that you measure utility by money. We economists assume that the margin of utility of wealth is constant. If you give Donald Trump a buck or a waitress a buck, the intensity of happiness created is the same. That’s what we must assume for this stuff to work. Economists have actually argued about value for centuries. The debate in the 1800’s was whether things have intrinsic value based on the usefulness of that thing or is it simply that someone is willing to pay for something that gives it value. For many years in Chile, potash was just a bloody nuisance and it wasn’t valuable to them, but once Americans went down and figured out 262 The Journal of Health Administration Education Fall 2011 this is fertilizer, then all of a sudden this thing had value that it didn’t before. You can see if you actually think about it that this is not so easy a concept. Now, the foreign example: does healthcare, say a pediatric visit, or perhaps having a stent implanted in someone, have an intrinsic value, or is its value determined strictly by what someone is willing to pay for it? When you talk to healthcare entrepreneurs who make medical devices, they literally can have tears in their eyes, I kid you not, when they wax romantic about the value of the thing that they’re producing. I always tell them it’s only worth what Med- icaid pays you for it and then you know that kind of ruins the cocktail party. So this is what has engaged economists—why is water so cheap and dia- monds so expensive when diamonds are basically useless, even in those days when they didn’t have industrial uses? You can imagine on a desert when you’re just about on the hump of a sand dune, just about to expire and some- body comes and says, “I’ve got a can of diamonds here or a can of water, what would you like?” The economist would probably say, “I’ll take the diamonds and go up to heaven where there could be angels. They could be useful, but you never know.” Most people would go for the water. It has to do with sup- ply and demand. The demand for diamonds is low, but the supply is even lower so the price is high. And water in most places on Earth is ubiquitous. Now, there is this old Roman adage, res tantum valet quantum vendi potest—a thing is worth what you can sell it for.” And that is the added value theory which is similar to the intrinsic value theory that many healthcare people have. A pediatric visit is good unless the economist can’t sell it, then it’s no good—it has no value. There’s one called value in use and another, value in ex- change. Adam Smith has long passages, beautiful passages in his book on that. So we translated that into the proposition that we measure the value of something to a human being by the price. There is a supply and demand curve, which actually in economics we don’t call the supply and demand curve, but the marginal benefit curve. Here’s Person A, who values this thing a lot either because Person A craves it or is filthy rich. Here is Person B and here is Person C, who doesn’t see the value of this thing either because they really just don’t like it, or because they’re poor. I remember peer reviewing an article by a very dear friend a little bit to the right of me, although to the left of Attila the Hun, somewhere in between. He said innocently, “Markets allocate resources to those who value them the most.” And I said, “If you were not my friend I would have left that in and hit you with it once it was in print, but since you’re my friend, do you really want to say this?” And he changed it to, “Those who are willing and able pay the most for it.” And that’s what one should say here. So, the price of things is determined at the margin. It’s equal to the value for the marginal buyer who just was on the knife's edge. While Person A 2011 Pattullo Lecture 263 actually gets a bargain, the market pays less than Person A would have been willing to pay. How often does it happen to you? I go shopping and I buy a shirt at Macy’s which cost $60 but now it’s on sale for $40. I was willing to pay $60 because I valued it at $80. I was already making a huge psychic profit and here I got some more profit—which is nontaxable because Obama can’t see what it is, otherwise he would tax it. These psychic profits are earned by lots of people. The consumer psychic profit in America dwarfs all corporate profits in my view. I’ll write that up for the Heritage Foundation someday. Anyway, that’s the difference between value and price. I’ll correct the saying that economists are probably the only people who really know the difference between value and price, however value is measured in money terms, which means we don’t know anything at all. Ultimately that’s the bottom line here. Now, there’s a problem with this paradigm in that it uses only private value; whatever the person is willing to bid. But when you have altruism—I benefit knowing that you have healthcare—then this thing that I showed you doesn’t work. Of course economists are never at a loss for words or equations, so the way we handle this is as shown on this graph. This is the private mar- ginal value curve and there’s a social marginal value curve. There’s a demand curve and it just sits higher, and this would be the extra payment other citizens are willing to pay to make sure that you get healthcare. This is basically how we deal with this analytically. It’s very nice and very elegant and of course you can get tenure with these kinds of thoughts but no one knows actually, practically how high above the private marginal curve the social curve sits. That varies clearly by type of service.

