Making Health Care Work

Yesterday I had the privilege of meeting David Cutler—Harvard health economist, advisor to President Obama, and co-author of much of the health reform legislation currently moving through Congress. While I am very skeptical of some of Professor Cutler’s policy goals, I was reminded once again that, for all our bickering around the edges, nearly all economists of all political stripes have a shared and useful way of thinking about the world.

I took the opportunity to ask Professor Cutler about a question that arose on this blog last week. I had posted about my fear that a public health insurance option would be manipulated by politicians intervening to get better coverage for their contributors and constituents, while passing the costs off to less well-connected groups. Some of the commenters—notably Cos and Sierra Black—asked whether this has been a problem in other countries. I had to admit that I had no idea, so I put the question to Professor Cutler. Here is what he said:

  • It’s been a problem in Italy, where the north is more politically powerful and therefore gets better medical care than the south, at the south’s expense.
  • It hasn’t been much of a problem in Canada, France or the UK. Professor Cutler’s guess is that this is largely because those countries have entrenched civil services that check the power of the politicians.
  • Although the U.S. does not have that sort of entrenched civil service, Professor Cutler (unlike me) suspects it wouldn’t be much of a problem here either. I quite disagree, based on the U.S. experience of politicians manipulating other government-run enterprises, most recently General Motors.
  • In any event, he doesn’t think the public option matters much one way or the other. If insurance is easily available at the right price, people will buy it quite independent of whether it’s offered by the government.

None of that was what Professor Cutler actually wanted to talk about. He had come to Rochester to give our annual Gilbert Lecture. This puts him in quite distinguished company; of our 47 past Gilbert lecturers, 15 have gone on to win Nobel prizes. His talk was about getting better value out of our health care system—more bang for the buck. And, like any good economist, he focused on getting the incentives right.

First, he talked about the explosion in administrative costs in American hospitals. Duke University Hospital, for example—one of the finest hospitals in the nation—has 900 beds and 1300 billing clerks. We have to give them an incentive to do better, he said. When I asked why they don’t already have all the incentive they need to save money, his first response was that “hospitals are mostly non-profits”. That’s of course an economist’s answer, but I found it deeply unsatisfying—even at a non-profit, there’s always some alternative use for funds, and usually someone with an incentive to economize in favor of that alternative use. So more than Professor Cutler, I am inclined to suspect that those 1300 billing clerks might actually be doing something useful. (My boon companion Lisa Talpey points out, for example, that they are almost surely handling the billing for hundreds of doctors’ private practices, not just for 900 hospital beds.)

His next point was that we have too much costly acute care. An American with an acute myocardial infarction has a 35% chance of undergoing a complicated and expensive cardiac cathetrization; his Canadian counterpart has a 7% chance—and yet both have the same 30-day and 1-year survival rates, partly because the Canadian is far more likely to receive useful medications. What about the quality of life for those patients? Professor Cutler says the evidence is mixed, with some studies finding that it’s better in the U.S. and others finding that it’s better in Canada. What about 5-year survival rates, as opposed to 1-year? He didn’t know.

I am inclined to believe that Professor Cutler is correct that we have too many of these elaborate expensive procedures, largely because we are overinsured. On the other hand, my colleague Mark Bils points out that an elaborate expensive procedure, even if has no direct impact on survival rates or quality of life or anything else we care about, can still be an extremely valuable innovation if it’s a necessary step toward the development of the next elaborate procedure that does improve health care outcomes. And insofar as that’s true, Canada and the rest of the world are currently free riding on American innovation.

Information technology, says Professor Cutler, is badly underused in the medical industry (which is part of why Duke employs those 1300 billing clerks). This impacts the quality of doctor/patient interactions (when your doctor doesn’t have your entire history at his fingertips), it impacts our ability to do cost-effectiveness analysis, and it makes it hard to determine which providers do the best jobs. Why don’t hospitals have an incentive to adopt cost-saving IT? His answer was complicated, but part of it came down to this: Hospitals don’t care because they pass the costs on to the insurance companies and no single insurance company will pay for an innovation that mostly benefits its competitors. Once again, I feel like I’m not getting the entire story—if the potential cost savings are so massive, I want to know why creative people haven’t found ways to realize them. But I am certainly sympathetic to the idea that bad incentives mean bad outcomes.

