Markets without Real Prices: How the Left Proposes to Control Health Care Costs

Doctors are the only professionals in our society who are not free to repackage and reprice their services. If demand changes, if technology changes, if new information becomes available, every other professional is free to offer a different bundle of services to the market and charge a different price. It is precisely this freedom that leads accountants, lawyers, engineers, architects — and, yes, even economists — to compete for customers based on price and quality.

In medicine, by contrast, no one ever sees a real price for anything. No patient. No doctor. No employee. No employer. Providers are paid based on rates negotiated in advance. And there can be a different payment rate for every third-party payer. Patients rarely see these rates. But even if they did see them, they are inconsequential to behavior, since the patient isn’t paying them anyway. Doctors, therefore, do not compete for patients based on price. And since they are not competing on price, they do not compete on quality either.

Everyone is left with perverse incentives. The patients’ incentive is to overuse and misuse the system, since they mainly pay for care with time and not money. The providers’ incentive is to maximize against the third party payment formulas. When everyone acts on these incentives, they do things that make costs higher, quality lower and access more difficult than would otherwise be the case.

So what can be done? Enter Zeke Emanuel, Don Berwick, Andy Stern, Uwe Reinhardt, Tom Daschle and other names you might recognize to offer the best thinking two dozen like-minded people the left can come up with in the latest issue of the New England Journal of Medicine (NEJM). Their answer: double down and give us more of the same. That is, doctors would be even less free to compete for patients based on price and quality, patients would be even less likely to ever face a real price for any service, and perverse incentives would become even more perverse than they are now.

The two most important proposals are: (1) market-wide negotiation leading to all-payer fees (every third party pays the same) and (2) a “global budget” cap on the rate at which these fees can increase over time.

A point that is almost never mentioned in these discussions (except by yours truly) is that whenever a price is negotiated you are in the same act predetermining a largely inflexible bundle of services. A physician encounter with a patient, for example, almost always means a face-to-face meeting in the doctor’s office. Suppose the doctor later discovers it is more convenient, cheaper and better to meet in some other way — say by phone, or e-mail, or text messaging, or Skype, or some other form of telemedicine? That’s too bad. Those items weren’t on the original negotiated list.

Anytime you pay any professional according to a list of tasks, about the only work you are ever going to get is work listed on the fee schedule. Anything you leave off is unlikely to ever get done, unless you are dealing with a professional who is willing to devote a lot of time to non-billable activities.

Just to give one example, Dr. Jeffrey Brenner in Camden, New Jersey, is saving millions of dollars for Medicare and Medicaid, keeping potentially high-spending patients relatively healthy largely through social work activities. But since most “social work” activities aren’t on the list of 7,500 tasks Medicare pays doctors to do, Brenner gets very little payment from the government in return. That’s why there aren’t very many Brenners around. If instead of handing Brenner a fee schedule, the government agreed to pay Brenner, say, 20% of every dollar he saves the system, there would be Brenner lookalikes all over the country.

Rather than following my advice (no, they didn’t invite me to participate), the NEJM crowd would make things even worse. By making the negotiations market-wide and by using them as the basis for controlling costs, the proposal virtually guarantees that no provider is going to experiment, innovate and try to find alternative ways of lowering costs, raising quality and improving access to care. And since the only people who are even remotely capable of doing these things are the providers themselves, this approach is doomed to fail before it’s even tried.

Parenthetically, I have never understood the obsession on the left with suppressing doctor fees. Arbitrary limits on provider fees are an attempt to shift costs from patients and taxpayers to doctors and other providers. But, as every economist knows, shifting costs is not the same thing as controlling costs. Even if the effort were successful, real costs would not be lower and the system would not be more efficient as a result. A better way of achieving the same result would be to tax doctor incomes and use the proceeds to subsidize health insurance premiums. That would achieve the same redistribution without creating even more distortions than are already there.

Trying to control costs by squeezing doctors’ fees over time will put even more pressure on them to maximize against payment formulas in every way they can. They will reduce the time they spend with each patient, reduce optional services, avoid seeing sicker, harder-to-treat patients, underprovide to sicker patients, etc. It is worth noting that in Canada — which largely follows the NEJM prescription — patients see primary care doctors more than Americans do, but they get fewer services. Indeed, uninsured Americans get as many or more screenings (mammograms, Pap smear tests, PSA tests, colonoscopies, etc.) as insured Canadians do! This method of controlling costs also virtually guarantees that the amenities surrounding care will diminish and rationing by waiting will become more pronounced over time.

There’s more. The authors propose to use economic carrots and sticks to try to tell doctors how to practice medicine. They endorse bundled payments — with the bundling being done not by doctors who have the most information, knowledge and experience, but by the third-party payer bureaucracies, whose primary interest will always be to provide less, not more. They also endorse pay-for-performance and incentives to practice evidence-based medicine — even going so far as to endorse Peter Orszag’s proposal to give doctors a safe harbor against malpractice lawsuits if they practice medicine in that way.

Three successive Congressional Budget Office studies have found that bundling, pay-for-performance and similar techniques are not working in the federal government’s demonstration and pilot programs. But the two dozen best left-of-center minds in all of health policy are not deterred. Ignoring the conventional definition of insanity, they want us to keep doing everything we have been doing and hope for a different result. Silly as this sounds, there is a logical reason for it. Once you have decided that patients and doctors should never face real prices, there just really isn’t anything else you can do.

What will we be left with? Cookbook medicine. Tell doctors that if they follow a protocol no one can sue them and odds are most of them will follow the protocol. Yet this is the opposite of the individualized medicine that patients are going to want — at least some of the time. I was in a MinuteClinic the other day and for the first 15 minutes of my 20 minute visit the nurse never looked at me. She was facing a computer screen, typing in my answers to her questions and following a computerized protocol. I didn’t mind. My problem was relatively minor, and I did not want to pay for a more sophisticated level of care.

But suppose you have a serious medical problem. Then you’d better hope your case is “average.” If you are several standard deviations away from the mean, you could be in serious trouble.

So what should we do? I wish someone would send all two dozen left-of-center health policy wonks a copy of my new book, Priceless. As the title implies, our health care system is priceless. So are the NEJM proposals. And that’s not a compliment.

SOURCE: John Goodman’s Health Policy Blog