PRIVATE vs. SOCIAL MARGINAL VALUE

P = Money price of the thing

Extra payment other citizens are willing to make

Supply of the thing

A

B Social marginal value curve C Private marginal value curve. Q Number of units demanded or offered 264 The Journal of Health Administration Education Fall 2011

For example if somebody gets hit by a car and is really in bad shape you know the amount we’re willing to pay is huge. When it comes to well-baby pediatric care however, we’re not willing to pay the current rate. In New Jersey- we pay pediatricians $30 for a Medicaid kid and about $150 for non-Medicaid, so basically we the citizens of New Jersey are telling a pediatrician that your professional work applied to my kid is worth 5 times as much as applied to a poor kid. This is an honest expression of how we feel in New Jersey about the poor. We single out through prices. Now for better or for worse, since we economists or anyone else really, don’t know how to measure this, because you have to do it for every item in healthcare, we have to leave it to politicians and pollsters. Then we curse them because they never get it right. But ultimately this whole thing becomes a groping process and sometimes we go too far. We went too far in the welfare states. We’re not pulling back, but the debate is really about how high that curve is above the private curve. That’s just the whole debate in America re- ally, if you had to do it in a graph. The question is, should you teach this junk to your students because you’re not economists? I’m paid to do it so I tell my students, “I teach you a lot of junk here, but hey, I’m paid to do this.” But for almost every chapter in Matthews book I have a counter chapter where I say, “Let me undo the damage that was done here.” I actually wrote a poem called, “the Ode to Joy.” It’s about efficiency über alles really, a very sarcastic poem, where in the end it goes, “…util shmoodle, to worry about interpersonal utility comparisons is futile,” etc. But in the end I tell my students, “You need to know this junk for the exam or I’ll dock you. Afterward you can read more to become a human being, when you’re done with it.” Should you teach this? I think you should, because your students should understand this. Economists, you have to understand them, because you have to deal with us; we inspire politicians and will say mellifluous things like, “we believe that people should be in charge of their own healthcare budget and have free choice.” And you tell that to a waitress by saying, “We believe in rationing healthcare by income class.” You can’t ever get a right wing economist to say it no matter how much you pay them. No, it’s always consumer choice. That’s consumer choice, consumer-driven healthcare with a $10,000 deductible. You tell me whether a waitress doesn’t get rationed out of healthcare. But they will not admit it nor the politicians they inspire. I wrote an article for JAMA some years ago where I was asked what was that year’s contribution of my discipline. By my discipline they usually mean a healthcare specialist, and I said, “My profession delivered a whole new vocabulary that makes all kinds of beastly things possible.” No one knows 2011 Pattullo Lecture 265 it and we think even God doesn’t, but God is not that stupid because a lot of what is being advocated is actually rationing by income class. I’m not say- ing that shouldn’t be done, but you should be honest about it. That’s what I resent a little bit about our profession. We are not honest about what we’re advocating. We should use English to describe what we do and not consumer choice or these sorts of phrases. You could have consumer choice if everyone got a voucher from the government and then tell the insurance company or the provider that they can’t bill extra. Then everyone is equal; you’ve got egalitarianism and then you can have consumer choice. That’s still, however, requires you to have information on the quality and price, and if you don’t have that then you’re sunk anyhow. So I believe the word “efficiency” is actually an ethical doctrine. Some of you may find it obnoxious because it says that people with more money should get more. It should be exposed as an ethical doctrine. Some of you know I’ve written papers on that. Steve Lansburg and I had an exchange on a blog, and at the end I asked, “If a public policy yields George a gain of $2,000 and causes Martha a loss of $1,000, does that policy enhance social welfare?” And without batting an eyelash he said, “Yes it does, I’m surprised you asked,” basically saying, “as a member of this religion, how could you ask me that?” You know if you’re Catholic there are certain beliefs you have about birth and so on, and why would you ask me that, right? And it’s a religious expression that you saw here. There’s much less science in economics than you may believe. Now what about the real world? You hear value at every conference, value this, value that, value purchase, value price, value maximizing, innovation for value, perhaps even value valuing. I think Bill White and I should write a paper and have a new concept; value valuing. I’m sure we can work that into something or perhaps at night at a reception, we get a little drunk, figure it out, and write a paper. You could become famous because we’re almost done with ACOs; we’re going to beat that to death. You know, I’m sure yesterday that quote with Mark Smith’s definition of an ACO is a unicorn, a fantastic animal that can do all kinds of things except that no one has ever seen one. I have a different one. An ACO is an organization as close to Kaiser Permanente as it can get without anyone realizing it, because Kaiser is a German name, and they’re socialists; you can’t have that and so, isn’t it really Kaiser we are aspiring to? I ran into Steve Shortell at the Chicago airport and I said, “You know Steve, I have found a 20 year old talk where you and I were on the po- dium on integrated healthcare. I have a beautiful slide where you integrate a health system layer by layer legally, administratively, and so on. I said the interesting thing is, I want to give this talk someday, just call it ACO and change no slide and no one will miss a beat. 266 The Journal of Health Administration Education Fall 2011