There are also bad incentives when it comes to curing people. If you get sent home from the hospital and come back three weeks later with a relapse, the hospital gets paid again. During that intervening three weeks, they have no incentive to keep in touch, make sure you’re taking your meds, and so forth. Professor Cutler’s solution: A system where you pay the hospital not to admit you but to cure you. If you have to come back, that’s included in your one-time payment. Physicians’ fees, medications, and so on would all be included in the one bundled payment.

I agree with Professor Cutler about the problem, but I am extremely skeptical of his solution: Wouldn’t hospitals be tempted to cherry pick their patients, turning away the sickest (i.e. the ones who are most expensive to treat)? Professor Cutler had some thoughts on how to ameliorate this problem, but nothing that struck me as terribly promising.

I do agree with him that it would be good to have more pay for performance. As it is now, among cardiac surgeons, some consistently have 1 to 2 percent of their patients dying on the operating table while others have 8 times as many; all these surgeons get paid the same amount. That’s a huge problem and we ought to face it squarely. But devising a solution is no easy business. Pay for performance raises the same issue as bundling: Surgeons would try to avoid taking the hardest cases. So while I quite agree with Professor Cutler that this is a problem worth tackling, I am less optimistic that there’s an easy solution.

Finally we came back to the question of how things work out in other countries: Is the health care industry more productive elsewhere than it is in the United States? Professor Cutler’s answer: Who knows? European countries ration health care in the sense that the government decides how much of each treatment will be available, and then doctors decide how to allocate those treatments among their patients. The U.S. system delivers very different quantities of care at a very different cost; it’s tough to guess what it would cost to deliver American quantities under the European system, or European quantities under the American system—so it’s tough to know who’s getting more bang for the buck.

In Professor Cutler’s view, there are three ways to fix things: First, European style rationing, which almost no economist favors (largely because there’s no way to tell whether the government is getting the quantities right). The second option, which Professor Cutler prefers, is revising the payment system to create better incentives . I agree that this would be a very good option if you could figure out how to accomplish it, and I agree that there might be a way to make it work, but I’m not convinced that Professor Cutler (or anyone else) has yet figured out how to do it. The third option is the one I tend to favor—more patient autonomy. I’ve indicated some ways this might work in an earlier post. Professor Cutler is skeptical of this third option on the grounds that—well, he didn’t put it quite this way, but essentially his argument was that a lot of patients are stupid. That’s probably true, and it means that this option is imperfect also.

My gut instincts point me in a different direction that Professor Cutler’s do, but I think we agree on what the big problems are and on what would count as solutions. I think almost all economists would agree on that much, and that’s a lot.

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31 Responses to “Making Health Care Work”


  1. 1 1 RL

    I would have asked Prof. Cutler why what appears to him as patient stupidity isn’t simply evidence of rational ignorance. Patients appear much better informed about cosmetic surgery and lasik, paid out of pocket.

    It’s rational to be ignorant of issues like physician competence and hospital quality when insurance limits one’s choice in provider. Licensing makes patients assume all doctors are equally safe, just as FDIC makes customers think all banks are equally safe. Physician advertising that mentions one’s success/safety record is either illegal or strongly frowned upon and likely risks one’s license (which typically prohibit offering “guarantees”).

    So, if Cutler’s point is that we have created a system that strongly encourages people to be stupid when it comes to picking doctors, I can’t disagree. But he’s clearly not being paid by the Obama administration to think outside the box.

  2. 2 2 Snorri Godhi

    I am inclined to believe that Professor Cutler is correct that we have too many of these elaborate expensive procedures, largely because we are overinsured

    This sentence jumped out at me, so I went back to re-read the earlier post:
    http://www.thebigquestions.com/2009/10/29/thoughts-on-health-care-reform/
    and I am still perplexed. I agree that, at least in principle, “People with insurance demand more health care, which drives up prices.” But take the example of cardiac catheterization: Canadians are insured, too, in fact a larger percentage of Canadians is insured than of Americans, so why do they get less catheterization? because of rationing? but American insurance companies ration health care, as well. I don’t understand why private insurance should apply looser rationing than state insurance; unless it’s because it is more difficult to sue the insurer, when the insurer is making the laws. A related hypothesis is that Americans are over-lawyered, rather than over-insured.

