Nobel Prize-winning economist Vernon Smith explains in simple language the underlying problem in our healthcare system:
The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party—the insurance company or the government—is paying A for it.
This structure defines an incentive nightmare. You do not have to be an economist to realize that, when phrased in this way, nobody knows how to solve this problem.
As I think I’ve mentioned before, back when I was taking economics I don’t believe I heard the word “incentives”, at least in the sense of structural incentives, once. I heard “taxes” and “subsidies” pretty frequently, though.
From what I’ve been seeing lately that view seems to be coming back into vogue. The problems with our healthcare system are structural; they won’t be solved by putting additional money into the system (every single bill healthcare reform bill making its way through the Congress increases the money in the system) or by expanding coverage, desireable as that might be. We need to change the incentives and that will require radical structural reform which will undoubtedly be opposed by practically everybody since most of the American people think that the current system is working just fine. Unfortunately, the current system is fiscally unsustainable which means that reform there will be.
The approach I’ve preferred would be to increase the amount of healthcare substantially. In proposing this I’ve assumed that alleviating the supply bottleneck would cause suppliers to compete with one another and force prices down. Another alternative would be along somewhat opposite lines: extend the licensing system and require that specialists be salaried employees of hospitals, much as things are in the United Kingdom or France. A third possibility would be to employ a capitation system as is the case in Italy.
With the battle lines drawn between those who oppose healthcare reform per se and those for whom healthcare reform means paying more money to insure more people, it’s hard to see any path by which reform that will change the incentives can happen. And incentives matter.
I think that there is substantial evidence that your theory of increasing supply will actually increase costs initially. As you point out, the physician and patient have significant asymmetry in this financial relationship. If there are more providers, ie, fewer patients per doc, they can recommend more tests, studies and procedures per patient. There have been studies done on this already, but if you just look at places with the highest physician to patient ratios, cities, you see that medicine is more expensive in those areas. In short, medicine can create its own demand. Thirty years ago few people had heard of reflux, now everyone is on some sort of anti-reflux medicine. At some point your assumption is undoubtedly correct, but can we afford the expense of reaching that point?
Your second and third choices are more likely to work, but are less politically acceptable. Here is a way to think about it. We need to reduce the absolute number of procedures AND we need to reduce the cost per procedure. Market principles may be useful in reducing the cost per procedure. Certainly making costs transparent makes sense. A large scale trial of HSAs would be worth a try. At present we have a theory that they might work, but no proof.
Reducing the absolute number of procedures and the cost will require better cost effectiveness AND outcomes research. There are all too many me too drugs. The device makers come out with new implants every year that offer minimal improvements, but keep up costs. We need to get everyone to practice as though they are working at the Mayo Clinic even if they are doing fee for service work.
Lastly, we need to give whatever insurance entities we have political cover for their products. We should allow private and public insurance entities to not have to pay for therapies that cost over X number of dollars per Y time of extending life. Those who can afford to and want to may buy more expensive coverage.
Steve
When I say “increase the supply of healthcare”, I don’t just mean increasing the number of docs although I think that would likely be part of the picture. I mean changing the work rules governing medicine, provide for increased telemedicine, automate some of the things that are being done by docs and in labs now, and a host of other reforms. Note that I wouldn’t claim that some of those things wouldn’t have adverse effects.
I think there’s always going to be a need for surgeons and GP’s. I think that radiologists and pathologists are something different entirely.
Smith’s definitely right, although it needs to pointed out that third-party payer C is not a passive provider – they negotiate with A and B to certain degrees to hammer out the terms of the trade in their favor.
There’s no real way to change it. Medical insurance rose out of the market because of the demand for it in the first place, so unless you ban it it will be there in some form or another, even if it is only limited to a certain group of individuals via income or other qualities. You’re probably never going to reach a point where most of the population B can negotiate directly with A for prices and payment, simply because many treatments cost far more than most individuals in population B will ever earn, and A will always have a massive information advantage on their side (simply because B needs them just to know what their problems are).
This is a good idea, but tricky. For one thing, how do you change the incentives in the system so that these things are adopted? Having more doctors and medical providers is nice, but there’s several chokepoints on any increase in supply.
Capitation has its own set of side-effects, good or bad. I think it can be good for specialists working in a larger setting (like a hospital or major clinic) in terms of keeping costs down, but it’s much trickier with GPs – while they have an incentive to keep you healthy, they also have an incentive to do as little as possible for you.
After the PR debacle in the 1980’s the insurance companies have very little incentive to negotiate prices down. Remember: healthcare insurance company earning are essentially proportional to payouts. They make about 3% over payouts. The higher the payouts, the higher their revenues.