Now, when I listen to all this prattle on value among people of the real world, I ask myself, what the hell do these people actually mean by that? Well, you typically find it defined as outcomes relative to cost, and then encompass- ing efficiency. Now, you can have fun with this expression in New England as I had, there were all providers, they were all from the supply side and I said, “It’s a great expression, I never thought of it as an economist but let me play with it. See what you can do with this.” So let’s look at this equation. The first thing you’ll know is that quality is multi-dimensional, it’s a vector. We geeks, have a certain aversion to dividing a vector by a dollar figure. Somehow it is hard to teach this, so we invented this little magic machine that can mush up vectors of quality with vectors of utility, feelings, and out comes this thing called a “qaly” (quality adjusted live year). And you know, Bismarck says you should never inquire how laws are made it’s like making sausages. This is worse, this is actually a little bit like making dog food, but you know earnings per share on an income statement is worse in terms of its reliabilities. So let us look at this ratio where we have value equalling qaly over cost, which, by the way, the inverse of that is just what we call cost effectiveness. The more you think about this ratio, you run into a very famous law, Alfred E. Newman’s. Now, who in this audience knows Alfred E. Newman? You’re the most educated. You know kids nowadays don’t know anything, no wonder they’re so weird. They’re not well-read. We all grew up on Mad Magazine which kept us sane. If you hadn’t read Mad Magazine you’d all be nuts by now because Alfred E. Newman understood the world. Here is this famous law, one person’s healthcare cost is another ones healthcare income. Now that’s worth a Nobel laureate. So following Alfred E. Newman’s law, I’m going to write it like this and you can do that to healthcare providers and you see their little eyes ask, could this be true? Who here has ever served on a board? I have on both for profit and not for profit. At any health clinic, what do they talk about: growth, growth, growth. It means revenue, so they don’t want to hear this. They want more qalys and more revenue, that’s what they really want. So, ask yourself this question; has anyone ever thought that the supply side folks want to create value for the patient by cutting their own revenue? I’ve never heard of that. Imagine a hospital board with an agenda item: 30 minutes on enhancing value for patients by lowering our revenue. Not thinkable. Has anyone ever seen such a board, or even an agenda item? I have served for over a decade on these boards, and not once. You know growth usually gets an hour; patient safety now gets a half hour. But efficiency, not once have I ever heard of it. 2011 Pattullo Lecture 267

It gets worse. We have this equation: revenue equals price times quantity times volume. Can you imagine how obscene that is to a hospital executive? Because they ask, “You mean we can create value by cutting prices? Aren’t prices and quality positively correlated?” And you say, “Why would you say that?” Even if you’re drunk, why would you ever say that? You know, so the hospital raises its price and you get more value. Here is the AHIP, the health insurance plans, and they published a list of hospital prices of the top 10 private insurers and what they actually pay . In Oregon, between 2005 and 2009, vaginal delivery went from $3,800 to $6,400. Does anyone re- ally think the quality of the babies went up this much more, or they were that much more complicated? What’s going on here? Now, let’s go back to this value proposition. The problem is that if you do this you still don’t know what a qaly is worth. You can tell me, yeah, it produces more qaly, but are they worth more? For example, supposing the innovation in healthcare yields an added 3 qaly’s per thousand dollars spent on it, should we do it? In England they ask that question, which is nice. In Germany they have a similar thing. In Canada they would ask that same question. However, we can’t do that here because Sarah Palin will brand you a Nazi. Think about this expression and turn it around on its head; it would be considered cost effectiveness. You could now have dollars in the denominator and at least the economist’s brain is engaged again. So, it’s the cost per unit of this qaly, of this output and we can draw a supply curve of that. Here is a qaly supply

