The Sorry State of Health Economics

First a disclaimer. I have never taken a course in health economics. I have never taught a course in health economics. I have never even read a health econ textbook.

Recently, however, I acquired such a book. I skimmed the chapter headings, looked at the graphics and spent some time going over the subject index at the back. It was a painful experience.

But before getting to that, let’s consider:

Fact 1: ObamaCare is based on advice given by some of the nation’s leading health economists.

Fact 2: The advice reflected state-of-the-art thought in the field of health economics.

Question: What in the world were these people thinking and why do they think that way?

We better think it over again

By way of background, let’s cover some basics.

The money price of care. One of the themes of my book Priceless is that there are no real prices in the conventional health care system. There are only artificial “reimbursement rates,” negotiated or imposed by third party payers. A considerable part of the book is devoted to explaining how this creates perverse incentives for all parties and when people act on those incentives they do things that make costs higher, quality lower and access to care more difficult than otherwise would have been the case.

How does a standard health economics textbook handle this issue? To find out, I consulted Health Economics: Theory, Insights and Industry Studies, by Rexford Santerre and Stephen Neun. I am told that this textbook is pretty run of the mill as far as health economics goes. Here is what it does: It tries to force health care into the traditional toolbox of economic analysis. It starts by analyzing demand, then goes to supply and then tries to put the two together. Initially, it shows price determined by the intersection of a supply curve and a demand curve — just what would happen in the market for wheat or corn. It then explains variations on market structure, including monopoly, monopsony, etc. All straight from conventional price theory and all totally irrelevant for what happens in most health care markets.

In the illustration of how supply and demand interact, the item being purchased was aspirin. Aspirin? Yes, aspirin. The very pill that hospitals charge $1.50 for, according to Steven Bill. Do you think the intersection of a supply curve and a demand curve can explain why a 100 pill bottle of aspirin would cost $150? The textbook had no answer for that.

Ah, but there are markets where conventional economic tools can be applied. These are markets where patients are spending their own money and providers compete on price and quality. So you would think that if economists were going to try to force the economists’ box of tools on health care, there ought to be a few examples of where that actually works.

Take cosmetic surgery, for example. I go to the index…Search under “c”…That’s “c…o…s…” hmm…It’s not there.

Okay, what about Lasik surgery? I go under “L”…That’s “L…a…s…” hmm…No Lasik.

Now I’m on a roll. What about walk-in clinics? No. Free standing emergency rooms? Nix. Domestic medical tourism? Nein. International medical tourism? Nada. Online mail house pharmacies? Zilch. Concierge medicine? No way. Reference pricing for joint replacements in California? Not a word.

In 552 pages ― crammed with type so small my dwindling eyesight can barely see the words ― these guys have not one example of a health care market where conventional tools of economics might actually apply.

The time price of care. Another important theme of Priceless is that our health care system is not fundamentally different from the health care systems of other countries, despite the spirited rhetoric that goes back and forth between the right and the left. At the point of consumption, we basically pay for care the same way the Canadians and the British pay for care. We pay with time, not with money.

How long does it take a caller to get an appointment with a doctor using a telephone? How many days does she have to wait before seeing the doctor? How long does it take to get to the doctor’s office and back again? Once there, how long does she have to wait? These are non-price barriers to care and there is mounting evidence that these non-price barriers are a greater deterrent to access than the fee the doctor charges ― even for low-income patients.

[By way of contrast, I can get my iPhone repaired on a moment's notice with no appointment, very little waiting and there are even services that will send a repair person to my home!]

What I don’t understand is why this isn’t obvious to everyone. Look around folks. That exterior office is called a “reception area” if you are calling on a lawyer, an accountant, an engineer or any other professional. It’s only at the doctor’s office that we call it a “waiting room.” The reason why one-fifth of all emergency room patients leave without ever seeing a doctor is that we are rationing emergency room care…How? Certainly not by price.

