When Market Incentives Lead to Bad Outcomes

By James Kwak

A couple of weeks ago, I wrote a post about Atul Gawande’s New Yorker article about health care spending and outcomes. I didn’t claim to have any particular insight about health care economics; I just thought that people should read his article – which, to summarize greatly, argues that there is no correlation between high spending and good outcomes, because the current system does not motivate doctors to seek good outcomes. (Apparently Barack Obama agreed, since the Times reported that “the article became required reading in the White House.”)

That post got a lot of interest, so here is a follow-up.

A lot of the data on regional variations in spending and outcomes come from the Dartmouth Atlas of Health Care, whose findings are summarized in the first paragraph of Jonathan Skinner’s Economix post:

For the last three decades, John Wennberg and his Dartmouth colleagues have documented regional variation in Medicare spending and a puzzling lack of association between spending and better health outcomes. Regions that spend more on medical care don’t necessarily have sicker people, and they don’t get better results. It isn’t clear what benefit they are receiving for all the money they’re spending.

Skinner’s post cites and then responds to criticisms mentioned in the aforementioned Times article and in a Wall Street Journal editorial. The most direct criticism, it seems to me, is that the Dartmouth study does not control for the sickness of populations; however, as Skinner says, studies that do control for population differences still find major spending gaps. In Economix Wednesday, David Leonhardt provides an overview of this debate.

Finally, Leonhardt’s column Wednesday addresses the political flavor of the same issue: rationing. His position is summed up here:

Milton Friedman’s beloved line is a good way to frame the issue: There is no such thing as a free lunch. The choice isn’t between rationing and not rationing. It’s between rationing well and rationing badly. Given that the United States devotes far more of its economy to health care than other rich countries, and gets worse results by many measures, it’s hard to argue that we are now rationing very rationally.

Leonhardt argues that the current health care “system” implements three kinds of rationing. First, businesses faced with higher health care costs compensate by reducing wage growth (to zero, in some cases) – so expensive health care comes at the cost of everything else. Second, higher health costs mean that many businesses do not provide health insurance; the rationing here is that some people get semi-comprehensive health care, and some don’t. Third, the current economic incentives lead doctors to provide some types of care (expensive procedures) at the expense of other types of care (spending time with patients, preventive medicine), even though the latter may be more important than the former; here, rationing is preventing access to some forms of care.

With financial reform watered down to “minor technocratic tweaks” (although I hold out some hope for the Financial Product Safety Commission, or whatever it will be called), the established health care interests must be encouraged.

Comments

[John Lounsbury]

James - - -

Very good summary and review.

Outcome based compensation for doctors, instead of procedure based compensation, also has some potential pitfalls, and can lead to a different kind of rationing. The incentives for patient selection favor the "easy cases" and patients with difficult situations may have more trouble getting care, because the doctor's compensation may be relatively much lower.

There is no magic formula that does not involve the patient taking ownership of his/her own situation. I will repeat what I have said elsewhere previously.

Whatever the health care system, the only way to assure you get the best care is to do your own research, be proactive with your doctor, question and investigate everything you are told and be your own case manager. If a person is not able to do this, then they need a surrogate, preferably a family member.

A workable system is one that has the patient with a stake in all aspects of care: diagnosis, treatment and costs.

Some people are intellectually, emotionally or physically incapable of doing this. But many who are capable are abrogating their responsiblility. Until we have a system that enables and provides incentives for patients to assume these responsibilities, and makes patients responsible for cost management of their own health care, we will not have a system that is efficient and effective.

Utopian view? I don't think so. Why shouldn't your health be a priority responsibility for you?

2009 Jun 19 11:05 AM

[The Khan]

Problem is that those with the brains (or the time) to do their homework get all the benefits. Those without don't. The point of a specialized society is that it has specialists. Do you think to investigate the techniques used in making the chunk of cheddar you buy in the supermarket? No, you implicitly assume the cheesemakers are on top of their job. I pay a lot more for healthcare than I pay for cheese....why should I not be able to assume the providers know what they are doing?

Unfortunately I can't. So, the cheesemakers are on top of their job, the docs aren't. What does that suggest?

The docs are crap, is what it suggests. Whatever the reason, they are crap. After spending 25 years working in the system, I can confidently assert that the logical deduction (they are crap) is frequently true. There's your starting point. How do you fix the quality of a system when the work is done by people who are not capable of doing it well? Throwing money at it doesn't help.


On Jun 19 11:05 AM John Lounsbury wrote:

> James - - -
>
> Very good summary and review.
>
> Outcome based compensation for doctors, instead of procedure based
> compensation, also has some potential pitfalls, and can lead to a
> different kind of rationing. The incentives for patient selection
> favor the "easy cases" and patients with difficult situations may
> have more trouble getting care, because the doctor's compensation
> may be relatively much lower.
>
> There is no magic formula that does not involve the patient taking
> ownership of his/her own situation. I will repeat what I have said
> elsewhere previously.
>
> Whatever the health care system, the only way to assure you get the
> best care is to do your own research, be proactive with your doctor,
> question and investigate everything you are told and be your own
> case manager. If a person is not able to do this, then they need
> a surrogate, preferably a family member.
>
> A workable system is one that has the patient with a stake in all
> aspects of care: diagnosis, treatment and costs.
>
> Some people are intellectually, emotionally or physically incapable
> of doing this. But many who are capable are abrogating their responsiblility.
> Until we have a system that enables and provides incentives for patients
> to assume these responsibilities, and makes patients responsible
> for cost management of their own health care, we will not have a
> system that is efficient and effective.
>
> Utopian view? I don't think so. Why shouldn't your health be a priority
> responsibility for you?

2009 Jun 19 11:23 AM

[TinyTim]

James-
Thanks for the summary and links.

Since most everyone on Medicare is over 62, analysis of this plentiful data may not be as useful or unbiased as reputed. Especially if it based on results.

Healthcare reform may be one of the most complex issues around and with significant long term fiscal ramifications. All interested parties seem to be intensely polarized. Some of them are sure to get scalped if any significant changes come to pass.

One aspect that interests me was brought up by McCain in the last election. This was why is health insurance tied to employment? This is a remnant of WWII price controls, but anyone who has it can't imagine any other way. Employers complain weekly about the costs and use it to reduce wages even as they receive tax benefits, but I wonder if they realize how many of their employees are only there because of those benefits.

It will be a challenge to resolve the dichotomy between the US superiority in high tech medical procedures and pharmacology, and the need for basic and preventive care for people without insurance.

2009 Jun 19 03:31 PM

[dcb]

As a physician I can tell you that the solution is very easy. Just like financial reform established interests have paid too much to have any effective reform.

In short summary you need regulated monopolies (total of about 4) that take care of patients needs as both insurance and care providers. they can't refuse anyone, there are different levels of care, and outcome data of each company is published on a regular basis. this is the model of the integrated health systems the article state work well. they compete with each other on a national level.

2009 Jun 21 10:46 AM