Saturday, February 23, 2008

Serving Medical Customers

HHS Secretary (former Utah Governor) Mike Leavitt says that the best hope we have for keeping medical costs under control is to give patients enough information to form a solid basis for medical decisions (see SL-Trib article). Leavitt says that putting healthcare provider data into the hands of the people would foster healthy competition and lower costs.

Leavitt is certainly correct on that point, but his solution won’t achieve the desired results. I applaud efforts such as the database discussed in the article. Information like that certainly can’t hurt. But this kind of effort alone is insufficient because it does not overcome the system’s basic problem.

One of the primary rules of economics is that suppliers do their best to supply what buyers actually demand. Who are the real buyers of medical services? Not you. Unless you pay for everything yourself or have only catastrophic insurance, you are not the buyer.

Your co-pay or deductible do not make you the buyer. They make you a minor partner to the buyer. They inform your decisions about buying health insurance. But they do not make you the buyer of the medical services you consume. The real buyers — the real power entities in purchasing medical services —are the government (via Medicare) and insurance companies.

Since suppliers provide what buyers demand, let’s ask ourselves what the real buyers of medical services demand. Do they demand the best possible medical outcome for each patient? Nope. It’s not possible for them to do that. So they design systems that aspire to that lofty goal. These systems seek to demand proof that proper procedures are being followed and tightly control what procedures will be covered.

Of course, to administer these systems, the government and insurers spawn massive bureaucracies of paper pushers. Medical practitioners actually serve their buyers quite well, supplying the desired paperwork. They report procedures that will bring payment. As I mentioned in this post, as long as the paperwork shows that proper procedures were followed, the actual medical outcome for the individual patient is not a priority. Since the patients are not the buyers, they are in no position to demand satisfaction.

Electronic Health Records (EHRs) have been touted as a way to improve the medical system. But it turns out that EHRs do not improve actual medical outcomes (see here). This is because they are only a more efficient way of pushing paper around through the bureaucracy. They are designed primarily for the government and the insurance companies rather than for patients.

Likewise, the push to achieve universal health insurance for everyone will not improve matters. That simply removes all patients from the buyer position. That’s why studies have found that health insurance increases access but does not positively impact actual medical outcomes.

Medicare is planning to refuse to pay hospitals for a handful of common medical errors (see here). Private insurers will likely follow suit. This will help hospitals refrain from specific counterproductive activities. It should be helpful, but it will produce unintended side effects as well. It will still not overcome the basic problem of medical service consumers not being the buyers of those services.

If you think that the database Leavitt touts will significantly improve matters, consider how things work today. After my Dad had a stroke, his cardiologist said that he needed to implant a defibrillator device in Dad’s chest. He talked to us about it and gave us some information. But with all of the information, we really had nothing upon which to base a decision. Not only did we not really know how necessary it was and what others’ experiences with the device were, we had absolutely no cost information provided, other than, “Medicare will cover it.”

A few weeks after the procedure, the itemized bills came in. We looked over the multitudinous individual charges, often stunned at the prices attached to each item. But the end price for everything — the device, the surgeon, the operating room, the anesthesiologist, nursing care, etc. — was eye popping. But my parents paid only a tiny portion of the whole bill. Medicare and insurance picked up the rest. The fact is that you never spend someone else’s money as efficiently as you spend your own.

If we knew then what we know now, Dad would have opted to skip the device. It turns out that these things are installed mostly to help practitioners avoid lawsuits claiming that they didn’t do everything possible. If anyone had said up front that the device installation would cost the amount it did, Dad might still have opted to have it done, because the money wasn’t coming out of his pocket. So, even if Leavitt’s database had been available, it probably would have made little difference. Besides, the doctor made it sound so necessary. On the other hand, if Dad was self-insured, he likely would have foregone the device.

Health insurance and Medicare were instituted to solve the problem of people being underserved. Most health insurance plans were once catastrophic insurance only. But public health officials and practitioners worried that too many people were avoiding preventative and routine care, waiting until situations became critical. Thus, the push to increasingly cover everything, including treatments that most people once paid for out of their own pockets.

This pattern has increased access, but it has not improved medical outcomes. And costs have skyrocketed. What we have today is a top-down system that dictates to us how much and what kind of medical services we should use. We do not have a dynamic, innovative patient-driven system that produces improvements while reducing costs — because patients are not in the driver’s seat. The bureaucrats are.

The only way we are going to solve today’s health care crisis is to turn patients back into actual buyers of medical services. This is heresy to the universal coverage crowd. But good public health and free medical markets are not mutually exclusive, as many assume. It is amazing what people will come up with when you give them liberty.


Cameron said...

How can individuals afford to be the buyers when costs are so high? How could your father have afforded any of the procedures done during his illness if he hadn't had insurance?

Also, doesn't ensuring that proper procedures are followed in medical care in turn ensure that the outcomes are the most desirable?

Scott Hinrichs said...

My father could have afforded all of the procedures he had. But it would have significantly reduced his retirement savings.

The problem we have today is the inefficiencies caused by a socialized system. No individual could afford a computer in 1972. Within a decade, however, computers had become far more complex, far smaller, and far less expensive because a competitive market existed. Many Americans bought computers for the first time in that time period. Since then, computers have become increasingly complex, smaller, and energy efficient, while simultaneously becoming more affordable.

There is no reason that medical care cannot work the same way. If we had socialized the computing industry, we'd still be stuck with billion-dollar clunky mainframes that could only do a handful of things well. If you want innovation and increasing cost effectiveness, you've got to free people from the socialized shackles that hold them down.