THE COST-EFFECTIVE SUPPLY CURVE FOR QUALITY-ADJUSTED LIFE YEARS WRESTLED FROM NATURE BY A HEALTH SYSTEM

3 45 6 78 91011121314151617181920212223242526272829303132 0 D It is the job of physicians and hospital executives -0.1 D – and those who teach them! -- to get the health -0.2 system onto its efficient QALY supply curve -0.3 It is the peoples’ job to decide whether the maximum price to C -0.4 be paid per QALY should vary -0.5 by the income class of the Inefficient person for whom the QALY -0.6 would be bought—i.e., to decide what social ethic should drive -0.7 our health system. B -0.8 A COST PER ADDITIONAL QALY SAVE -0.9 Efficient -1 NO. OF QUALITY-ADJUSTED LIFE YEARS (QALYs) SAVED PER YEAR 268 The Journal of Health Administration Education Fall 2011 curve on a horizontal axis, additional quails that the health system delivers, and on the vertical what the system will charge us for that. So the health system collectively approaches American society and says, “Given how sloppily you live, we can buy additional life years for you, but at increasingly higher prices.” Some are very cheap—immunization, blood pressure control—but when you use Avastin on terminally ill patients, the cost per qaly gets very expensive. And now, of course, the red point that’s inefficient means we paid more for that qaly than we should have, and that’s an inefficient configuration of healthcare. I would say that an evenmore gross configuration is the insurance industry that burns so much money on administration. The Swiss and Germans could teach us a thing or two on how to run an insurance sector. The Swiss system is all private insurance but, with a common nomenclature, common claims form, you don’t need insurance brokers, very simple. We don’t like this, we like complexity. Your job is to teach young leaders how to drive points from inefficient to efficient on that qaly supply curve. That is what you teach, basically, and that is what economists should teach, except you know we’re a little more on Pluto. It’s the people, and the politicians who represent them, that have to pick a point on that curve for which we say we no longer buy. And that’s very interesting. I had a blog post in the New York Times where I said the idea that human life is priceless is romantic and silly. I testified before the Waxman Committee, and Representative Gingrey from Georgia, a physician, said, “Did you write that?” And I said, “Well you just quoted me. Of course I wrote it and I mean it.” And he said, “Well how dare you tell me what the value of my life is?” And I said, “I’m not telling you that—I’m telling you how much I as a taxpayer would be willing to pay for your life.” And I was serious, I wasn’t being a smart ass, I said that has its limits. That does have its limits and then he said, “Well that is German think- ing of another era.” That triggered a certain anger point in me and I said, “You send my son into battle in without a flak jacket. What price did you put on his life? The second year he went back in unarmored Humvees protecting convoys. What was the price, sir, that you applied to my son?” I said,” I’m totally the wrong guy to have this discussion with.” What really annoyed me was that when the transcript came he took the entire discussion out. I think that’s dirty pool frankly. We had a nice frank exchange and it should have been in there for others to learn. So there is a price, and the Europeans and Canadians do that and they’re not inhuman. There are other social priorities that we have. In this country, if something costs a horrendous amount of money for added qualy, should we produce it? Producers of healthcare products would say “absolutely.” Why? 2011 Pattullo Lecture 269

Because it’s revenue. Physicians in theory would not, but in practice, yes. Hospital executives would say, “Don’t ask me, ask physicians because they always say we don’t determine what goes on here.” Malpractice lawyers would say “absolutely” if they have not sued the pants off you. Judges—it depends how I feel that day, what they had for breakfast. Vertical economists would say “no,” it shouldn’t be paid for. Horizontal economists, “absolutely, you know because once we’re sick we become people again,” and then politicians say “absolutely but we may not fund it,” which is sort of a classic response. On the one hand you beat up on Obama for being a Nazi for rationing care, on the other hand you cut back Medicaid spending and you think you can fool God with this. I just don’t think, as I said, that God is that stupid. I’m shocked that people, politicians now, get away with the worst contradictions and no one calls them out on it. You know how they beat up on Obama for the Medicare cut to $500 billion? Did you know Ryan has that in his budget, unabashedly, and no one says a word? It is amazing. So much for the real world of concept of value. I have laid out for you the US healthcare value chain. I don’t want to torture you through it, but I gave a talk on the value chain. I think actually it’s sort of an interesting concept. But the thing that impressed me, the one in yellow is the act feual healthcare. You know somebody produces products and then healthcare gets delivered which is received by patients and on top you have this huge overhead component. Of course there is medical research which is good, risk management, financial compliance, marketing, lobbying, legal information, it’s huge. I believe very

Quote under this graph: “This is a useful diagram to show how value is generated in a healthcare service... This concept was created by Michael Porter, and I find it extremely useful to evaluate healthcare opportunities in the services sector.” http://www.healthonomics.org/2008/10/healthcare-services-value-chain.html 270 The Journal of Health Administration Education Fall 2011 few other countries have to feed as many camp followers in healthcare as we have to do in America. Again, if you want more value in healthcare you should focus on cost and those overhead items. In theory, frankly we shouldn’t need insurance brokers. Think of this when you have a bunch of teenagers who go in a supermarket parking lot and slash 100 cars tires. Then of course garages from around the area fix the tires, make the cars mobile, and you pay them. Now the question you would ask students is, “Do the garages add value?” Yes, an immobile car moved. “Did the garages make the care owners better off?” Yes, your big price creates value. “But was value added to society in the entire episode?” No, there was value subtraction in this, And welfare was actually reduced. Now consider this fact. There are highly profitable niche companies that help physicians submit bills for health insurers. These niche companies help patients claim reimbursement from insurers and also help physicians to bill a clean bill. They are multi-millionaires, these kids who do that. I’ve never heard of the need for such a firm in any other country. I know a guy who’s actually a nephew of George Bush who runs a company like that. That’s great value for physicians, helping them get clean bills. But in fact, in Germany that wouldn’t be needed, in Canada it wouldn’t be needed. So he works like hell, he’s rich, he should be rich given the value added to doctors, but he adds zero value to America, so where does that differ from slashing tires? We built a health system that is the analogue of slashing tires at a supermarket. This is crazy. That’s what you should also focus on in your classes. Now, there’s a difference between gross and net value added. I personally think on this whole value thing there’s a lot of babble. We can’t even agree on a conceptual basis. The economist concept of value is cool because you can take derivatives and do all kinds of wonderful things. But it’s of very dubious ethical merit in most modern society. It might work in Afghanistan but I don’t think in modern society with some sense of solidarity our value concept is very useful. A management consultant is less controversial but the executives on the supply side completely disregard the denominator in this thing and worry only about what can be measured in quality. So practically, I think I would use value more as a rallying cry first, at the micro level where you can teach your students to manage somehow to increase some dimensions of quality without driving up costs and you can teach how that gets done. Then lower the cost of care for a given level of cost a mirror image of that. I think we can do a lot, there’s a lot of room. You do it, you teach it, management consultants do it and then it’s all very good. But there is this other thing here—we talked about the gross value of the healthcare. But if you take a larger view of healthcare then you really ask, 2011 Pattullo Lecture 271

