Healthcare
Econ
101

January 10, 2018 -- It is well understood that our health care system is expensive and dysfunctional. We pay too much and, in terms of outcomes, get too little, especially by comparison to other countries. Why? Here are a few of the basic economic principles at work in our health care system.

Principle #1: Follow the money. Financial rewards are the primary motivator -- indeed the raison d'être -- of every business, and in the United States health care is a business. But here is the problem, as stated in the Journal of the American Medical Association (JAMA) in 2003: "The United States alone [among wealthy countries] treats health care as a commodity to be distributed according to the ability to pay rather than a social service to be distributed according to medical need."

Principle #2: Regulate. I am as much a capitalist as the next guy and am clear that business is what makes our high standard of living, but it must be regulated. Well regulated. Such regulation must enforce basic human rights including the right to health care. Leaving people without health care, medical bankruptcies, exclusion for pre-existing conditions and so on, are travesties and should not be permitted.

Principle #3: Payment models matter. In an ideal system, providers are rewarded for outcomes. There are some incentives for this in the Affordable Care Act (ACA) and in Medicare including patient satisfaction surveys that have been made a factor in hospital reimbursement by government. However, the predominant models are driven neither by outcomes nor by quality.

Principle #4: What is rewarded increases.

  • A traditional model is fee-for-service. The result is, of course, more service. (This was discussed in my blog post Doctors as Businessmen.)
  • Another common model is capitation -- a provider network is reimbursed a fixed amount for each patient. So the result is more patients. In capitation models, the scramble is for market share.
In any model, the physician says, when the patient is in front of me, he is the most important person. After he leaves, the most important person is the payer.

The intersection of healthcare and economics, alas, will always be an uneasy one.

Cartoon by Charles Keller (Dan's Dad)

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