I recently had a conversation about rising health care costs with my businessman father. I suspect it typifies how many people think about health care costs and health care markets.
"It's an easy solution that will be difficult to implement," dad said. "We've got to cut labor costs. It's the only way to reduce costs in any business."
It makes sense, doesn't it? Just ratchet down labor costs and we're done. It's the argument I've heard advanced (by dad and some of my older relatives) to oppose minimum wage laws or to oppose unions. If we could just get workers to accept lower wages, we could cure all the evils of commerce practically overnight. Pesky, recalcitrant workers!
How, I asked myself, do I explain health and health care to him? The information asymmetries; the third-party (insurance) payment that insulates purchasers from prices and prices from accurately reflecting resource costs; the agency problems; the pharmaceutical industry that capitalizes on taxpayer financed research and retains the apparently unfailing profits for itself; the other large, wealthy interest groups that work daily to undermine any effort to rein in health care costs...how, I thought, do I make this sector understandable to him?
"Dad," I said, "imagine that you're in a business where the more you sell, the more money you make. Only imagine that you're in a business where the customer believes that you know way more about what she needs than she does. In fact, you do know more than she does. She comes to you and asks your opinion about what you should sell her and what she should buy. And she trusts you to recommend only what she needs, that you will not be influenced by any conflicting incentives you might have to make more money or publish more papers or bring in more research grants.
"Gee, Maxine, that's not much different from my own business. What's your point?" said dad.
"OK. Let's talk about the differences between your business and health care," I said. "Your customers are usually not feeling fear or desperation about their symptoms or their need to make a purchase. In addition, your customers can comparison shop on quality and price all over town and the internet. If you were a physician or hospital selling medical treatment, your patient won't be able to comparison shop because it's nearly impossible to find out what different providers charge for the same procedure. There's another difference, too. If she's insured, she'll pay out of pocket only a fraction of whatever you charge her. The combination of ignorance about price, quality, and whether or not something is even marginally beneficial to her combined with desperation and someone else picking up most of the tab is a potent demand enhancement mechanism. In the absence of a fee schedule or strong market or moral constraints, you could pretty much charge her whatever you felt like charging. The reasons you wouldn't do that are that there are still some weak market forces constraining you and you are trustworthy and moral and insurers won't pay you any price you like."
"Now imagine that what you as a health care provider sell has been shaped over time to favor curing disease rather than preventing it. The technology you use has been shaped by market forces that favor diagnosis and treatment over prevention. And you're not paid for prevention. You're paid by piece work, so everything you sell, you can bill and get paid for (if she has insurance). If you make a mistake, you don't have to accept returned merchandise and refund the payment. In fact, you may actually get paid more for trying to fix the mistake."
"So, dad, you're operating in a very non-competitive market where you are better off financially if there are more sick people than well people. Healthy people are not revenue generators for you. Understand, you're not a bad person. You're a product of markets and science that evolved from a mindset that viewed disease, not as the preventable culmination of a lifetime of sometimes bad consumption decisions, but as something outside of our control that happens to us randomly and requires intervention only after the fact. You're also in a world of animal spirits. When people become ill or disabled, they're willing to pay much more in hopes of a cure than they might have been willing to pay to prevent a hypothetical, sometime-in-the-future, episode of the same illness or injury."
"On top of all this, dad, a drug rep shows up every couple of weeks with materials aimed at persuading you to prescribe the most recent, expensive, still-under-patent drugs, rather than older, but nearly as effective and a lot less expensive drugs. Even if you try to prescribe the lower cost, older drugs, your patients have seen the direct-to-consumer ads on television and (praise be to the market) demand that you prescribe the newest, most expensive, still-under-patent, side-effects-may-include-lymphoma treatment for the most recently medicalized aspect of their lives (yellow toenails being my personal favorite)."
"So, here's the question, dad. What's better for the country, for health care costs and for patients: to reduce the number of sick people, to increase the number of healthy people by preventing disease, reducing injuries and disability, and promoting health (thereby increasing the number of people able to work and enjoy their lives) or to continue with a business model that spends a lot of money on high tech after-the-fact treatments delivered after people become ill or disabled, money that could be spent on other things like education, infrastructure, and just plain old fun?"
"Well, prevention, I guess." he said. "But that's going to put a lot of doctors and hospitals out of business."
"Yes, it will." said I. "That's the whole point, dad. The same market forces that drove you to sell higher quality goods at lower prices are virtually non-existent in health care. Instead health care costs trend higher each year with no guarantee of higher quality. More and more of our resources go to care that could have been prevented or reduced with a little foresight and better access to care. Unfortunately, we're a pretty myopic species and some of that myopia is actually rational. As a result, there are often only weak private incentives to prevent the development of chronic diseases that are among the major cost drivers of 21st century health care. In fact, private incentives to sell "fun foods," like chips and candy for profit, may promote obesity and accompanying chronic diseases, like diabetes.
Medicare is trying to change this by tying its payments to quality indicators that target chronic disease management and by paying for some forms of prevention services and counseling. The recent health reform legislation contains many provisions aimed at reshaping the mix of services provided to favor prevention and chronic disease management, thereby reducing costs of after-the-fact rescue care."
Always a quick study, dad got it.
"So what you're saying, Maxine, is that to reduce health care costs, I would have to run my business in a way that ultimately puts me out of business. If I do a good job of preventing illness and making my customers healthier, they won't come see me as often or buy as much from me. Eventually, I'll have to close my doors or figure out some other way to make money."
"Yes, dad. That's exactly what you would have to do, if you were serious about reducing health care costs. Or you would have to change your business so that you make money from healthy people. Now what market forces would produce that result? (And don't say: convince healthy people that they're in reality sick. The pharmaceutical industry already does that and you see where it's gotten us.)"
I'm still waiting for his answer.