 Our headliner for day one of the McLean conference is a lawyer with a PhD in economics. He's a professor of law and medicine at the University of Chicago. He clerked for the iconic Supreme Court Justice, Sandra De O'Connor. He's improved the lives of millions of people in the slums of India. He helped design and evaluate India's health insurance system. It's a new Pellani who will speak on the need to restructure health policy and innovation. Thank you very much for having me here today and sticking around. All right, so the title of this talk is obviously up there, but it really should read what is the value of health care innovation. Because that's what I'm going to stress. I'm going to use, I'm going to contrast the value of innovation. So medical technology, new drugs, new therapies with health insurance. Okay, so here are the two main points that I'm going to try to make in about 15 minutes. The first is that most people are worried about risk in the health care sector. And when we think about risk, we think about medical bills. And I want to kind of reframe that and help people see that in fact the main risk is sickness. And that once we see that sickness is the biggest risk that people face, that the solution to sickness is not health insurance, it's first medical innovation, new treatments. The work that you all do, not necessarily the work that health insurance does to pay the bills that are generated. The second thing that I want to point out is that even if we want to focus on financial risk, which is something that's a very big topic, for example, in the discussion that precedes the election that will come next year, the federal election that comes next year, the main source of financial risk is actually the price of health care. And the question is how should we tackle the problem of prices in health care? Should we negotiate that down or should we provide insurance? And on that I want to just issue a note of caution that insurance, although it doesn't seem it, actually can make things worse and not always better. So I want to talk about those two themes. So let me start with the first one, which is about medical innovation and comparing medical innovation with health insurance. So let me start with the conventional view. I think this is the view that you'll hear in policy discussions. You'll often hear this, I think just in discussions with friends and things like that. People compare, complain about medical bills. And they think the big problem in the medical system is that treatment, medical treatment is expensive and that creates financial risk. And that's what worries people. And in response to that, they want things like health insurance to help protect them against those financial risks. The $20,000 bill from the hospital or treatments for drugs required for treatment for chronic care. So that's the standard view. And that's why you see in health care policy discussions and health care reform discussions, the focus always seems to be about health insurance. How can we protect people against medical bankruptcy? How can we give them more health insurance? Let's expand health insurance. And I want to argue that that view, or I will argue that view is wrong. There's a better understanding of health care risk. And in this better understanding, the key is to appreciate that the main risk that we face in health is sickness, not your medical bill. The medical bill is a consequence of sickness, but it's sickness that drives risk. And that's very, very important. Because once you see that, you'll see that health insurance doesn't actually ensure you against health risk. It ensures you against the medical bills that come after that. The thing that helps you with medical risk, the sickness, the thing that helps you with that is medical care. And the reason why people still think that there's risk is because the medical care has a cost, and that cost leads to a bill, and people focus on the bill instead of the sickness. Then they fail to appreciate the value that health care plays. Now, once you see it this way, I think the thing that you realize is what if you had a world where there was not a treatment for your medical care? Any particular sickness that you want to imagine that there was no health care? What could health insurance do for you? Not much, right? So in order for you to even have value from health insurance, you have to have the health care in the first place. And I think that's a very important insight when we think about policy. So the way that I always try to reframe this is to say, look, the primary risk in health is sickness. Medical technology takes what is a physical risk to you and converts it into a financial risk, which is a medical bill. Why is that important? Because you can't insure against the health risk, the actual sickness with insurance. But once it's a medical bill, you can insure against it. You can financially reallocate it to other people, spread it around, share the cost, which you can't do with sickness. And I think that's the most important way to look at this problem. Because once you do that, you then suddenly start thinking about medical technology differently, okay? So medical technology, most people, like if you do cost effectiveness work, you will typically say, okay, how do I value medical technology? How do I value a new therapy, a new type of surgery, a new drug? What you'll typically say is, okay, I'm going to put myself in the feet or in the shoes of somebody that's sick. And I'm going to ask, how much does my health improve? I'm sick, how much does my health improve once I have the medical care? And that's right. It is certainly true that health care has that value to a person that's sick. But