Everyone seems to agree that the health care system requires reform, although many differ in both the method and merits of that reform. Michigan is being touted as a “model for health care reform," focusing on information sharing and preventative health--two things they claim have reduced costs and improved health care. These two things are undoubtedly important and should be pursued, but do they amount to a panacea for our failing system? I think not. Rather, the search should begin with a thorough audit of the incentives that the current system creates for doctors, insurance companies, and individuals. It is understood within economics that “people respond to incentives” and the health care system is no exception.
Massachusetts is on board. They have the lowest uninsured rate in the country—2.6 percent compared to 15 percent nationally. But their system is failing due to the high cost of near universal coverage. The solution, as they see it, is to radically change the way that doctors and hospitals are paid. According to their system, Doctors would receive a flat fee for each patient on their rolls rather than a system that pays more for doing more.
Being paid more for doing more, that sounds better than the alternative doesn't it? And won’t a flat fee convince hospitals or doctors to drop their most expensive patients or not recommend pricey but potentially life saving treatments? On the surface, the answer to both of these questions is yes, but a more thorough examination could shed some light.
If doctor’s salaries are dependent on the number of visits, lab tests, and procedures they recommend, then it follows that they might over prescribe these things, especially if they don’t perceive it as harmful. Doctors say that our increasingly litigious society has made it financially dangerous to pass up any treatment that has a chance for success. On the other hand, we certainly don’t want doctors to under-prescribe. The problem, aside from the inordinate threat of law suits, is developing a system of incentives that induces doctors to prescribe only when it is beneficial to the patient.
What would be an efficient level of treatment? One way to tackle the problem is to imagine a simplified system. Imagine you are both the patient and the doctor, forced to balance the personal costs of treatments against the personal benefits of those treatments. We would expect that when the benefits outweigh the costs, the treatment is good and should be undertaken. In the real world, this is not the case. Patients do not directly perceive the full cost of treatments, and are not typically knowledgeable enough about medical issues to decide what is best for them without the help of a medical professional. So, if patients "see" the full costs of treatment and doctors only advised treatment they themselves would undergo, we would be much closer to an efficient level of treatment.
The most important thing to a patient undergoing treatment is, "will it work?" Will the treatment be successful? In that case, a good starting point would be to tie doctors profits to how successful their treatments are. Though in my view this should be only one component of their pay. A “pay-for-performance system” alone conjures thoughts of the used car lot, or in my case, the constant prying of a Guitar Center employee (I worked there for a short time). Nonetheless, there are obvious benefits to this approach. Namely, if altruism fails, doctors still care about the outcome of their patients. This approach, along with the one endorsed by Massachusetts to pay doctors based on their number of patients, seems ideal, at least given the current structure of the industry. Of course, a more thorough analysis could yield additional perverse incentives that were not part of the original system. My point is that this kind of analysis should be at the forefront of the argument. It should be a guiding light for policy makers, or better yet the economists that advise them.
The great thing about this type of exercise is that it doesn't require a PhD in Economics, or any other expertise for that matter. Anyone can do it, and perhaps more people should. As far as health care goes, I don't have any real answers (just in case you thought otherwise). But I can say with certainty that if the reforms that are put in place don't cater to the incentives they create, then we are administering the equivalent of a placebo for a truly sick patient.
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