  3. 3 3 Andy Wood

    Wouldn’t hospitals be tempted to cherry pick their patients, turning away the sickest

    Why couldn’t they just set a higher price for such patients at the outset? Is this in the context of price controls?

  4. 4 4 Bill

    In all the discussions of information technology, I have yet to see any indication that the cost of data collection has received serious attention. Doctors would love to have all that clinical information at their finger tips. They are much less likely to love the idea of spending the time collecting it electronically in the first place.

    The problems of organizing the presentation of electronic information increase exponentially as well, as the amount of data increases. “Enough” becomes “too much” very quickly. Having the patient’s serum porcelain level in the system and being able to access it quickly and conveniently are two very different propositions.

  5. 5 5 Mike

    While I certainly believe that more patient autonomy is the least bad of the options, just having a reformer snap their fingers and say, “have more patient autonomy” is not going to help – in fact, in may worsen the problem. An enormous amount of institutional reform (from the beginnings of our education system right into the surgery room) would need to happen, and I have no way of knowing how rigid the system truly is.

    My point is that doctors, other providers, med school teachers, med school students and even younger students are so conditioned to NOT being aware of prices and having patients monitor their own treatment, that if customers suddenly were given autonomy, providers wouldn’t easily be able to accommodate them. We have been HSA with High Deductible consumers for a while now. And while it has helped us save health care funds for future times when we need it – it has not been that useful in helping us find more value for our dollar when we actually spend it. For example, when we had our son, we had asked what various pain meds would cost and what various overnight staying options would cost, and we were not told. We had our son in the ER last March … and have still yet to see our actual bill – and when we asked during his stay what the cost of being admitted versus the cost of staying in the ER were, we were not given an answer, despite my sometimes annoying persistence in asking the question. When our son was advised to get physical therapy, the primary care doctor was totally taken aback when we asked about who else aside from the state would be able to provide such care. At least she was diligent enough to do research with us and help us identify some local options.

    I have no basis to say whether this inertia would be easy or hard to overcome beyond the fact that sprinkling in a little consumer discipline into the current fragmented system with poor incentives may not do too much good. But that might be too obvious to mention.

  6. 6 6 JJ

    What about a baseball card like system for doctors, that report their statistics. Haha, I think this would be great, allow the public better ability to discriminate between doctors.

  7. 7 7 Josh

    Would it be worth paying people to exercise and eat healthier food if there were an easy/efficient way of ensuring compliance before payout?

  8. 8 8 Dave

    Mike – not sure I agree.

    I got transferred internationally with my job and to my surprise, instead of paying for flights/moving/accomodation etc, they gave me a lump sum of money to sort myself out.

    It took about 3 microseconds for my wife and I to work out we could save a decent amount of cash by flying economy class and staying in a cheap apartment for a week instead of a nice hotel for a month until we found permanent accomodation.

    Kept the excess for more fun/usefl stuff.

    I don’t think it’s a stretch to imagine that setting up an autonomous system automatically has the average person seeking for the best value for money.

    I imagine your experience with the ER is unfortunately overhang of the non-autonomous ghosts of regulation past and present.

  9. 9 9 jj

    Here’s an idea for getting surgeons to treat difficult cases: have them bid on the job, like plumbers or drywallers do now. Harder cases will cost more as the surgeon considers the odds of failing and not getting paid.

  10. 10 10 Dave

    jj – bingo!

    eSlay.com too graphic?

  11. 11 11 jj

    I may be stupid when it comes to buying health care, but I’m equally ignorant of my automobile; yet I manage to get a decent car based on cost and the automaker’s reputation. If I’m really interested I can do the research, read reviews, and the signals sent by my purchase will shortly help the more oblivious segments of the market. Health care doesn’t need to be any different. Without the insane patchwork of regulations now in effect, private health networks could be akin to automakers in that you spend as much as you can afford to and wish to, and get either a Kia or a Lexus of plans. There’ll always be somebody trying to sell you a lemon, but they won’t be in business forever (unless the government gets involved, of course)

  12. 12 12 ryan yin

    [E]ven at a non-profit, there’s always some alternative use for funds, and usually someone with an incentive to economize in favor of that alternative use.