“What is the net value added of the health system in total?” That is a different issue because we have to keep in mind that half of health spending in America comes out of public budgets and they are under fiscal siege and will be se- verely constrained. So if healthcare eats it, education won’t get it. And that is something we never worried about before. In terms of social value added, is it the health system? Who delivers more, the European or the American health system? You know we keep looking down on these Europeans for one they’re un-American and then Canadians too. But in fact, here is the normal delivery; in the US it ranges from low $6,000 – $13,000. These figures come from an international federation of health insurers. Now I will grant you, American babies are of superior quality from Swiss and German, but the question is, are they that much better? And then again, why would there be such huge variation in the quality of babies across the US? So this, I think, is where you could enhance value. If a lady in Oregon has a baby, and instead of charging her $8,000 or $6,500 you charged her $4,000, you enhanced her value proposition. You know, hospitals don’t understand that but it’s a fact. There was a study where 12 health economists participated on a business roundtable, and they said, “Given what Europe spends and what Europeans get, we Americans get 23% less value for what we spend than we should.” So there’s your value proposition in healthcare. For Asia it’s even more: 46%. At Milliman & Robertson they looked at premium and out of pocket spending; it now costs $19,000 per year for a family of 4 under 65 for healthcare. There, I think we economists are right, it comes out of the take home pay of workers. That’s where that comes from. So you just think of that. How long can this go on? Think back to this social value proposition when we’re talking about innovation and value etc. We should keep in mind, even with these specialty drugs, the social opportunity [because now you’re going to have a new drug that prolongs life for another 2 months, but by injecting it], as Daniel Callahan once wrote, you’re basically depriving our kids of education. Ultimately, you’re going to have a whole bunch of over-medicated Americans living in tents. So, there is an opportunity cost, education, science, infrastructure, national security, and our whole standard of living. So, our heads are firmly stuck in the sand and we let healthcare chew up our paychecks, our schools, our infrastructure, just like Pac Man. I think this is a very serious issue. Our job as teachers, yours and mine, is to apprise our students of this danger. We never used to think of that before—there are very few papers concerning the social opportunity costs of healthcare, if you can find one at all. And you should teach them the knowledge and techniques that they need to make healthcare contribute positively to net social value and not just to the one episode of care. 272 The Journal of Health Administration Education Fall 2011

Question (individual unknown): I’m an economist from Syracuse. What is going on with the education of the economists? You’re challenging that edu- cational process to teach them to think in these kinds of ways.

