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.