Health Care Dilemma: Cost Control vs. Profit Maximization

Right-leaning economists never tire of explaining the unintended consequences of government schemes–“they hurt those they intend to help.” But what about the unintended consequences of marketization? That’s a theme of Robert Kuttner’s latest contribution to the New England Journal of Medicine, which argues that “The extreme failure of the United States to contain medical costs results primarily from our unique, pervasive commercialization.” (Background fact–the median OECD country spent 8.4% of its GDP on health care in 2003; the U.S. spent about 15%.) According to Kuttner, we are witnessing a slow transformation of the American medical system where “resources are increasingly allocated in response to profit opportunities rather than medical need.”

Kuttner examines a “false economy” of market incentives that appear better designed to motivate more focus on the wealthiest and healthiest patients than real cost-control. For example, “some [doctors] defect to ‘boutique medicine,’ in which well-to-do patients pay a premium, physicians maintain good incomes, and both get leisurely consultation time. It’s a convenient solution, but only for the very affluent and their doctors, and it increases overall medical outlays.” Doctors are also defecting from general hospitals–which cross-subsidize emergency and uncompensated care–to niche providers that allow them to keep more profits:

Other doctors opt out by becoming proprietors of specialty hospitals, usually day surgeries. In principle, it is cost-effective to shift many procedures to outpatient settings that are less expensive but still offer high-quality care. In a government-organized universal system, the cost savings can be usefully redirected elsewhere. But in our system, the savings go into the surgeons’ pockets, and their day hospitals often have a parasitic relationship with community hospitals, which retain the hardest cases and give up the remunerative procedures needed to subsidize those which lose money.

In 2004, Fitch Ratings said that the niche providers would be a “long slow drain” on community hospital resources. Though regulation and taxation of specialty hospitals may help preserve funding for the types of uncompensated services general hospitals provide, ambulatory surgery centers are more entrenched. In one recent case they have used doctors’ legendary lobbying clout to assure favorable legal treatment.

More examples from Kuttner below the fold. . . .

1. On Insurance: “The private insurance system’s main techniques for holding down costs are practicing risk selection, limiting the services covered, constraining payments to providers, and shifting costs to patients. But given the system’s fragmentation and perverse incentives, much cost-effective care is squeezed out, resources are increasingly allocated in response to profit opportunities rather than medical need, many attainable efficiencies are not achieved, unnecessary medical care is provided for profit, administrative expenses are high, and enormous sums are squandered in efforts to game the system.”

2. On Managed Care: “Physicians have a mental picture of expected earnings — an income target. If the insurance plan squeezes their income by reducing payments per visit, doctors compensate by increasing their caseload and spending less time with each patient. This false economy is a telling example of the myopia of commercialized managed care. It may save the plan money in the short run, but as any practicing physician can testify, the strategy has multiple self-defeating effects. A doctor’s most precious commodity is time — adequate time to review a chart, take a history, truly listen to a patient. You can’t do all that in 10 minutes. Harried primary care doctors are more likely to miss cues, make mistakes, and — ironically enough — order more tests to compensate for lack of hands-on assessment.”

3. On revenue-maximization at hospitals: “Large hospitals, which still have substantial bargaining power with insurers, necessarily cross-subsidize services. The emergency department may lose money, but cardiology makes a bundle. So hospitals fiercely defend their profit centers, investing heavily in facilities for lucrative procedures that will attract physicians and patients. For the system as a whole, it would be far more cost-effective to shift resources from subspecialists to primary care. But in an uncoordinated, commercialized system, specialists might take their business elsewhere, so they have the leverage to maintain their incomes and privileges — and thereby distort cost-effective resource allocation.” [emphases added]

Kuttner paints a stark picture of a more market-driven system. It will divert ever more resources to those best able to pay. It will ever more “efficiently” deny care to those who cannot. Isn’t that the entire point of conditioning access to care on ability to pay?

You may also like...