Reinhardt: Take consumer choice theory...Danny Kahneman says people don’t choose that way. We have a theory of insurance, he said, called Expected Utility Theory. In fact Danny Kahneman and a colleague did experiments in Israel and all over the US and they developed a so called prospect theory which is really quite technical. He asks whether it is utility in wealth or is it in gains and losses? And that makes a whole lot of difference on how people behave. So we steadfastly teach models based on theories that actually have been declared pretty much wrong by someone who got a Nobel laureate in economics. The textbooks should reflect this very quickly. You say in healthcare it takes 17 years to diffuse an idea. In economics it takes longer. So we need to actually address this. We actually should have lunch where ever possible with psychologists to learn how people actually behave for one. I think we should be more mindful of the social ethics implied in our dicta and we’re not. I see these young people come with their multiple equations, you know most of them in our game, and they always talk about efficiency. Sometimes I ask, “excuse me, can you tell me how do you define- ef ficiency, what is your metric, and how do you know when we’re more efficient or not?” And more often than not, these kids are stymied. Then they say, “I know there’s a problem there,” but in fact they don’t because it’s not taught. Now when I teach the rich kids in my class often are very nervous because I’m basically saying that we economists are shilling for you guys. We always stay if you outbid me you deserve it. I say that is not at all clear to me coming from another country. As a German, whoever conserved the social solidarity or Canadians, we just don’t think that way—that rich people, particularly when they inherited the money, should necessarily deserve something more just because they outbid me for something. And so, it is actually getting harder with my students—not with yours. I think your students come pre-selected with the right social ethics. So we have a duty, I think. We have a meeting in Toronto where I was going to give a talk on this very issue but somehow there’s no taste for that. Economists don’t want to hear it because they think it will destroy a lot of their algorithm and they don’t want to hear it. That’s why I have these tinkling matches with Steve Lantz with whom you probably know, who by the way has a beautifully clear defense of the volunteer army. I gave a lecture on the volunteer army and I said, “Look at what we economists are really saying with all these graphs and elegant things.” I said, “If you have to stop bullets 2011 Pattullo Lecture 273 with bodies, use cheap bodies and cheap bodies are those that produce less GDP.” It is just the economist’s professional dictum on the volunteer army. And I give a speech why that has a whole bunch of problems. But Steve actu- ally has a lovely exposition on this with graphs and all this and in the end he said, “Well, if you have a draft, the draft board might draft high value people like artists, musicians, and economists. Then he said, “If you had a volunteer army maybe low cost people would enroll,” and I told my students it’s funny, this guy doesn’t even blush when he says that. So I asked my son, he was an officer in the Marine Corps and he said, “Yeah all my kids were from the barrio, I didn’t have rich kids in the Marines, I was an exception.” They used to sort of go after him because he was from the Ivy League, even the Officers are not from the privileged classes—you know it’s very rare. And I wrote a piece in the Washington Post I said you know how we always hear about if you’re over-insured you become a reckless consumer of healthcare; isn’t that the mantra? I said, “Well if you have a social class that can declare war, but it pays none of the blood or even the money cost...” Remember we celebrated the war by giving us a tax cut, if neither is of no cost, isn’t there an over consumption of war? Like going into Iraq when you shouldn’t. I don’t know if this professional will reform itself. If you want to see something really shocking, go on PBS and buy, for whatever they charge you, a video called “The Warning.” There was a lady who headed the CFTC–the Commodity Futures Trading Commission, and early in the 90’s she said that there’s something wrong with these derivatives. It’s going to cause a major disaster in America and she wanted to regulate them. Three geniuses of fi- nance ganged up on her. Bob Rubin, Larry Summers, and the head of the SEC brutally went after her and got Bill Clinton to sign a law that made it illegal for the CFTC to regulate derivatives. Can you imagine? But what is the penalty for being so wrong? Nada. Larry Summers is in the White House, Rubin is sailing high. You know, Greenspan is the only guy who actually apologized in public. So our profession has a lot of problems, a lot of problems that we don’t admit. Then Bernanke came to Princeton gave a speech basically saying nothing is wrong with economics. That was his speech, think of that. Then Bernanke in 2005 said that the subprime market was under control–it wasn't a problem. So I think our profession is sick. I say it openly I make no bones about it, it is sick because it has lost its way. Don’t forget Adam Smith was a chair in moral philosophy, it wasn’t in applied mathematics.

Spencer Ward: I read people like Tom Friedman and others in the New York Times and they talk about this choice between education and healthcare and 274 The Journal of Health Administration Education Fall 2011 how it is being tremendously impacted by the change in the global economy and America’s competitiveness. So a lot of the strategies that people have used are about “growing the pie,” lowering taxes is really the way we need to go in to improve our future chances for better healthcare. I just wondered if you could comment on that a little bit.

Reinhardt: I looked at the OECD data from 1995 to 2005, which were sort of normal years, because afterward it gets turbulent financially. If you look at growth rates in GDP and you plot total tax, there’s a percent of GDP, you get a scatter and you get no line—your R squared is .00 something. There seems to be no correlation between average tax burdens and GDP growth. If you had at the margin tax rates, you’d have to be somewhat smart about whom you tax and not. But even though I always ask this question, I never get an answer from my fellow economists. We have a capital gains tax, and they say that’s to create encouraged growth. I say okay, if the idea were that a venture capital- ist puts $50 million into a start-up that may or may not make it. If ultimately they manage and have an IPO and make a ton of money on it, I would not tax it at all. They keep it because you risked your money and it worked for us. The Google’s, etc. were the companies that created the jobs. But if I buy a share of stock now and sit on it 13 months and sell it at a huge gain, why should I pay a lower tax on what is essentially a windfall than the neurosur- geon who does a wonderful thing on a pediatric case. Can you explain that to me? You don’t really need that many people trading, dialing, and sitting there on their machines to make a market in stocks. So the capital gains tax for example is completely misapplied. I would give people tax credits for starting businesses that create jobs, for instance starting a new restaurant or something. For all of this equipment you buy 10% of the value of that you can write off against taxes. Kennedy did that and it really worked. So we need a revision of the tax code. Interestingly so far, President Obama has been there a long time, but he hasn’t come up with anything. That’s a little bit shocking that they don’t have some signature Democratic idea of what the tax reform should be other than raising it. Just raising it per se is a blunt instrument. You really should be more targeted than that. The other thing though I have to tell you is my wife is Chinese and we go over to Beijing. We just had a conference there in fact, with Princeton that was very high-level Chinese and American counterparts. The Chinese pretend to be very humble, but if you know the Chinese very well, you know that they look down on us. We can tell in their body language and my wife speaks to them in their native tongue but they think we’re nuts in America—what we have done is crazy. They think our fiscal policy is ir- responsible. 2011 Pattullo Lecture 275

