Health Care Reform 2

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Health Care Reform 2

By: John A. Baden, Ph.D.
Posted on April 09, 2008 FREE Insights Topics:

Unless deliberately randomized, as in drawings for moose permits or draft lottery numbers in the 1970s, decisions are based on information and incentives. It follows that to change behavior, people’s information and the incentives to act on that information must change. Little else, surely not professed concern, will suffice.

Well-intentioned people who ignore or discount this principle become disappointed when their reforms fail. Here’s a fundamental principle of political economy: Things that can’t go on won’t, our current Medicare system for example.

America’s unfunded Medicare liability is $74 trillion, a sum equal to the world GDP in 2006 or five and a half times the U.S. GDP in that year. At current growth, one quarter of our entire GNP will go to health care by 2025. The Congressional Budget Office’s 2007 study “The Long-Term Outlook for Health Care Spending” projects a crowding out of all other government programs. It concludes the obvious; today’s Medicare and Medicaid are unsustainable.

American health care will change. The question is, will it be improved. A positive answer will result only if we pay attention to information and incentives.

Our health care system has many perverse features and those who try to improve its delivery are penalized for doing so. Economist John Goodman, President of the National Center for Policy Analysis, has worked on health care reform for decades. His focus is on improving information and aligning incentives to foster more sensitive, effective, and efficient care.

Ironically for those who look to government mandates for solutions, the key to progress is creativity in designing market-like incentives. Consider the success in those areas of medicine where physicians compete on price and quality: cosmetic surgery, medical tourism, and Lasik surgery.

Lasik, a type of refractive laser eye surgery, corrects for myopia, hyperopia, and astigmatism. Google lists thousands of medical articles, and even more advertisements, on this formerly exotic and expensive procedure. Here are two examples: “Custom LASIK, $0 Down, 0% Interest! Award Winning Center & Surgeons” and “Special prices starting at $299 per eye. $0 down and 0% Interest.”

Because these are elective procedures not covered by insurance, the providers have incentives to compete on price, quality, and convenience. Concurrently, prospective patients have incentives to search and select for the best delivery.

In contrast, doctors participating in Medicare receive no pay for consulting with patients by phone or e-mail; or by teaching them to care for themselves or change dangerous lifestyles. These are not tasks reimbursed by Medicare and hence they are neglected.

Costly, ineffective treatments are often reimbursed at substantially higher rates than superior alternatives. Further, researchers estimate that roughly half of American patients don’t receive the most basic recommended treatments—like an aspirin after a heart attack or antibiotics before hip surgery. Successful reform will have incentive to identify and correct omissions of such simple and cost effective practices.

Further, to drive down costs, Medicare rates are suppressed. As a result, doctors are reluctant to perform inadequately reimbursed procedures. As Goodman counsels, “We should be willing to reward doctors and other health-care providers who raise quality and lower costs—including improving patient communication and access to care, and teaching patients how to be better managers of their own care.”

Nearly all involved with medicine understand that changes must come—and experiments are underway. An example from central PA is the Geisinger Health system, a 660 physician hospital founded in 1915. In February 2006, Geisinger launched a new program with the explicit goal of changing how healthcare is provided and paid for in the U.S. Called ProvenCare by Geisinger, the program features three key elements: strict evidence-based medical standards, innovative finance, and patient engagement/activation.

The New York Times wrote of their approach: “[T]aking a cue from the makers of television sets, washing machines and consumer products, Geisinger essentially guarantees its workmanship, charging a flat fee that includes 90 days of follow-up treatment.” The Times goes on to note, “Geisinger’s effort is noteworthy as a distinct departure from the typical medical reimbursement system in this country, under which doctors and hospitals are paid mainly for delivering more care—not necessarily better care.”

Information and incentives are keys to successful reform. What incentives will lead politicians to act on this truth?

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