Paging Dr. Gawande: Health Reform Matters.

Atul Gawande’s article “The Cost Conundrum” has become a cause celebre in policy circles. The Obama White House is reading it, leading journal Health Affairs has sponsored a roundtable on it, and pundits across the political spectrum are invoking it.

There are good reasons for all the attention in health reform circles. But there’s a paradox here, too, because Gawande doesn’t believe that changes to health care finance and regulation can deter the wasteful and uncoordinated provider behavior which he sees at the root of the present crisis. I respectfully disagree. Law may not be doing a good job at this now—largely because health care regulators over the past 20 years vastly overestimated the degree to which the market would improve quality and access. But we have a rare window of opportunity to correct for those assumptions. Moreover, without real reform, the profit-obsessed providers who are the villains of Gawande’s piece will systematically outcompete the integrated delivery systems he champions. Gresham’s Law applies in health care, too.

First, some background. Gawande compares a high-cost Texas town (McAllen) with a nearby, low-cost one (El Paso). He finds very little in the McAllen extravagance that is actually improving the longevity or quality of life of its residents. The piece describes in some detail how commercial imperatives affected medical practice in McAllen:

[M]any physicians are remarkably oblivious to the financial implications of their decisions. They see their patients. They make their recommendations. They send out the bills. And, as long as the numbers come out all right at the end of each month, they put the money out of their minds.

Others think of the money as a means of improving what they do. They think about how to use the insurance money to maybe install electronic health records with colleagues, or provide easier phone and e-mail access, or offer expanded hours. They hire an extra nurse to monitor diabetic patients more closely, and to make sure that patients don’t miss their mammograms and pap smears and colonoscopies.

Then there are the physicians who see their practice primarily as a revenue stream. They instruct their secretary to have patients who call with follow-up questions schedule an appointment, because insurers don’t pay for phone calls, only office visits. They consider providing Botox injections for cash. They take a Doppler ultrasound course, buy a machine, and start doing their patients’ scans themselves, so that the insurance payments go to them rather than to the hospital. They figure out ways to increase their high-margin work and decrease their low-margin work. . . .

In every community, you’ll find a mixture of these views among physicians, but one or another tends to predominate. McAllen seems simply to be the community at [the high-cost] extreme.

Gawande describes a market gone wild in McAllen, where doctors would demand “four or five thousand [dollars] a month” or even sex in exchange for routing their patients to certain home health agencies.

How does such a culture of commercialization develop? Gawande is not a social scientist, but he can extrapolate from his own experience. He knows how physicians mentor one another and provide models of care. He also mentions the work of Woody Powell, who examines how certain leading institutions can set the tone for much of an economic community. These “anchor tenants” led McAllen’s “medical community . . . to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers.”

Gawande contrasts McAllen with several centers of excellence in health care, including the Mayo Clinic and a Grand Junction, Colorado network of physicians. Mayo doctors are salaried, and in Grand Junction “the doctors agreed among themselves to a system that paid them a similar fee whether they saw Medicare, Medicaid, or private-insurance patients, so that there would be little incentive to cherry-pick [and lemon-drop] patients.” A local HMO encouraged the Grand Junction doctors to meet and “focus[] on rooting out problems like poor prevention practices, unnecessary back operations, and unusual hospital-complication rates.” As a result, quality improved, cost declined, and Grand Junction Medicaid patients enjoyed higher rates of effective access than average.

It would seem that a health reform ought to focus on encouraging these types of interventions. But in an interview with Ezra Klein, Gawande is strangely agnostic on whether law can change much:

My vantage point on the world is the operating room where I see my patients. And trying to think about whether a public option would change anything didn’t connect. I order something like $20,000 or $30,000 of health care in a day. Would a public or private option change that?

People say that the most expensive piece of medical equipment is the doctor’s pen. It’s not that we make all the money. It’s that we order all the money. We’re hoping that Medicare versus Aetna will be more effective at making me do my operations differently? I don’t get that. Neither one has been very effective thus far.

I think there are several misconceptions in that quote. First, the public option is not designed to displace private insurance. It’s supposed to be a benchmark for private plans, to incentivize them to act more constructively. Second, Gawande is here invoking his own perspective, that of “good” physicians, those who push “the money out of their minds” as they decide courses of treatment. Law, as Justice Holmes reminds us, should be written and interpreted with the proverbial “bad man” in mind, who “cares only for the material consequences which [knowledge of law] enables him to predict.”

Many of the rules of health care finance and regulation address exactly the types of problematic behavior discussed in the article. Niche facilities and imaging centers are at the cutting edge of the commercialization Gawande worries about. Lawyers have debated them for years, and the policymaking is still ongoing. HHS set a moratorium on the development of specialty hospitals in 2003, but it expired. This led to a flurry of interest in administrative action designed to address specialty hospitals’ “cherry-picking” of lucrative patients and “lemon dropping” of costly cases onto other hospitals. Something as obscure as “certificate of need” rules (operating at a state level) have proven critical in determining the spread of specialty hospitals. Reports from the GAO and the Medicare Payment Advisory Commission have investigated their impact, while CMS rulemakings have focused on re-assessing payment levels for procedures at ambulatory surgical centers. Antitrust litigation could also play a pivotal role in the struggles between general and specialty hospitals for what Gawande calls the “soul of medicine.”

In the article, Gawande repeatedly talks about “blunting financial incentives” for bad medicine or patient cherrypicking. But that’s exactly the charge of the Medicare Payment Advisory Commission (MedPAC) in its examinations of developments like niche providers. State policymakers can also reflect these concerns in various ways–adjusting nonprofit status, facilities licensure rules, taxation, and many other legal variables.

In other words, law matters. Sure, all these laws can be bent in ways that favor the further commercialization of medicine. Much of any book on health care finance regulation is a tale of frustrated hopes and dashed ambitions. But this body of law at least provides some tangible guide to past and potential realignments of incentives–something that can’t be said for the appeals to cultural change at the core of Gawandean quietism.

Gawande concedes that “In the war over the culture of medicine—the war over whether our country’s anchor model will be Mayo or McAllen—the Mayo model is losing.” Calls for cultural change just aren’t being heeded—and why should they be? If an insurer develops an extremely effective protocol for dealing with the chronically ill, it will be rewarded by the market with. . . . more expensive, chronically ill patients wanting to sign up for it. As things stand now, providing high-quality care for the chronically ill is a great way to go out of business in virtually any market where your competitors can “skim the cream” of the healthiest half of the population, who only demand about 3% of health care spending. Health reform (including real risk adjustment to properly compensate such plans) can help change that.

Gawande’s “Cost Conundrum” could be to health reform what Sinclair’s “The Jungle” was to food safety. It explains current trends in the commercialization of medicine better than virtually any journalistic work out there. Sadly, it appears that its author is now more inclined to “stay above the fray” than to try to articulate and lobby for the regulatory infrastructure necessary for the cultural change he so eloquently advocates.

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