They have their own problems mind you, the rural population etc., but it’s kind of scary. We go to these international conferences where you have our manufacturers, GE and Medtronic, etc., dreaming up devices for the emerging markets. MRI machines for $10,000. They already have a scanner that’s this big. They have a sonar scanner this big and demonstrated it. The guy showed us his heart that can be in rural India and then beam images to a medical center where they can be analyzed. Why don’t they sell this here? My theory is that at some point we should let them do all that for the emerg- ing markets, then send your students out there to copy it and bring it back home and make American healthcare cheaper. They can do it for India; they can do it for China, why can’t they do that for us? And I think that is another issue that we need to address. It’s really worth going to these conferences. It’s fascinating what’s happening in the emerging markets. Brazil too is quite advanced actually in many healthcare areas.

Michael Saul: I believe at the base of all of this obviously is the American culture; the issue of solidarity verses individualism. I was very disheartened last quarter to hear students in my Introduction to Health Systems course say that they would not be willing, for the most part, to pay a little more in taxes in order to insure everybody, and these were not well to do students. I don’t know how to best get across to students the value of somebody else being well. I read text a number of years ago called “Tragic Choices,” that shows, as you were saying, how the balance of all the resources in any society is finite and you do have to make choices. But it seems like in the US the choices are always individual and I wondered if you could respond.

Reinhardt: Are they really? I mean this is the point I make when I teach about government and micro-economics, I always ask when I start a lecture, “Who in this class has a mother?” The interesting thing is I get 25% response. Really I kid you not! I mean most of them are emailing and not paying attention. And I say, "Well, I wouldn’t admit that either, mothers are terrible creatures. I don’t know why evolution allowed them to survive because it usually kills off what arrests human development. Here they are still around.” Then I tell them that they are rugged individualists; they're out there doing research, novel research. What they’re trying to do is test the strength of a window pane. First snowfall they’re out there and boom, snow balls to see when it breaks. And the door flies open and this development arresting creature shouts, “You can‘t be in the snow with bare feet in jammies throwing snowballs at the window!” This is terrible, see, you know all this research doesn’t get done. Or, you’re fully mature, age 15, in fact more mature than you will ever be, and you and 276 The Journal of Health Administration Education Fall 2011 your boyfriend went to a rock concert and you would want to stay over at the Waldorf; who kills that novel experiment, mom right? But I said when you’re in trouble where do you go? Mom! I wrote an editorial that was actually published in Germany called, “I Hate Mom and the Government Too.” I said look at our big rugged individualists who sit on their golf carts cursing the government, then defecate it all over their balance sheets and then run to Washington to ask Ben Bernanke and the Treasury to please clean it up. There’s a wonderful YouTube clip where a male teenager weight trains with barbells, and the barbell goes into the fish tank and all the water comes out. Guess what are the first words out of his mouth? “Ma.” And she comes in with a bucket. And I said that is the American way. We don’t have rugged individualists at all. The motto is when the going gets tough, the tough run to the government. Who is it the Governor of Mississippi who said, “yeah, I got a little storm, some lines’s are down.” Where does he go? Washington. I said, “Why didn’t you go to your own house? Why didn’t you get insurance, why did you build it to begin with where you shouldn’t?” This is the American way, we are not rugged individualists. I don’t know if there are some. I once gave a talk to Cato, and I said, “I’ve never actually seen a rugged individual so I come here maybe there’s some of you here. But I doubt it too. When you get in trouble you run to the government.” We’re more beholden to the government than the Germans. Germans do not have a public health insurer. They don’t have Medicare for the old. You stay with your insurance plan and you prepay when you’re young and when you’re older you get it half price. Right? They have a different social contract. We rely on government all the time. So there is no rugged American individualist. This is an interesting thing, I Googled pictures of “rugged individualists’” and it’s amazing what you find. I found a guy on a Harley riding up in the Colorado mountains and all you can see is his leg sticking out, he’s about to take a spill. I said, now here’s a rugged individualist, according to Google, and he’s probably uninsured because a Harley costs a ton of money. And his head gear was a bandana and his body coverage was a T-shirt. That’s what you see in those mountains. And I thought what he now expects from society is a helicopter from Denver to take him down to a neurosurgeon who will come in and spend 10 hours fixing him up. When he gets finally out of the hospital, he can’t pay; we pay. That’s rugged individualism American style. So I actu- ally told Cato that I’m sick of rugged individualists because I never find one. I say if you want to see rugged individualists, go to China; communist China has them, we don’t. That is the tragedy, it is all so phony. So that’s the first place where they have some claim, I think is that they see this health system that is very wasteful and they say, “Well you’re ask- 2011 Pattullo Lecture 277 ing me to support waste.” I think that is perhaps a more legitimate claim. If you want tax payers to pay, you owe them efficiency in return, and people who get the benefit of that owe them to manage their health. I don’t know if you teach that? I guess at Drexel I’m sure you have a course called "You and Your Health.” I wish we taught that at Princeton. You couldn’t have a course called “You and Your Body and How to Manage Healthcare” approved at any Ivy League school. They would sarcastically say, “Oh, that’s useful!” I think that’s terrible. That’s the other side of the equation, because I get all kinds of hate mail from my blogs. People always say, “I don’t want to pay for people who don’t look after themselves,” and there is something to be said for that, but then you say, “Well, if you actually read the sociological literature, this is actually the cheapest food available to them given they have 2 jobs and kids at home.” But you know there is an issue here that we also need to be quite honest about.

