Why Everyone’s Wrong About Fixing Health Care

Photo by: Bolshakov

Like most debates in this country, the health care debate has gone into the weeds.  People, regardless of their point of view, spout disingenuous arguments to further their cause.  Critics suggest that simply providing insurance for everyone will make everything “fair,” while their opposition makes arguments for the continuation of a broken system.  While I have a healthy skepticism of the government’s ability to solve most problems, it seems that there are telling factors that suggest that the status quo is not just unsustainable, but catastrophic.

Why Do We Need to Do Anything?

Before we move forward, this is a question many believe remains unanswered.  Why do we presuppose that something is wrong with the American medical system?  The most basic reason is that we spend more money to get worse outcomes.  While there are areas in which we excel, ultimately we spend almost double that of most industrial nations, but our infant mortality rate, for example, is signifcantly worse than almost all other Organization for Economic Cooperation and Development (OECD) member countries.[1]

Additionally the care and cost in America are widely uneven.  Interestingly they go hand in hand.  The Dartmouth Atlas of Health Care studied the issue nationwide and found almost a threefold difference in health care costs and an inverse correlation between costs and outcomes.[2] In other words, the more I’m spending, typically the worse care I’m getting.  All of this suggests that we’re wasting a lot of money, and we need to figure out why.

Perverse Incentives

The fundamental problem in American healthcare boils down to one simple issue: perverse incentives. A perverse incentive is one in which those who are creating the incentives are creating unintended and typcially counterproductive effects.  They are essentially creating their own negative consequences.  As we’ll see almost every component of our system is rife with these types of incentives:

Overconsumption

The opponents to changes in the system constantly raise the “grim” visage of rationed care.  Americans fear loss of control when they look at other countries in which residents have to wait for procedures, even though those countries generally have better health outcomes than does America.  However the flip side to a lack of rationing tends to be overconsumption.

Everyone in the current system has an incentive to allow patients to over-consume medical attention.  Assuming a patient has insurance, it really costs him or her very little out of pocket to get an MRI — even when the doctor may consider it largely unnecessary.  Meanwhile the doctor typically makes money because the patient gets an unnecessary MRI.  The insurance company is likely indifferent as they have already priced their insurance plan assuming this kind of over-consumption.  In the end, we’ve spent considerable money on this MRI and no one’s health is any better.

As the Bear Mountain Bull points out, the structure of many current insurance plans is likely to cause overconsumption.  Because the patient has no “skin in the game,” they opt for procedures that are very unlikely to be useful.  All kinds of diagnostic tests can be taken on the assumption that it’s “better to be safe than sorry,” without taking the cost into account at all.

The Way America Rations

Even as we show such aversion to rationing, America has a different kind of rationing that is far more insidious.  In an extremely perverse incentive, the number of doctors in the United States is decided upon indirectly by the American Medical Association.  That is, current doctors decide how many new doctors there should be.  In the 90′s, despite the oncoming wave of baby boomers reaching old age, the AMA somehow decided that there were going to be a glut of doctors and actually recommended to cut the number of internships available.[3] Much of the current shortage now can be attributed to this decline in the number of doctors.

It is rarely in the best interest of the consumer for the provider of a service to decide how many people should be allowed to provide that service.  Even providers with the best intentions are likely to err on the low side.  That doesn’t even take into account those who may be intentionally self-serving and trying to increase demand for their services.

The Doctor’s Profit Motives

Because America’s system works around a fee-for-service model, doctors have an incentive to do procedures.  They don’t have an incentive to get good outcomes.  As we mentioned above, if your patient wants a procedure, you have no incentive to suggest against it.  In fact, if you can perform the procedure, you have every incentive to provide it.  Additionally if you look at other kinds of cost-cutting measures, doctors have the incentive to resist them.  For example, if you look at the option of having most primary care provided by registered nurses and physicians assistants, studies have found this to be a low cost comparable alternative.[4] Once again however, doctors are expected to be selfless and advocate for this, even though it could very well cost them income.

Long Term Savings

All of these factors suggest that there are ways to realign the incentives of the parties in the system, but it doesn’t look like it can be an incremental change.  The reason such an invasive change is necessary however is the aging population of America and its overall health.  While an overhaul will likely be very costly in the short term, it may save trillions of dollars in the long term if it is implemented rationally.  The spectre that Medicare and Medicaid could be consuming 20% of GDP by 2050 looms over the current situation direly.[5]

The Dangers of Reform

Naturally, when the government is tasked with solving a problem, many of us have an immediate skepticism.  There are very good reasons to be wary of government reform of health care:

The Government Gets To Control Everything

One suggestion that has some resonance with me instinctively is that the provision of government sponsored health care gives the government authority in almost every aspect of your life.  Whether you smoke, drink or are overweight all suddenly becomes the government’s business.  While I have an immediate distaste for this idea, sadly I think the idea of independence of action is a fallacy to begin with.

This is largely a moot point, since we’re already paying for other people to live unhealthy lives; it’s just abstracted.  They simply get emergency care and other kinds of benefits for those who cannot afford their own care.  Also, group plan rates are often increased by the cost of other members in our plan.  In the end, the unhealthy lifestyle of others is already costing me money; I just can’t see it directly.  Thus this argument doesn’t seem to hold that much weight, however there are other more compelling arguments.

