Health Care Reform Now
Dear Friends and Colleagues:
I hope that you have spent a relaxing Eastern and Passover Holiday.
Attached you find an interesting article from the Wall Street Journal
entitled "Perverse Incentives in Health Care."
The author claims that in health care delivery mediocrity is the rule
and excellence, where it exists, is distributed randomly. There is no
systematic reward for excellence and no penalty for mediocrity. As a
result, excellence tends to be the result of the energy and enthusiasm
of a few individuals, who usually receive no financial reward for
their efforts.
Due to the fixed price-system (i.e. third-party payors) high-quality,
low-cost care is not financially rewarding. Hospitals and doctors can
make more money providing inefficient, mediocre care(i.,e, volume
based care)
The author correctly states that in health care, contracts and prices
are imposed by large impersonal bureaucracies. The individual
physician has virtually no opportunity to offer a different bundle of
services for a different price. As a result, very little
entrepreneurship is possible.
Bottom line: When doctors and hospitals do not compete on the basis of
price, they do not compete at all.
Where third-party payment is the norm, markets tend to be bureaucratic
and stifling. But in those health-care sectors where third-party
payment is rare or nonexistent, the market is vibrant, entrepreneurial
and competitive.
I agree with the authors observation that many believe (including our
AMA) that health savings accounts (HSAs) will radically reform the
health-care system. Yet this is also a reform that focuses on demand,
not supply. Even with an HSA plan in hand as you approach the doctor's
office, you should know that your insurer has already spelled out what
services will be paid for, which ones will not and how much will be
paid. HSAs, therefore, will not free doctors to take advantage of
telephone, email, computerized records or any other truly innovative
service. Like school vouchers, HSAs create new freedom on the buyer
side without loosening the shackles on those who produce. The reform
is commendable. But real innovation must come from the supply side of
the market.
Why are our patients flogging to in-store clinics, traveling to
Thailand for surgery or are buying prescriptions from Canada? Because
they seek the best price for the care they need. Our health care
system is not market based, but controlled by bureaucrats and
legislators
Meanwhile, organized medicine is still battling every year to avoid
further Medicare cuts instead focusing on comprehensive health care
reform.
Our health care system is on life-support and we are still afraid to
pull the plug. If we don't do it someone will do it for us.
Lets jump-start the market-oriented process, promote entrepreneurship,
instead of stifling it.
Change has to happen NOW!!!
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Perverse Incentives in Health Care
By JOHN C. GOODMAN
Wall Street Journal April 5, 2007; Page A13
Our public-school system and our health-care system may seem as
different as night and day. Yet both systems share something in
common: Mediocrity is the rule and excellence, where it exists, is
distributed randomly.
In both cases the reason is the same. There is no systematic reward
for excellence and no penalty for mediocrity. As a result, excellence
tends to be the result of the energy and enthusiasm of a few
individuals, who usually receive no financial reward for their
efforts.
Research by John Wennberg and his colleagues at Dartmouth Medical
School suggest that if everyone in America went to the Mayo Clinic,
our annual health-care bill would be 25% lower (more than $500
billion!), and the average quality of care would improve. If everyone
got care at Intermountain Healthcare in Salt Lake City, our
health-care costs would be lowered by one-third.
Of course, not everyone can get treatment at Mayo or Intermountain.
But why are these examples of efficient, high-quality care not being
replicated all across the country? The answer is that high-quality,
low-cost care is not financially rewarding. Indeed, the opposite is
true. Hospitals and doctors can make more money providing inefficient,
mediocre care.
In a normal market, entrepreneurs in search of profit would solve this
problem by repackaging and repricing their services in order to make
customer-pleasing adjustments. Yet in health care, contracts and
prices are imposed by large impersonal bureaucracies. The individual
physician has virtually no opportunity to offer a different bundle of
services for a different price. As a result, very little
entrepreneurship is possible.
Sometime in the early 20th century, lawyers, accountants and most
other professionals discovered that the telephone was a useful
instrument for communicating with clients. Yet even today,
consultations with doctors by telephone are quite rare. Sometime in
the late 20th century most other professionals discovered email. Yet
only 21% of patients exchange email with their physicians; of these,
slightly more than 2% do so on a frequent basis.
One would be hard-pressed to find a lawyer in the U.S. today who does
not keep client records electronically. Ditto for accountants,
architects, engineers and virtually every other profession. Yet
although the computer is ubiquitous and studies show that electronic
medical record systems have the capacity to improve quality and
greatly reduce medical errors, no more than one in five physicians or
one in four hospitals have such systems.
Why has the practice of medicine (as opposed to the science of
medicine) changed so little in the modern era? The reason is because
of the way we pay for medical care, particularly the way we pay
doctors. At last count, there were about 7,500 specific tasks Medicare
pays for. Telephone consultations are not among them. Nor are email
consultations or electronic record keeping. What is true of Medicare
is also true of Blue Cross and most employer plans.