Will White: When I listen to this, I think maybe the problem is a little differ- ent. There is a lot of talk about rising inequality and I was talking to one of my colleagues who studies a lot of this. He says that there is rising inequality but its earned income, and actually if you include all things in government too, then it turns out that it’s not so bad. Now he cuts out the top 1% because that is tax data, that doesn’t count, but then he turns around and says to me, “You know, we’ve got problems which are Medicaid and Medicare. All of these transfer payments, we’ve got to do something about them. And as far as I can tell we are incapable of telling Mrs. Jones that she can’t have coronary bypass surgery if she’s on Medicare. But if we can switch it over and give her a voucher then we can say she’s not willing to pay for it and it’s okay.” So, I agree with you that it’s quite a big concern about having so much money go- ing into healthcare, but I’m a little worried as I see where we’re headed that what we’re about to do is fix this problem of offsetting rising inequality by cutting back the transfer payments.

Reinhardt: I got off easy with this one. The point you make I totally agree with. It is in fact true. In a blog post I once wrote I wanted to make the point that many American’s actually have to rely on government; that was my point. But commentators pointed out that if you look at just wealth; stocks, bonds, and real estate, the distribution of wealth in America is, unbelievably, I think something like the top 5 % own 40% of all the wealth. Then they pointed out that if you include the present value of the life cycle of Medicaid (if you’re poor), food stamps, and all of the government benefits, and bring them back to present values per person and then look at the distribution of wealth, it 278 The Journal of Health Administration Education Fall 2011 turns out the bottom half of the income distribution gets something like 45% of all the wealth and the top half gets 55%. And then he said, “This isn’t fair, the top half should get more.” People somehow say this is a welfare state, these people are undeserving, and I always tell my students that after World War II we had the GI bill that vastly redistributed the wealth. The soldiers coming out of the trenches or off the airplanes or ships, they knew luck was luck and it should be shared. You think luck is deserved and it shouldn’t be shared so you inherit. I have students many at Princeton, who come to Princeton with a trust fund of $100 to $200 million dollars—they come to school that way and they think they deserve it and they resent having to share it. That’s the difference now. Of course when you look at the infrastructure, these kids never actually stand in line for anything because they always go with their parents on their jet, etc., and increasingly they become the leaders of America. Increasingly, they become political leaders too. You know how many millionaires there are in Congress. I don’t know if you can undo this and it would be okay if say 45/55 you could live with that, but that is precisely why we have great society programs; to undo the income distribution that markets give that is so skewed. The danger is now that, like this young man was telling me 45% is too much and he wants the ratio closer to 30/70. Practically that means block grants for Medicaid, people just get ra- tioned out of healthcare, the elderly etc., and you could see this approach quite clearly. Obama says that for the hospitals in the future he’s going to put in a 1.1% productivity gain as a subtraction for future reimbursement increases. That’s what he did, so he lowers the revenue of hospitals and says, “Manage down for everyone.” I think the big battle will be fought over this issue. I tell hospital execu- tives that if I give you 10 years notice that you will be out of $7 trillion, you’re going to get a haircut of $5 and a billion you mean you can’t manage down to this? Let me tell you about corporations who manage down much better than that. You should be able to handle that quite easily. You know Obama’s cuts are really not burdensome. That’s why Ryan kept it in there. But this switch to a voucher is ominous. I’ve blogged on that too, and basically used CBO numbers that really rose over the burden. So the battle really is the way to think about the distribution of wealth now, 45/55 and whether we can keep that or go to 35/65? In a nutshell, that’s the battle we have. Thank you again.