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September 5, 2019

Is $4.5B a fair price for a wrist surgery? (Hint: No.)

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    Here's a fun fact: If you want to infuriate health care Twitter, a great way to do it is to claim that orthopedic surgeons are wildly underpaid—by a factor of about 4.5 million.

    That's how Jay Crawford, a pediatric orthopedic surgeon, invited the wrath of the internet last week when he published a STAT News article headlined, "My hand surgeon should have been paid $4.5 billion for fixing my broken wrist, not $1,000."

    Ready-to-use slides: Orthopedic market trends for 2019 and beyond

    Why Crawford says his hand is worth $4.5 billion

    Crawford's saga started a few years back, when he fell from a ladder and severely injured his wrist. One of his medical partners, whom he calls "an incredibly skilled hand surgeon," rushed to his rescue and spent "three hours putting everything back where it belonged with a plate and 11 screws."

    For that surgery, his partner was reimbursed about $1,000—a figure that, according to Crawford, fails to reflect the extraordinary value of saving his highly skilled hand.

    "Each year," Crawford explains, "the work I do [as an orthopedic surgeon] generates about $1.5 million in revenue for my practice." By summing up that revenue across the remainder of his career, Crawford estimates that repairing his wrist preserved $22.5 million in economic value.

    But why stop there? Crawford extrapolates further, noting that his own patients will in turn gain economic opportunities from Crawford's ability to perform surgery. "[F]or each patient I treat in infancy with an otherwise totally disabling condition, I save society more than $3 million," Crawford estimates.

    "Multiply that by the 1,000 or so patients I operate on each year, and multiply that by 15 years," Crawford writes, "and my future work has a total economic impact of $45 billion."

    As such, he writes, if his surgeon had been paid at an "entrepreneurial scale of 10% of the value he created," his bill for Crawford's surgery would have come to a tidy $4.5 billion.

    Why orthopedic surgeons don't actually make billions of dollars per surgery

    At risk of being too hard on Crawford—who was, at least in part, being deliberately provocative—that's … not how economics works. Still, it's worth exploring why his claim is so off-base, and what it implies for the future of health care spending.

    Perhaps the most fundamental flaw in Crawford's argument (and there are several) is that he conflates the economic value of a good or service with its market value.

    Consider a product that most would argue is even more vital than hand surgery: an ordinary meal. Without a few square meals a day, neither Crawford nor any other orthopedic surgeon would be creating much value. In fact, they'd be dead.

    As such, one might expect that cafeteria workers should earn millions of dollars a year—perhaps billions! They're keeping countless people alive and thus, indirectly, powering the economic engine of the world.

    So why don't they? Well, while the skills required to prepare your lunch create a ton of economic value, they aren't terribly scarce—and as you probably learned in Economics 101, an abundant supply of a good or service tends to depress its price. That's why the market wage for a fast-food cook is about $10.89 per hour.

    (Of course, some argue that free-market capitalism undervalues the critical labor required to keep society functioning. But most who make that argument would choose a different example than orthopedic surgeons, who already earn around $482,000 per year.)

    The skills required to perform hand surgery are, of course, far scarcer than those required to cook hamburgers. But it turns out you don't need to offer a surgeon $4.5 billion, or even $1 billion, to convince them to perform a routine operation. The $1,000 that Crawford paid will do just fine.

    What Twitter had to say

    In Crawford's defense, he conceded in his article that there were "limitations to" his argument, which he said he "ignored … for brevity and simplicity." He added, however, that he "[looked] forward to seeing these points discussed."

    If so, he wasn't disappointed:

    The kernel of truth in Crawford's argument

    So it's fair to say Crawford's argument would raise eyebrows in an economics classroom. But it does illustrate a few critical points about health care pricing.

    First, it shows that—despite how much physicians are paid today—there's still plenty of room for wages to climb. We'll never live in a world where orthopedic surgeons bring home $4.5 billion, but if Crawford (or, more likely, his insurer) were forced to pay 10 or even 100 times the current price tag for his surgery, they probably would have gritted their teeth and done so. This suggests that, if physician shortages worsen or if surgical specialists become harder to find, wages could yet rise significantly.

    Second, Crawford is right to point out that health care, when done right, creates enormous economic and societal value. Every surgically repaired wrist really does make the world a better place, as does every kidney transplanted, every heart attack averted, and every flu shot administered.

    But while Crawford erred in suggesting that surgeons should capture "10% of the value" they create (because, after all, they work in a competitive market that bids down the cost of their labor), there are other areas of health care where competition is limited or nonexistent.

    Most notably, patented drugs receive monopoly protections, intended to encourage innovation, that allow manufacturers to charge whatever price the market will bear—in other words, to act much like Crawford's hypothetical surgeon, claiming 10% or more of their economic value.

    The benefits of these innovative drugs are undeniable, but their price tags are eye-popping. Consider the family with a rare disease that once faced a drug bill for $6 million per year.

    Future innovations could drive even more economic value and, potentially, support even higher price tags. A study by Kevin M. Murphy and Robert H. Topel of the University of Chicago, for instance, estimated that "a 1% reduction in cancer mortality would be worth about $500 billion." A patent-protected drug that conveyed such a mortality reduction could support a truly stratospheric price.

    It's figures like this that lead many economists to believe U.S. health care spending, as high as it already is, could climb much, much higher.

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