So I check the index again. Time price? It’s not there. Waiting? Not there either. Rationing by waiting? Nowhere to be found. And here is something interesting. Although there is a very lengthy glossary of terms that every student of health economics will need to know, the word “rationing” is not among them.

Cost of care. Health Economics is organized the way a typical price theory book would be organized. First there is the theory of demand. Then, there is the theory of cost (supply). Then you put the two together in a market. And that makes perfect sense PROVIDED THAT the factors that affect demand are fundamentally different from the factors that affect supply. In most markets, that assumption is sound. In health care it is not.

As every doctor knows, if you shift a task from a doctor to a nurse, you lower the cost of care. But you also lower the amount Medicare will pay ― and therefore you lower the amount almost every other payer will pay. So much so, that it generally makes no economic sense to shift to nurses all of the tasks they have the professional training to perform.

Similarly, every hospital knows that it can bill Medicare two or three times as much for the same service if the doctor is a hospital employee rather than in private practice.

Factor inputs, therefore, are not independent of demand. To the contrary, how you produce a service determines what revenue you can expect to receive.

Managed competition. One of the great failings of the health economics profession is the fact that almost no one seems to understand what managed competition is or how it works. Health Economics is no exception. Although the book has a publication date of 2012 and although President Obama made clear as early as the 2008 campaign that health insurance would be sold through exchanges based on a managed competition model, this fact does not appear even once in 552 pages of text.

But I don’t mean to pick on these guys. You can’t find a decent explanation of managed competition and its perverse incentives anywhere outside of the NCPA’s publications and blogs. See my latest post here.

Comments (42)

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  1. Vicki says:

    I like your song pairing.

  2. Ken says:

    Great post.

  3. Matthew says:

    There is obviously a disconnect in what health economics textbooks explain and what actually occurs in the health care market. It is no wonder how the state of our health care system is in based on the conflict of principles and real life experiences.

    • Thomas says:

      “All straight from conventional price theory and all totally irrelevant for what happens in most health care markets”

      If it is irrelevant, then why not give examples in the text in which conventional price theory does work and doesn’t work. Instead, the textbooks choose to be as general as possible.

  4. Jay says:

    “Time price? It’s not there. Waiting? Not there either. Rationing by waiting? Nowhere to be found”

    Then what terms are health econ students required to learn?

    • Bill B. says:

      With no real world terminology or examples, I am surprised they learn anything at all from that textbook.

      • James M. says:

        They don’t learn anything. Hence, the title of “the sorry state of health economics.”

  5. Manuel C says:

    There are clear conclusions that we can take out from this blog post. First, the healthcare industry is heavily regulated by people who have no idea what they are talking about. Second, the school of thought followed by the majority of health economist is based on the wrong assumption that the market for health is the same as for any other good. Third, there will not be a comprehensive reform to the industry until we change our approach to analyze the market for healthcare. Finally, this post shows that Dr. Goodman needs to write a textbook on health economics.

  6. Paul T says:

    The amount of regulation that surrounds the healthcare market leads to market failures. We cannot analyze the health market as we do other markets because this industry has the most government intervention. Healthcare prices are not determined by suppliers and demanders, therefore it cannot be studied as the market for corn or wheat. Prices are determined by the doctor, the government, the insurance companies, the consumer and others that participate as well; different participants as there is in a normal market.

  7. Blake R says:

    There is no invisible hand in the health market. Actions by different participants prevent the market to reach equilibrium. Price ceilings, price floors, barriers, and other instruments are used that destroy equilibrium. In the healthcare industry there is a “dark hand” that overshadows the invisible hand.

  8. charlie bond says:

    Good morning John –and Uwe (I hope you are reading this morning),

    It has been since before Hillarycare that I have been trying to point out that the fundamental flaw in health care economics is the absence of cost-based pricing.
    In the 90’s my concerns were dismissed right, left and center.