what's interesting is that once you look at health care the way that I've suggested in the previous slide, you'll see that there's a second value of medical care. And that second value of medical care is a value that accrues not just to the sick person, but to the healthy person. And the reason is what health care technology does is it takes from the perspective of a healthy person, when they face the risk of sickness, they face something with some sort of physical cost. If I can then come along with technology and reduce the magnitude of that physical cost, or convert it from a physical cost, physical risk, to a financial risk, then all of a sudden there's additional value. Even a healthy person appreciates this new medical technology. It's like reducing the risk that you're going to face in the future, even before you're sick, okay? And that alteration of the gamble is a very, very important thing. In fact, I'm going to argue that it's not only like insurance, but it's worth more than insurance. And I'm going to show you some evidence on this. But before I do that, I want to give you a numerical example, because I think this concept is not intuitive. I think what I said on the last slide is fairly intuitive, but this is a little bit different. So let me give you an example with heart. And this is a stylistic example. I've made up some numbers, but it's not that far off. Okay, so heart, everybody I think in this room is familiar with highly active antiretroviral treatment. It's a treatment that helps you, that slows the progression or eliminates the progression for the most part from HIV to AIDS. Okay, now imagine a world back in, say, 1990. I'm going to assume that you live in a pre-heart world. When you get HIV, I'm going to assume just to make the math really easy that immediately you get AIDS and that AIDS means you die and that your value of life is 100,000. I don't need those facts to be true. We can modify this to make it more realistic. It won't make a difference to the point that I'm making. So you're going to die if you get HIV. You lose $100,000 a year when you die. Okay, that's pre-heart. By the way, insurance does nothing for you. If I gave you, if Medicaid covered AZT, it wouldn't have made a difference. It's not going to make you live longer. Okay, it's a great illustration of how health insurance by itself doesn't do anything. It needs the health care. Now let's suppose heart comes along. So now you're in the year 2000, let's say, or 96 heart comes out. So let's suppose that you're in the year 2000. Heart is going to allow you to live for a very long time, 25 plus years, even if you have HIV. Now that means that you don't have that $100,000 loss each year, right, if you get HIV. But you will have a bill. Now imagine if that bill was $100,000. Imagine if the people that produced heart charged you $100,000 a year. Would you prefer to live in 1990 or live in the year 2000? You prefer to live in the year 2000 because whereas before you guaranteed to die, face $100,000 a year monetary equivalent loss, there's nothing you could do about it. But once it's an insurable risk, once it's a $100,000 medical bill, before you even got HIV you could buy insurance that would deal with that. The government could help you with that and you could live, right? So that's the first value that comes from medical technology. It just converts a physical risk into a financial risk that you can use financial instruments for or that you can get help with from the government. Now here's another thing. Heart wasn't actually priced at $100,000. It was priced at something close to $15,000. Now that's a second benefit that medical care had, that heart had, which is that it took a risk that was $100,000 a year potential loss, and it reduced it to a $15,000 a year potential loss. That's on top of the fact that it made something that was a physical risk, into a financial risk that you can ensure. It also reduced the magnitude of that risk down to $15,000. And that's the second value that has both accruing not just to the sick person, but to the healthy person because it changed the nature of the risk. Now, what's really interesting about this is what role does insurance have at that point? Insurance takes you from, takes that $15,000 risk and helps you smooth it out, helps you get help from other people. So that you only have to pay an annual premium rather than play that $15,000 a year shock if you happen to get hard. But now you can compare what health insurance does to what heart did. Heart took you from $100,000 to $15,000. Health insurance takes you from $15,000 to your premiums. Okay, now, this is stylized fact. I could have just made up these numbers. In fact, I did make these numbers up, but they're not entirely unrealistic. I think what you would probably want to know is what about the data? What does the data say? So what we did, I did this with co-authors of mine, all actually associated with the University of Chicago, Bryce Lackawalla and Julian Rafe. Bryce is at USC and Julian is now at University of Illinois. Then what we did is we went to a database that just maintains of cost effectiveness studies. And in this database, we looked at about 1,600 studies that had enough data that we could work with. There's 1,600 studies of different treatments, both drug treatments, non-drug treatments, but that had cost effectiveness analysis done so that we could try to figure out what would be the benefit to a healthy person of getting access to these particular treatments. And then what we did is we said, okay, let's price these treatments out, let's value these treatments in the traditional way that cost effectiveness does. Then let's figure out what additional value they