No Profit Motive

Once we create a government entity to compete with private companies, it will be dominated by one motive: to grow.  If there is a government program that competes with private insurers, it doesn’t care if it is profitable.  It only cares whether everyone there gets to keep their job and even better if it can get new people in its ranks.  It seems difficult to imagine a government run insurance provider that is competing fairly with private insurers, when they are subsidized by tax payer dollars.  Moreover it has a perverse incentive to keep winning, even if it’s losing money in the process.  This is a dangerous recipe.

Single Payer

As this government bureaucracy grows, you move closer and closer to a single payer system.  While the outcomes of our “free market” approach haven’t been optimal, I feel reluctance towards having the government provide all health care.  Unfortunately many politicians don’t agree.  In fact President Obama has said that if we were starting from scratch he feels a single payer system would be optimal.[6] While our current system seems to argue for some form of government intervention, absolute government control has rarely resulted in good results in the long term.

Subsidy and Regulation

The data seem to suggest that while the American system is broken, the culprits are fairly obvious.  If we can find ways to remove the perverse incentives of the system, it doesn’t seem necessary for the government to take control of all our health care decisions.  At the same time, I think we run the risk of accepting that outcome instead of making the hard choices to build a superior system.  In lieu of deciding to make an exceptional American system, we are flirting with the idea of adopting mediocre ideas from elsewhere.

The two components for reform that seem necessary are subsidy of insurance for those who can’t afford it, whether through tax breaks or direct payments, and regulation changes to break the cycle of perverse incentives.  Moving doctors to salaries, making sure that consumers bear some of the burden for their overconsumption and changing the way internships are allocated seem viable ways to make significant differences without introducing a competing government entity.  In the end however, the status quo seems completely unviable.  Those who don’t want a competing government entity need to start making quality suggestions, instead of simply advocating sticking with the current broken system.

  1. OECD Family Database – Infant Mortality []
  2. Dartmouth Atlas of Health Care – Health Care Spending, Qualty and Outcomes []
  3. USA Today – Medical Miscalcuation Creates Doctor Shortage []
  4. Health Affairs – Use Of Physician Assistants And Nurse Practitioners In Primary Care []
  5. CBO - Health Care and the Budget: Issues and Challenges for Reform []
  6. The New Yorker – The Concilitator []

5 Responses to “Why Everyone’s Wrong About Fixing Health Care”

  1. BMB says:

    As you probably already know Brad, I’d be an advocate of getting insurance somewhat OUT of the picture rather than being a bigger part of it. I have no problem with the idea of catastrophic health insurance, but the overuse (and abuse) of health insurance is part of that ‘perverse incentive’ you mention.

    Let’s have people start paying cash for doctor visits and ordinary procedures again. That would get people to start shopping around, asking prices, and forcing doctors to start competing amongst each other on price. That would be a start to bringing some of our ‘everyday’ health care costs down.

  2. American Medical Association says:

    The AMA continues to advocate for an increase in the physician workforce, especially in light of our quest for health-care reform that covers all Americans. We need to attract the best and brightest to careers in medicine and help practicing physicians continue to provide high quality patient care. To successfully increase the physician workforce to meet America’s long-term needs, the AMA is calling on Congress to lift the current cap on residency positions, create new incentives to get physicians to underserved areas, and enact permanent Medicare physician payment reform. With the growing U.S. population and aging baby boomers, the physician shortage is one our nation cannot ignore if we want adequate access to health care.

    American Medical Association

  3. Brad says:

    @BMB I think that getting people to be involved in making some of the cost/benefit analysis of their treatment is part of the goal of realigning everyone’s interests.

    @AMA Thanks for commenting! I don’t want to give the impression that I’m accusing you of engineering the problem and I do think it’s been recognized by your organization at this point. Nor do I think you don’t act with the best of intentions. However, I always think it’s dangerous to ask a group of service providers to determine how many new service providers would be optimal. The fear of a glut of doctors is going to be more likely to motivate members than the fear of a shortage.

  4. Maria says:

    Hi Brad–

    Interesting article.

    I especially like this suggestion:

    For example, if you look at the option of having most primary care provided by registered nurses and physicians assistants, studies have found this to be a low cost comparable alternative.[4]

    We MUST allow such in our system of healthcare. Let some experts with shorter degree requirements handle the basics–well-woman exams, bp checks, cholesterol checks, physicals, immunizations and so on. Bring the basics to everyone at a basic cost. As BMB says, not everything should be insured.

    I’ve never understood the stats that say other countries have better healthcare. If that is true, why do so many come here for procedures? Canada has large number of patients that come here. UK not so much, but some.

    The mortality rate is also interesting because NO ONE is denied care in the current system. Anyone can go to an ER and receive treatment. So it can’t simply be lack of healthcare that it at issue here. We also have many state programs for women (Pregnant or otherwise) that allows prenatal care. So I’m not certain that the numbers can be blamed on healthcare or access to it.

    I’d like to see more suggestions that lower the cost of healthcare–and less worrying about insuring everyone and pushing a socialistic solution onto the entire country. If people have to take some responsibility for their own lives, it’s also possible that they will do things to improve their lot: exercise? Eat better? stop smoking?

    There are expensive healthcare problems that are a good fit for “insurance.” But not the whole system.

    Our Congress needs to spend more time thinking about BETTER alternatives to what other countries have tried. More time on quality–less time on rushing something through just for the right to say, “we got it through.”

  5. I so agree with brad, I blame this insurance companies for the ridiculous amount quoted by the doctors. not completely against the insurance thing but the system is just taking advantage of the situation. People like me think twice before going to the doctor and think is is really worth going? Never the less health comes first whatsoever and I am glad I have found some good doctors around.

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