    This sentence jumped out at me. I’ve heard similar arguments, and the extension, a number of times. By extension, it goes for the government too. Thus, the argument goes, markets cannot do something inefficiently (because otherwise there would be a profitable deviation), nor can government (because otherwise there would be a politically profitable deviation). Isn’t this sort of reasoning almost self-refuting?

  13. 13 13 Sierra Black

    Thanks for the shout-out, and for this very informative article.

    My problem with your “third option” is that, as you say, patients are stupid. Forced to be price conscious, they will trade long-term benefits for short-term savings.

    In your previous article, arguing for health savings accounts, you say: “That way, at least some of us would shop around for better prices and forgo treatments we don’t think we need—lowering demand and making medical resources easier for everyone else to afford.”

    This is a terrible idea.

    Even in the best case scenario of smart people making smart choices, there’s a tension between what is good for individuals and what is good for the state/society.

    I recently read an article by a small business owner glowing about his high-deductible insurance plan, which costs him very little for major medical and lets him pay out of pocket for all his family’s maintenance and preventative care.

    He “cleverly” read some statistics and decided that well baby visits are an unnecessary cost – about $200 per visit for the baby to be weighed, measured, etc. Why pay for it?

    Those visits also screen for rare, serious medical problems that can occur in the first year of life. Let’s pretend those problems are 1 in 100,000. It’s a reasonable risk for any given individual to take, to skip the screening, save $2000 or so, and hope your baby is one of the 99,999 healthy ones.

    But since early detection can save hundreds of thousands of dollars in medical costs, special education expenses and lost productivity, I want everyone in my economy to shell out the $2000 for those well baby visits. Otherwise I am paying the price for their risk-taking when one kid suffer a preventable medical disaster.

    That was the best case scenario. The other two major problems with a health-savings-account type approach are:

    1. people who are marginalized for any reason: less affluent, less educated, illiterate, mentally ill, etc. are going to be poorly served by that type of system. Again, the costs of their failures will fall on all our shoulders when they wind up in the emergency room needing tens of thousands of dollars in medical care for something that could have been dealt with quickly and cheaply had they had proper preventative care. Not only is it unethical to leave those living in the margins of our society out of our health care solution, it’s also costly.

    2. People consume health care at different rates. For example, prenatal care and birth for one normal healthy pregnancy costs about $25,000. I have two kids. If I had a health savings account with a fixed amount of money in it, I would be heading into middle age with $50,000 less to care for my later life health issues than a childless peer (or any man, for that matter).

    I don’t like the scenario where we provide people with disincentives to pay for preventative care because they need to save their money for later. I don’t like the scenario where we punish women for having children – I think creating and raising a next generation is a public good that benefits everyone, and I shouldn’t have to bear the cost of that alone. And I don’t like scenario where elderly people, who are the most economically vulnerable and most likely to need expensive medical care, risk running out of health coverage and dying earlier than need be.

    Spreading out the costs through a single payer system or even through universal coverage using our existing private insurance systems makes keeping everyone healthy everyone’s responsibility. And that’s how it should be, because when we fail at health policy, it costs us all a lot of money and heartache.

  14. 14 14 Steve Landsburg

    Sierra:

    Those visits also screen for rare, serious medical problems that can occur in the first year of life. Let’s pretend those problems are 1 in 100,000. It’s a reasonable risk for any given individual to take, to skip the screening, save $2000 or so, and hope your baby is one of the 99,999 healthy ones.

    But since early detection can save hundreds of thousands of dollars in medical costs, special education expenses and lost productivity, I want everyone in my economy to shell out the $2000 for those well baby visits. Otherwise I am paying the price for their risk-taking when one kid suffer a preventable medical disaster.

    You are proposing to spend, collectively, $2000 times 100,000, or two hundred million dollars, to prevent “hundreds of thousands of dollars” in medical costs. Now of course much additional good comes of this, in terms of pain and suffering prevented, etc. But isn’t it plausible that 200 million dollars might better be spent in a whole lot of other essential ways?

  15. 15 15 Snorri Godhi

    My problem with your “third option” is that, as you say, patients are stupid.

    Sierra: no offense meant, but please speak for yourself!

  16. 16 16 Ben Alexander

    Mike said:

    My point is that doctors, (et al) … are so conditioned to NOT being aware of prices and having patients monitor their own treatment, that if customers suddenly were given autonomy, providers wouldn’t easily be able to accommodate them.