offer to the healthy person, this insurance value that I pointed out in the previous slide, this stuff. And then the last thing we're going to do is we're going to try to figure out how much value health insurance provides in terms of risk reduction. Once the pricing is taken care of, does that make sense? So here's what we found. We found that on average the risk reduction value of innovation first doubles the value of innovation as compared to what cost effective analysis says. Then on top of that, if you compare the risk reduction value that you get from health innovation on average across all these studies to the value of health insurance, that multiple is about 10x. That is to say, the risk reduction value of medical care among these technologies was 10x the risk reduction value of health insurance itself. So now I'm going to show you a table that's not going to make a lot of sense to you. But the important thing is if you're interested in the actual prices, this is a way that we actually depict this. We look at in the first column different types of people that have different risk tolerance. We take the typical value that we see in the literature, which is the middle row, which starts with three. We calculate what the value is for the median technology, for the 90th percentile technology, for the mean technology, using cost effective analysis. That's that first panel. Then we calculate the value, the risk reduction value, that you get from health care technology in this middle panel. Again, the median 90th percentile in the mean. And then we compare that to the value that you get from health insurance ensuring against whatever remaining financial risk there is. I circle two numbers. Those are numbers that are from the mean for the average risk averse guy in the population. And what we basically find is for the average technology in the cost effectiveness analysis registry, the value of that technology is worth about $883, the risk reduction value. But the actual financial risk reduction from health insurance is only worth about $45. That's about 20x multiple. It's a little bit smaller multiple if you look at medians. But the general idea is that you're not getting, a lot of the risk reduction comes from the value that health technology itself creates. Okay, so what's the policy implications of that? And if I stop the slide right here, I'd be okay, but I'll continue. The first thing is that maybe what we want to do is invest in innovation and not just in health insurance. That if we really are worried about risk, worried about the risk that people face, we should be focused on sickness and not just the medical bills. And even if we're worried about the medical, we should be focusing on innovation. And there are many ways that we could invest in innovation. Spend more money on the NIH. We could try to make private if this is what you want. Richard Epstein was here. I think he would argue for this. Let's make private innovation more profitable. And what you do for that is you could extend patent life for certain things, especially for more effective drugs. You can lower the hurdles to drug approval. You can subsidize clinical trials. There are many different ways. I'm not gonna plug any particular instrument. I'm just saying let's think about ways that we can promote innovation as a form of risk reduction. Now, there's a question that lingers. Well, shouldn't we still do some health insurance? And I think health insurance is a great idea for risk reduction. I don't think it's necessarily as valuable as medical innovation. But you have to be a little bit careful because it's not obvious to me at least whether or not health insurance encourages or discourages innovation. There are arguments on both sides. I'm on one hand, by having health insurance, you have guaranteed payment for treatments. And so if I'm a researcher, I say, hello, there's a future market out there for me because I know people have health insurance. But the flip side is that Tom Phillips and I have this paper out that says one of the things that we've noticed is that when people have access to health insurance, they're less likely to enroll in clinical trials. And so it makes it harder and harder for people to run the clinical trials required for you to get drug approval and that's marketing approval from the FDA. So those two things work in opposite directions. I don't know which one is necessarily bigger, but it's something worth considering is that these two things might be at odds. So let's see if I have time to make a second point, which is to think about what is the source of financial risk. So even if you took what I said before seriously and then you said, but I still wanna focus on that $15,000 risk that's left over from part, how do I address that? Well, I'm gonna talk a little bit about that and what drives that. And what's gonna drive that is prices and I wanna ask what we should do about prices. It's also a big topic today. So let me start out with a simple stylized fact. The US and the UK on a per capita basis consume about the same amount of quantity of medical care, okay? We have very similar numbers for nurses per capita, physicians per capita, office visits per capita, things like that. For sure there are some differences, but in terms of the big spending numbers, quantity-wise we're not that dissimilar, okay? Obviously we're much bigger, so I did this on a per capita basis. However, the US spends about double per capita what the UK does. So if we look at it on a GDP basis, we spend about 17%, they're spending 8.9% on a per capita basis. We spend about 8,500 per capita in the UK and this is 2010. So we're past this point. They spend about, much though, it's not exactly 