Things are made worse by the fact that patients do not usually pay for
health care with money; they typically pay with their time instead. As
in Canada and most other developed countries, health care in the U.S.
is mainly rationed by waiting, not by price.
When the doctor's time is rationed by waiting, the primary care
physician's practice is usually fully booked, unless the practice is
new or located in a rural area. As a result, there is very little
incentive to compete for patients the way other professionals compete
for clients. Because time -- not money -- is the currency we use to
pay for care, the physician does not benefit very much from
patient-pleasing improvements and is not harmed very much by an
increase in patient irritations. Bottom line: When doctors and
hospitals do not compete on the basis of price, they do not compete at
all.
Where third-party payment is the norm, markets tend to be bureaucratic
and stifling. But in those health-care sectors where third-party
payment is rare or nonexistent, the market is vibrant, entrepreneurial
and competitive.
Take cosmetic and Lasik surgery, for example. In both markets,
patients pay with their own money. They also have no trouble finding
what is virtually impossible to find for other types of surgery -- a
package price covering all aspects of the procedure. People can
compare prices, and in some cases quality. Providers are competing on
price and quality and competition pays off. Over the past decade and a
half, the number of cosmetic procedures grew sixfold along with
numerous technological innovations of the type that are blamed for
rising costs everywhere else in health care. Yet despite tremendous
growth and technological change, the real price of cosmetic surgery
declined. Over the past decade the real price of Lasik surgery fell by
30%.
The market for prescription drugs is another area where a great many
people are paying out of pocket. In response, Rx.com was the first
online outlet that began competing based on price and quality (they
make fewer mistakes than local pharmacies). Wal-Mart's new policy of
offering a month's supply of generic drugs is yet another example. Can
anybody imagine Wal-Mart offering the same deal to Blue Cross?
Perhaps the most spectacular instance of a health-care product
developing outside the third-party payment system is the walk-in
clinic. These can be found in shopping malls and drug stores in the
upper Midwest and they are spreading like wildfire around the country.
They post prices. There is very little waiting. They maintain records
electronically. The quality of service is comparable to traditional
primary care at half the cost.
I know what you're probably thinking. Markets may work for certain
specialized services; but can they work for run-of-the-mill hospital
surgery? Medical tourism is proving that the answer is yes. If you're
willing to leave the country you too can have access to efficient,
high-quality health care. In India, Thailand and elsewhere around the
world, facilities are offering U.S. citizens virtually every kind of
procedure for package prices, covering all the costs of treatment, and
sometimes airfare and lodging as well. These prices are often
one-fifth to one-third the cost in the U.S. and care is often
delivered in high-quality facilities that have electronic medical
records and meet American accreditation standards.
One part of our health-care system (the part where third parties are
absent) is teeming and bristling with entrepreneurship and innovation.
In the other part (where third parties pay the bills),
entrepreneurship has been all but extinguished. How can we make the
latter more like the former?
Public and private efforts to reform the health-care system have been
actively underway for the past two decades. The results have been
disappointing, to say the least, and they all have one thing in
common: They focus on the demand side of the medical marketplace.
Managed care, practice guidelines, pay-for-performance -- each of
these short-lived fads involves buyers of care telling the providers
how to practice medicine. Does no one notice how strange this is? In
normal markets, buyers do not instruct sellers on how to efficiently
produce their products. Even the HMO movement is a demand-side reform
in this context. The HMO doctor is just as trapped as the
fee-for-service physician and just as unable to rebundle and reprice
his services in innovative ways.
Some believe that health savings accounts (HSAs) will radically reform
the health-care system. Yet this is also a reform that focuses on
demand, not supply. Even with an HSA plan in hand as you approach the
doctor's office, you should know that your insurer has already spelled
out what services will be paid for, which ones will not and how much
will be paid. HSAs, therefore, will not free doctors to take advantage
of telephone, email, computerized records or any other truly
innovative service. Like school vouchers, HSAs create new freedom on
the buyer side without loosening the shackles on those who produce.
The reform is commendable. But real innovation must come from the
supply side of the market.
One would think that health insurers and employers would find it in
their self interest to break the mold. To the extent that
entrepreneurs raise quality and lower price, the insurance product
itself should become more attractive to potential customers. The
trouble is that the entire third-party payment system is completely
dominated by government (principally through Medicare and Medicaid).
Private insurers tend to pay the way the government pays and providers
who break Medicare rules in order to better serve the patient risk
being barred from the entire Medicare program.
A possible way out of this morass is to start with government. Under
the current system, Medicare and Medicaid stifle entrepreneurial
activity and financially punish efforts to lower costs or improve
quality. Why can't these agencies reward improvements instead? Suppose
an entrepreneur offered to replicate the Mayo Clinic in other parts of
the country -- potentially saving Medicare 25% of costs and improving
quality of care along the way. Medicare should be willing to pay, say,
12.5% more than its standard rates in order to achieve twice that
amount in lower total costs. That would leave the entrepreneur with a
12.5% profit -- an amount that one would hope would encourage other
entrepreneurs to enter the market with even better ideas.
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