by Tom Robertson
Executive Director, Vizient Research Institute

Economics is fundamentally about choices. Some choices are relatively easy and others are agonizingly difficult, but in the end, we are faced with making choices. At the root of economic theory is the culprit that forces choices: scarcity.

Scarcity is the collision between limited resources and unlimited wants. If we had unlimited resources, we could satisfy unlimited wants by always saying yes. Unfortunately, our resources are limited and that scarcity requires us to make trade-offs. A shopper with a limited budget might have to decide between milk and soda. A family may have to decide between a new car and a vacation. Even countries must make choices: tough decisions between investments in defense versus investments in domestic production. In macroeconomic textbooks, a common euphemism for such a trade-off is an allocation between the production of guns and butter.

In health care, the enormous cost of becoming seriously ill has necessitated the intervention of insurance. Prior to 1973, health insurance was largely limited to hospitalizations. Much of what patients received outside of hospitals was paid for out-of-pocket. With the HMO Act of 1973 came a 20-year period during which health insurance changed from protection against catastrophic loss to all-inclusive benefits that significantly reduced, and in many cases, eliminated entirely the patient’s out-of-pocket responsibility for ambulatory services.

Over the same time, the expanded influence of Medicare, introduced less than 10 years earlier, created an unprecedented demand for health care services. Expanded insurance coverage masked the scarcity of resources and consumers were faced with entirely different choices. Rather than choosing whether to consume, as managed care plans offered restrictive networks of doctors and hospitals, patients had to choose where they would consume. An explosion of technology, pharmaceuticals and new facilities was fueled by the increased oxygen supplied by insurance changes in the late 1960s and early 1970s.

For years, we have anxiously watched health care spending consume an increasing proportion of the gross domestic product (GDP), wondering aloud whether there was an upper limit on its growth. Some noted economists reassured us that health care spending could represent whatever percentage of the GDP that we collectively wanted it to. But therein lies the rub. We collectively have no shared opinion on how much of what America produces should be consumed in health care. If, without debating the precise upper limit on health care spending as a percentage of GDP, we simply agree that at some point we will reach a practical limit, then the unavoidable conclusion is that the U.S. health care system will face a macroeconomic “guns and butter” crossroads.

As uncomfortable as it is to talk about openly, we are fast approaching the time when we will have to choose between enormous spending during the last six months of life and other competing uses for the increasingly scarce resources. The aging of the baby boomers, the smaller population cohorts coming behind us, and the pressures of a global economy that tug the United States toward a lower common denominator of spending, all point to tough choices ahead.

Contributing to the conundrum of end-of-life spending is the law of diminishing returns. Simply put, the more of something that I already have, the less I value just a little bit more of it. The easiest example involves a bottle of water. Someone stranded in the desert with nothing to drink would pay a much higher price for the same bottle of water than a person who had just drunk their fill in an air-conditioned room. The price we’re willing to pay for something varies according to our circumstances.

I am reminded of a conversation that I had years ago with Lawrence Furnstahl, now the chief financial officer at Oregon Health & Science University but at the time the chief financial officer at the University of Chicago. We were discussing runaway health spending when Lawrence asked an interesting question: how much would you pay for an additional six months of life? The answer is quite different depending on who you ask. From a healthy 19 year-old, with their entire life ahead of them, an extra six months might fetch a relatively small price. But a terminally ill patient, facing imminent mortality, views an additional six months of life through a completely different lens. Lawrence recognized time as an economic good, and the realization that an additional six months of time has a much higher value to a terminally ill patient goes a long way toward understanding the difficulty that the system has in making macroeconomic choices.

Confounding the calculus associated with end-of-life spending is the balance between quantity and quality of the remaining time available to terminally ill patients. An aspirational goal for the U.S. health system as a whole, but more importantly for individual providers, might be to match scarce resources with the attainment of optimal balance between longevity, functionality and the enjoyment of life.

Two tactical objectives would contribute toward the achievement of such an aspirational goal. Providers should reduce avoidable variation in terminal episodes by increasing adherence to evidence-based standards of care, and in the process eliminate marginal utilization, including unwanted hospitalizations, that fail to improve the quality of life for terminally ill patients and their families. The enormity of the problem, and the complex web of interrelated issues associated with any attempt to address it, put us at risk for systemic paralysis unless we can change the tone of discussions from shrill to measured, and focus attention on a manageable number of realistic steps that have the potential for admittedly modest progress in the intermediate term, but which could form the foundation for generational change in the long run. If we fail, we will leave an economically unsustainable health care system for our children.

My mom, who turned 81 this summer, is pretty healthy. If she was faced with the prospect of incurring tens or even hundreds of thousands of dollars’ worth of medical services in order to extend her life by six months, however, I’m not sure what she would say. But if she thought the money came from her great grandson’s college funds, I am certain of her response. Scarcity requires choices. I’m a really lucky guy. I have two grown daughters who love me very much. I just never want to find out exactly how much.

About the author and the Vizient Research Institute™. As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.

Published: November 17, 2016