3,100, that's at the bottom end, but it's about half as much, around 4,000. So we spend, consume the same quantity, but spend twice as much. So this leads, by the way, those figures come from one of my favorite articles by Ewa Reinhart and co-authors. It's called It's the Price is Stupid that says the reason why we spend more than Europe and I think that there's more nuance to this, but I love the basic point which is it's we pay double for the same stuff. We can do the same amount, we just pay double. So the question is, what do we do about that? Because it suggests that we're getting the same quantity, but we are facing twice as much risk in the United States, right? Not only a price is high, but remember, price is what leads to that financial risk that people want health insurance for. So what do we do about that? Now there are two policy options. One is we can lower prices, okay? And this is, you know, there are two ways to lower prices. Well, there are two ways to lower prices, but let me actually not go down the specific mechanism for lowering prices. But one thing is we could lower prices, you know, for example, by having the government negotiate prices with hospitals, with drug companies, we could have the government provide more healthcare so it has even more market power to be able to negotiate those prices. That's one way to do it, okay? And but the risk of that approach is that you're gonna have a risk to innovation. And so you see these debates coming out where people are saying, look, if we negotiate down prices, you know, if we negotiate down drug prices, then there's gonna be less medical drug innovation. If we negotiate down prices for hospitals or physicians, we're gonna get less amenities at hospitals or there are gonna be lower quality physicians that come into the marketplace. You know, people are gonna wanna turn to become lawyers or investment bankers, God forbid, rather than becoming doctors. So that's maybe one argument. So you say, okay, well, what else can I do? If I can't, if there's risks, downside risks to cutting prices as a way to control risk, maybe what I should do is provide people health insurance. Okay, so instead of eliminating the high prices, I'm gonna protect them against those high prices. Okay, that seems reasonable, but I wanna point out that health insurance is a double edged sword. It can sometimes worsen the problem. So let me give you two reasons why. And these are fairly even. I'm not gonna give you a lot of numbers, I'm just gonna give you the conceptual idea. And one I think is fairly obvious. Let's think about the incentives of a health insurance company. I'm a health insurance company. On January 1st, you give me your premiums. I care about my profits. During that year, you know what I wanna do? I wanna make sure that prices are low. Because the higher prices when you guys consume care, the less money I have left over at the end of the year, right? I wanna minimize costs. However, I don't exist only for one year. I exist year after year. Here's one thing I know. I know that if prices are high, you guys are gonna be worried about medical risk. And so next year, you're gonna come back to me and want more of my product. And those incentives push in opposite directions. One causes the insurance company within the policy year to wanna reduce prices, reduce costs. But the other one causes the insurance company to be like, we're okay with risk. In general, we think this increases our demand in the long run. We want that. So at least they should convince you that it's not obvious that health insurance companies are good at reducing costs. And if you ever work with health insurance companies and I have friends that have tried in the startup space, they're perplexed why the health insurance companies are not interested in lowering costs. It's just like a weird thing. But it's not so weird once you think about their long-term incentives. So let me offer you a second one, which again, I think is kind of intuitive. It's just, I wanna modify. Everybody knows that the downside of health insurance, health insurance is good, it helps reduce these risks that you face. But the thing that it can cause is moral hazard. And what I mean by that or what economists mean when they talk about that is they say, look, instead of paying $20,000 for say hospitalization or $200 for a drug, if you're facing a cost that's just the copay or 10% of that or even just $10, you'll consume more of it. And maybe you'll consume more than you need to. I know people think that's kind of weird, like why would people consume more medical care than they need to? But we do that for lots of things. And I can imagine that there would be more visits to the doctor, more visits to the hospital, the more days in the hospital, things like that. And we've estimated that empirically that in fact when you reduce the price of care by 10%, you increase the utilization of care about 2%. That's moral hazard. Now that's fine. That's not the thing that I'm really worried about. What I'm actually worried about is something that's more subtle than that. And here I think it's much easier to think about your cable bill. This is something that happens to be each year. Okay, I look at the cable bill and the cable bill changes. And then when the cable bill changes, I go, I don't need that many channels. I need to switch to another plan, things like that. Now, I do that with the cable bill, and not often as I should, but I do that because every time the cable bill goes up in price, I face that cost. Okay, so if the cable bill goes up by $10, by the way, my cable bill is about 60 bucks. So $10 is the reasonable amount. If it goes up by $10, I worry about that and I go and