    Doesn’t this strike you as a sign of a big problem? Consumers of health care and producers of health care who are engaging in a transaction and who have no idea what the price actually is? Can you tell me any other business where that is the norm?

    There is another thing that strikes me as a big problem, and I’d like a real economist’s take on it. Sometimes, I get an “Explanations of Benefits” document from my insurer where the amount billed has a discount applied because of who my insurer is. I am assured on this document that I am not responsible for this discount, only the amount listed as not covered (my co-pay, deductible, or exclusions). I get the feeling that if I were not insured I would not have the ability to negotiate that better price, and would have to pay more for the same care.

    Is that economically bad?

    I think I understand that discriminatory pricing does not reduce the total benefit of trade, that it only shifts the benefit of the trade to the supplier and away from the consumer. But wouldn’t insisting that suppliers provide price lists that are not dependent on who the customer is improve access to health care? This idea seems to drift away from ‘pay for performance’ so I’m not sure how to balance the incentives.

  17. 17 17 ryan yin

    The (internal) trouble with the “patients are stupid” notion is that it doesn’t really aggregate very well. Sure, if most people are smart and a couple people are stupid, you could see how it might be better for the stupid people if the smart people just told them what to do. But if most people are stupid, it’s really hard to see how the political system could possibly make things better rather than worse.

    There are, of course, other problems with the argument (e.g., are patients actually stupid? and if so, would they be if the 3rd party payment system didn’t condition people to be clueless?), but I just thought I’d focus attention on how it’s not even internally consistent

  18. 18 18 Ben Alexander

    Sierra: You write
    “And I don’t like scenario where elderly people, who are the most economically vulnerable and most likely to need expensive medical care, risk running out of health coverage and dying earlier than need be.”

    After losing both of my paternal grandparents over the past decade, I can offer a different perspective. Both of them were adamant about *refusing* some particular kinds of medical care, and embraced the option of “dying earlier than need be”.

    Surely you can anticipate exactly what kind of medical treatment they were trying to decline. Life support machinery, food tubes, ventilators, etc. Grandmother had died on the way to hospital in my dad’s car, and the hospital staff was moving quickly to perform emergency “life saving” actions, and my grandfather put a stop to it. I think that choice is extremely personal, and suggesting that someone has died “earlier than need be” is likely to strike some people (as it did me) as insensitive to the needs and desires of some particular patient.

    You seem to be wringing your hands over the fact that the elderly may have run out of health coverage. In the US, they still have access to health *care* and if they want to pay for it, or if their family does, or if you do, fine. Pony up, pay for it and get them the care. But remember that the care will always cost somebody, and by not being explicit about who that somebody is, you are making all of us liable to a very open-ended cost.

    Also, the word “care” is pretty vague. An insurance plan that covers palliative care, but not life-extending treatment (or only up to a certain dollar amount) would leave some elderly people in a situation of “running out of coverage” as you describe it, but they would also have plenty of coverage *for certain treatments*. And if that’s the situation they chose under a HSA arrangement, why do you think it’s so terrible that they get to choose it?

    Sometimes the cost of a treatment is not worth the benefit it brings. Suggesting that some people are too financially vulnerable to pay for valuable treatment themselves means that somebody else (who, exactly?) will have to pay and somebody (who, exactly?) will have to decide whether it is worth it. If you are suggesting that the person receiving the care should be different from the person who pays and decides (who may be different from each other) then you better be prepared to justify your system very, very well. And you’d also better recognize that people will game your system something fierce!

    I’ll also take exception to you comment that due to your two children you’d be $50,000 worse “than any man”. Men have children too, and they pay for them too. And children may be a financial drain on your younger years, but they can be a financial boon in your later years. I won’t say that the finances balance out exactly, but I can say that I have seen it go both ways: some children taking more money out of their parents then they’ll ever give back, and some children giving more back. And that’s all in one family!

    And there are some ways in which society already compensates you for raising the next generation (thank you, by the way, and sorry I forgot to send you a Mother’s Day card this year). The childless still own homes, and pay property taxes which fund the schools you’ll (mostly likely) use, and there are some discounts on taxes you receive that I don’t. And if you didn’t like the deal you were getting from the rest of us, why’d you sign up for the job?

