Cutting government spending has been a hot topic in the media of late, as Medicare and Medicaid (healthcare costs) are among the main entitlement programs that have been discussed as targets for cost controls in recent fiscal cliff budget discussions. Targeting healthcare costs is particularly complex because this area is not governed by the general rules of economics. Efficient markets work to ensure that good products at low costs tend to achieve commercial success while low-quality or high-priced products lose market share.
Healthcare does not follow these same dynamics. In fact, the nature of healthcare confounds economic theory and prevents the market from being efficient. There are several reasons. In healthcare:
- The consumer (patient) usually does not have adequate information to make a decision.
- The consumer (patient) is not paying for goods and services rendered. While there may be a co-pay, the majority of cost is paid by insurance.
- The decision maker (physician) is removed from price/cost considerations. The doctor does not pay anything at all and may not be aware of a patient’s co-pay or cost of treatment.
- The decision maker (physician) is partly incentivized by both his own training and his own economics. Surgeons get fees to do surgery. Cardiologists get paid to do cardiac catheterization procedures. Somewhat related to this, I’m reminded of a saying that I first heard in medicine when doctors would sometimes bemoan recommendations made by other specialists: “When all you have is a hammer, all the world looks like a nail.”
- The payer (insurance company) has limited ability to influence the decision process. Further, there is mistrust such that the consumer may feel (sometimes rightly, sometimes not) that the payer is advocating an inferior choice based solely on cost considerations.
Contrast healthcare to buying a car. For a motor vehicle, you know what you’d like to spend. You might modulate your cash outlay somewhat depending on luxuries you’d like or savings you can achieve by forgoing luxuries. You can do comparisons and evaluate options to become nearly fully informed about your options. This is not the case in healthcare.
Even with substantial reading and information-gathering, it is difficult for patients to be fully informed and prepared to make or evaluate medical decisions. Complicating this even further, different options would be preferable for different people depending on any number of variables. Alternately, different medical choices may be equally good options. Or the benefits of a given therapy, while there, may be negligible and not worth additional monetary cost to a patient.
One example where price considerations drive medical practice is the way that Medicare pays for intravenous (IV) drugs. Medicare reimburses doctors the cost of the drug plus an additional 6% payment which is intended to compensate doctors for their services. While it does make sense to compensate docs for their working capital needs (higher inventory costs for high-priced medicines), there also is a perverse incentive that is created. If there are two therapeutic options wherein one costs $100 and the other costs $5,000, the first generates an IV deliver fee of $6 while the second generates a fee of $300 (for the same amount of work . . . giving an IV infusion).
Not only is healthcare inefficient as an economic market, healthcare decisions are deeply personal. When one factors in costs, risks, and the burden of choosing among multiple options (with varying and hard-to-understand risks and benefits), healthcare decisions can be emotionally charged. This is at least in part why delivering good, low-cost healthcare remains challenging.