Diagnosing the Economics of Health

“There is a tough tension between health economics and politics, because the economics gets very complicated and becomes difficult to explain to the voter,” Vivian Ho said.

While the political climate may ebb and flow, often dramatically, Ho strives to improve health for as many people as possible every day by designing and putting forth research-based, objective policy. As the director of the Center for Health and Biosciences at Rice University’s Baker Institute for Public Policy, Ho’s research examines the effects of economic incentives and regulations on the quality and costs of health care.

Although Ho and her colleagues are operating in a non-partisan think tank, they need to pivot whenever there is a change in political administration. “Under the previous Democratic administration, there was a strong belief in getting everyone access to health care,” said Ho, who is also a professor in Rice’s Department of Economics and professor in the Department of Medicine at Baylor College of Medicine. “Now we have an administration that is willing to sacrifice access to health care if they can lower government spending,” she said. “So we have to change what we’re going to focus on and make recommendations that we think will help the most people in the context of who is actually calling the shots.”

The Business of Healthcare

Comprising 18 percent of the country’s gross domestic product, American health care is an extremely large and complicated issue that includes a variety of stakeholders and affects virtually everyone. “As health care costs continue to rise, providers are responding to strong economic incentives, because there is so much money to be made off of health care,” Ho said. “Employers are willing to pay large amounts for health insurance to cover their employees, and Medicare and Medicaid are spending large amounts on health care as well.”

Ho works to identify and understand the economic incentives behind this behavior and the regulations that lead the health care system and costs to often appear out of control. Through her research, she has discovered that sometimes well-intended regulations don’t work the way they are expected in health care. For years, she’s been looking at state Certificate of Need regulations. Many states don’t allow a provider to open a new hospital or offer a specific service unless they can show there is a direct need in the local market. “We’ve actually shown that those regulations restrict competition, and they lead to no savings in cost,” she said. “People thought there would be economies of scale, because you have fewer health care providers that are larger, and that’ll save money for patients. We’ve shown that is not the case.”

Ho and her team have also researched patient use of urgent care centers and free-standing emergency centers on weekends or after hours. They found that many people were not looking carefully at the signage and assumed a freestanding ER was an urgent care center. “They would discover they went to a freestanding emergency center when they got a bill a few days later for $1,000,” she said. “They could have gotten the same care from an urgent care center for $100-$200.”

Another issue Ho is concerned about is physician and hospital integration. “There are many more physician practices that are choosing to either be acquired by hospitals or form strong contractual relationships,” she said. “One would think this would lead to more coordinated care, but we are finding it leads to higher spending, because of the incentives that are in place by Medicare and other organizations that reimburse physicians at a higher rate if they’re billing through a hospital.”

The Affordable Care Act

When the Affordable Care Act’s insurance provisions took place in 2014, Ho’s life changed. While health economists were in the room throughout the design of the ACA’s more than 1,000 pages of legislation, some of their recos were not included in the law, for fear that they would be unpopular with voters.

To find out if the legislation was a benefit to Texans, the Baker Institute partnered with the Episcopal Health Foundation to conduct a survey. Their estimates revealed about one million people in Texas obtained insurance because of the ACA, either through the marketplace or the other general provisions in terms of employers being required to provide insurance. “I do think the ACA makes Americans better off overall,” Ho said. “That being said, the law is not perfect and we are now challenged to discover what areas went wrong. How can we lower premiums? How can we get this market to work in the way that helps the most people?”

Advice for Students

Ho urges students interested in studying health care economics to get to know every single component of health care – everything from how doctors and hospitals think to the pharmaceutical industry and to employers’ decisions to cover employees to health behavior trends, such as rising obesity rates, alcohol consumption and the opioid crisis.

“My advice is to be open, you have to drink it all in and follow what’s going on with the newspapers and then think very carefully about the economics,” she said. “You have to go back to fundamental economics — simple things like demand and supply curves, consumer welfare, monopoly power and insurance, which changes health care relative to many other products that you see on the market.”

The Future of Healthcare

Ho believes the future of a better healthcare system lies in promoting price transparency and rewarding for quality instead of quantity, through the bundled payment program.  “We have learned since the ACA passed that there are tremendous differences for prices in health care services even within the same city,” she said. “Patients with different types of insurance plans who see the same hospital or doctor, can pay very large differences in prices – some by a factor of two or three.” Prior to the ACA, a hospital could earn more if bad things happened to their patients, causing them to stay longer to have more procedures. “We need to put financial penalties on hospitals that have higher readmission rates than their competitors and encourage bundled payments, in which a group of hospitals and doctors gets one fixed payment for performing a procedure, rather than just billing for every single service and complication that arises after that procedure.”

Published at Unconventional.rice.edu: https://unconventional.rice.edu/vivian-ho.