    (The snarky *** in me says that if you’re willing to do the job anyway, why should I pay you anything? But I’m not quite like Dr. Landsburg: I don’t give thanks for greed. It’s just that I accept that greed is real and I give thanks for systems that help turn greed into a force for good. And I like to understand exactly how that works, so I can turn more of the greed in the world into more good for the world.)

  19. 19 19 Snorri Godhi

    But if most people are stupid, it’s really hard to see how the political system could possibly make things better rather than worse.

    By a lucky coincidence, just a few weeks ago I discovered Condorcet’s jury theorem:
    http://en.wikipedia.org/wiki/Condorcet_jury_theorem

  20. 20 20 ryan yin

    Snorri Godhi,
    Sure, but the median voter theorem et al work for rational ignorance, not for stupidity (i.e., irrationality). (And really, voting increases the incentive to be ignorant too, so that would still fall under the “makes things worse not better” rubric.)

  21. 21 21 Snorri Godhi

    Ryan Yin: I am not sure that I get the point of your comment today (dec. 16), but just to be clear, I think that the jury theorem supports what you said the day before (in your 2nd comment). I was trying to provide some mathematical backbone to your comment that, if people are stupid, then government is going to make any problem even worse — at least in a democracy. Maybe that’s why Hayek and Friedman claimed that you can’t have both central planning and democracy.

  22. 22 22 ryan yin

    Snorri Godhi,
    I’m sorry, I misunderstood. The jury theorem is sometimes used as an argument for democracy [e.g., suppose that each voter is better than random and we're thinking about binary issues (up or down on a particular issue, Republican vs Democrat), then a super-large electorate leads to the correct outcome], and I thought that this was the argument you were making. But you’re right, that’s not technically what the theorem says, and it actually says quite the opposite if you assume voters are stupid (i.e., p < 1/2). Thanks for pointing that out.
    Ryan

  23. 23 23 Snorri Godhi

    Ryan: thank you for your reply. In hindsight, I admit that my first comment was quite ambiguous (especially for those who don’t know the jury theorem!). Writing another comment helped me clarify my own ideas on this and made me see the possible Hayek/Friedman connection.

  24. 24 24 Cos

    I think you asked him the wrong question. What we care about isn’t whether it (politicians’ influence over a public health insurance system) is a problem in absolute terms, what we actually want to know is whether it’s *more* or *less* of a problem that similar effects in the private for-profit insurance companies we have now. If a top executive’s friend or family member has a condition that isn’t adequately covered, the executive also has motivation to use their influence to tweak the insurance, passing the costs on to those who are less well connected. And in a private company, there’s generally less transparency, so executives who misuse their influence in this way are less likely to be found out; the check on their ability to go too far is competition from other insurance companies. If all of them do it to a similar extent, that check is ineffective.

    This is even more pertinent in context: We’re not talking about *replacing* private companies with the public option, we’re talking about a public *option* that would have a significant share of the market but would likely (at least at first) be well behind several of the private insurers. So it, too, would be competing with them, and if it suffers from disproportionate abuse of influence then some of the private companies would deliver better results for the money, and the public option would lose market share.

    However, the public option, it seems to me, would probably suffer from this problem *less* than the private companies. It would be managed independently of the politicians unless it fell into crisis (the government does know how to set up mostly independent entities, like the Federal Reserve, and that’s the idea with the public option as well), yet it would still be governed by rules mandating much greater transparency than private companies. And if it did better than private companies – for this or any other reason – it would pressure them to do better so as not to lose customers to it.

  25. 25 25 Cos

    Now, an unrelated question:

    >> I am inclined to believe that Professor Cutler is correct that we have too many of these elaborate expensive procedures, largely because we are overinsured. <<

    Is it largely because we're overinsured, or is it largely because doctors and hospitals are effectively paid on commission, so they make more money the more expensive procedures they do?

    For example, look at some places in the US that pay doctors and hospitals a flat rate (a doctor gets a fixed salary). Their patients are probably just as over- or under-insured as the rest of the country, so you could see what the influence of pay-per-procedure vs. flat rate is.

    Have you looked at that? Have you weighed the relative effects of what you refer to as overinsurance, vs. the payment structure?