call the cable company up and I say I want a different plan, okay? But now let's suppose that you had insurance. And insurance paid for 90% of the cost. And so when your cable bill went up $10, you actually only paid $1. Would you call up, would you spend time on hold, trying to get the cable company? It's like over a year, that's 12 bucks, not worth my time. The inside here is that when you have insurance, you not only over consume, but you don't complain when prices rise quickly. Does that make sense? Because somebody else is bearing most of the cost increase, so you don't feel the need to complain. And what that means is that you're more tolerant of price increases, medical price inflation. If there's more medical price inflation, that's increasing medical risk over the long run, right? And so that's the second reason where it's not obvious to me that in fact health insurance is helping you reduce. It is reduce prices or keep down that financial risk. In the very, very short run, yes. But in the long run, not obvious to me. And I think that for a lot of people, this is intuitive, like medical price inflation has been quite high, prices of medical care have been much larger than they were way in the past when we had a lot less insurance. Okay, so again the policy implications. One is you can either negotiate prices, okay? You can have the government do it, do Medicare for all, Medicaid for all, whatever your preference, and have them negotiate. Exercise them to opposite prices. Alternatively you can just say, for whatever we're doing now, we're gonna do more cost effectiveness analysis and only pay people, pay providers for treatments that are cost effective or pay the amount that we pay would be proportional to the cost effectiveness. Sometimes this is called value-based insurance design. I think Stacey a little bit talked about this, to some extent. If you're not a government type and you're a free market type, then you could go the opposite way and say, hey, I actually want less insurance and actually I want more price transparency. Let's make all the prices transparent so people can compete, free markets. You can do that too, that's one policy option. But if you do those things and you somehow lower prices, maybe what you ought to be thinking about is, how do I address this innovation problem? And I want a couple of those things with things that make innovation easier. And that's where we get back to the last set of slides. Maybe you want to do things like NIH spending, lower barriers to drug approvals, allow companies to innovate within their organizations to reduce costs, things like that. Okay, to do that sort of innovation. Okay, let me stop there, but thank you very much for your time. Okay, I love the concept of insurance so I'll try to speak in defense of the insurance industry. For the second part of your presentation. Well, we might, you know, can we evaluate the two edges of insurance the same way you evaluate insurance versus innovation like in the first part, whether that principal agent problem actually worsens the insurance coverage of that. I mean, that's some research direction which will take quite some time in research funding. But for the first part, you know, is the result, the comparison result, heavily dependent on how you measure risk? You know, whether it's about variance or whether it's tail risk, because I would imagine insurance is a very good cover for tail risk, but innovation might not be a very good cover for tail risk, you know, for diseases that cost a lot to cure, but are rare. Yeah, so I think I'm at, so let me just restate the point to a re-understand. So health insurance might be really good for very rare but very big bills and maybe innovation is not as good at that. And I want to push back on both of those claims a little bit. I don't know the answer, but I'm a little skeptical. Here's the reason why. First of all is people in this country don't have high deductible, don't in general have high deductible health insurance plan that covers you when you're just above $5,000 in cost or $10,000 in cost. They have something a lot closer to first dollar insurance where the deductibles are in the order of a few hundred dollars or a thousand dollars. And so in that context, I don't think health insurance is only providing those, the high risk costs. And as it turns out, the biggest drivers of actual costs I think are not the tail risks, but that is to say the big drivers of health insurance costs are not the tail risks, it's the middle, like the lower cost treatments that we see more frequently. The answer to the medical innovation part is, I don't know. I mean, on the one hand, you might say HIV heart is a great example of tail risk. It was not a very common thing up until a point and death was as about as big an outcome as you could imagine. But I can see the arguments going in both directions. There's also chronic treatments that are actually not tail risks, but middle risk. What I would say to that is that there's some people that care about tail risks, some people that care about middle risk. Health insurance can cover both and health care can cover both. The question is whether you care about the tail or the middle, what is doing a more cost effective job of protecting you? If I had my druthers, I'd worry a little bit more about tail risk, but I would still think that medical care is critical. And the last point I leave you with is, without the medical care, health insurance is not even good for tail risk. There's no reason to go to the hospital for a $20,000 bill if the hospital can't do something for your problem. True. Thanks very much, and you have a great talk. Thanks again. Thank you. Mark, we'll let the...