  26. 26 26 Steve Landsburg

    Cos: But one difference between private executives and politicians is that private executives have to pass costs on to their other customers, and thereby risk offending and losing those customers, whereas politicians can pass costs off to taxpayers generally. Your example of the Federal Reserve is, I think, trumped by the examples of Fanny Mae, Freddy Mac, and General Motors—just for starters.

  27. 27 27 Steve Landsburg

    Cos: I absolutely agree that the commission system is part of the problem. Unfortunately, the flat rate alternative introduces a different problem: It gives doctors an incentive to cherry pick the healthiest patients and turn away those who will need the most care. I have no idea which problem is worse, though I bet someone has looked into this. Part of what disappointed me so much about Cutler was that I’d assumed he’d be the guy with answers to questions like this, but he apparently knew no more about them than I did.

  28. 28 28 Cos

    >> Cos: But one difference between private executives and politicians is that private executives have to pass costs on to their other customers, and thereby risk offending and losing those customers, whereas politicians can pass costs off to taxpayers generally. <<

    I think I already covered this in my earlier comment, but I'll repeat the two key points relevant to this comment:

    1. Private companies only risk losing those customers if they're significantly worse than other private companies. If all of them have similar levels of abuse of power, nobody will notice. Unless, of course, there's a public option that has a *different* level of abuse of power. So part of what you need to demonstrate is that a public option would necessarily have *more* abuse of power than the average level at private companies (I find that unlikely), and…

    2. Since we're talking about a public *option* that would compete with private companies, you also need to demonstrated why that very incentive (loss of customers) that you say is sufficient to curb the problem in private companies, is insufficient when it comes to the public option.

    Now, you try to do that by saying "whereas politicians can pass costs off to taxpayers generally", which brings me to point three (which I also made in my earlier comment):

    3. The public option as proposed by Obama, in the House bill, and in the Senate HELP committee bill – that is, the universal consensus of all of the forms of this public option under consideration – would be financially segregated from the rest of government. It would have a separate budget of its own, and after an initial startup, would be self-supporting. If any of its costs were to be passed on to the taxpayer, that would have to be done very openly, through legislation transferring more money to the public option. It would be very transparent (and you could lobby against it). The public option could not pass on these costs to the taxpayer in some hidden non-obvious way.

  29. 29 29 Cos

    >> Unfortunately, the flat rate alternative introduces a different problem: It gives doctors an incentive to cherry pick the healthiest patients and turn away those who will need the most care. <<

    And yet, does this actually happen in the places in the US that pay flat rate? I think it doesn't, though I'm not sure. That's another thing worth looking at.

    In theory, I can easily see ways that the law could prevent that. In most single-payer systems, for example, doctors neither get to choose which patients they'll treat, nor do they have to pay extra for medical procedures on those patients, so they don't even have the incentive to turn anyone away. But in China, there's even a concept of paying the doctor to keep you well – if you're sick, you don't pay until you get better, then you resume payment. I wonder how that stacks up.

  30. 30 30 MikeF

    Rather than flat-rate or per-procedure, what if you paid (and doctors were paid) based on your condition?

    If you go in with strep throat, you walk out with a prescription for antibiotics 30 minutes later and it’s a cheap visit. If you go in with cancer, the cost is substantially higher.

    The hospital looks at the average cost of treating that type and stage of cancer. You don’t get unnecessary procedures, and the doctor doesn’t have an incentive to cherry-pick patients.

    The doctor scorecard keeps doctors from shoving each patient out the door, and you know exactly what the doctor was treating when something went wrong – if they have a high-risk patient, it impacts their score less when they die and more when they’re cured.

    It leaves some questions unanswered, but it covers a lot of the problems with other payment methods (and creates new ones, I’m sure).

  31. 31 31 Steve Landsburg

    MikeF: I’m not sure you’ve solved the cherrypicking problem. Suppose I’m a doctor and a patient shows up who I (reasonably) believe is less likely to get well than other patients who look exactly the same on paper. I am going to want to avoid taking that patient, because he/she is going to either need more care than others (for which I get no extra pay) or have a worse outcome than others (which looks bad on my record).

    Now you might say: Ah, but the fact that this patient looks so sick should be recorded on the day he shows up. The problem is that there might be a lot of things that are clear to a doctor’s instinct but hard to state precisely on an official form.

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