    I remember very clearly one evening in the early nineties when I was invited over for a drink with my friend Scott Fleming. Scott was, for my money ,the “brains of the outfit” at Kaiser. Normally a quiet and reserved guy, he came in from work animated, anxious to explain the idea that he, Alan Enthoven and Paul Ellwood had been hatching–managed competition. When he got to the end of his explanation, I posed a simple question: How does this system of financing fix the fundamental economic flaw in health care–that goods and services are not pegged to the reality of the rest of the economy? Scott, with his usual perceptiveness, said he would leave such questions to health care economists. And with that he poured his second gin martini.

    Uwe, given the political clout and lobbying force of all the vested stakeholders (health insurers, pharmaceutical companies, hospitals, even poor doctors whose dwindling professional organization is clinging to the codebook for dear life)–how can such a huge sector of the economy be righted without general economic collapse? As i have said many times, health care in America is the largest economic bubble in history and when it pops, we will all be in it.

    I have, of course, read John’s book, as well as your writings Uwe, but the pricing crisis seems to elude both of you.

    In the absence of clear solutions from other quarters, I have proposed an alternative currency called CareExchange. It works a bit like a blend of a loyalty program and Bitcoin. Without going into great detail, CareExchange would allow community members to exchange goods and services for a portion of their health care bill, thereby tethering at least some of our health care costs to day-to-day economic reality. It seems that without such a grass roots free market effort, we are looking at massive governmental regulation or massive economic collapse.

    I obviously believe that pricing lies at the heart of our crisis, and would welcome the opportunity to work with anyone, regardless of political persuasion, to address the issue.

    Please feel free to contact me at cb@physiciansadvocates.com.

    Cheers,
    Charlie Bond

  9. Roger Waters says:

    John, John, John,

    You seem to forget: “Those who can – do, those who can’t – teach health economics; and those who can’t teach health economics write health economics books…” it’s that simple. (from someone who used to teach and used to wonk, and now is doing – it’s much different in the real world than in “Hollywood on the Potomac” – some of those wonks should try it out).

  10. Patrick S says:

    Dr. Goodman, you have said it before “It’s a law of human nature. Whenever people start discussing health policy, their IQs fall by 15 points”. It makes sense why the market is so flawed, people don’t understand the market thus they make statements (and reforms) that goes against health economics, a field we are yet to comprehend.

  11. Charles M says:

    It is really interesting your point on time price of care. It’s a subject that raises several questions and a good one to study. It has been claimed that the United States spends more on healthcare than any other developed country, which is why we needed a reform. The question is on time price. In which country does it take longer for a patient to see a doctor? In which country does the patient has to wait less? Healthcare can be free in Britain or Canada, but if it takes longer to see a physician is their system better?

  12. Yancey Ward says:

    The lack of discussion of things like cosmetic medicine and Lasik is the give-away, in my opinion. There is one, and only one, rational explanation for their absence in this textbook- both markets violate the authors pre-conceived notion for how medical care should be paid for.

  13. DoctorSH says:

    “given the political clout and lobbying force of all the vested stakeholders (health insurers, pharmaceutical companies, hospitals, even poor doctors whose dwindling professional organization is clinging to the codebook for dear life)”

    Vested stakeholders do not belong in healthcare.
    There us no economics with special interests involved.

    As a practicing physician the only real stakeholder is and should be the patient. Everything else should be in the background.

    Unfortunately the ACA is just a set up for redistribution of resources and an eventual full takeover of healthcare when, not if, the ACA system collapses, which it will.

    Stop asking if the authors of ACA ever read an economic textbook.
    They did!
    You must understand your enemy if you want to defeat it to be able to rebuild the conquered and impose your own system,
    They read the textbooks and set up the ACA to fail.
    Economics, and finding what will crumble the present system is helping to accomplish the demise quicker.

    One example and then I sign off.

    The ACA has just about destroyed the private insurance system and is further ending the link of employer sponsored health insurance. With private insurance destroyed what is left but the ACA’s exchanges.

    The ACA authors are not stupid.
    They are actually very bright and following through with their plan.

    • Jeff C says:

      Agree the authors of the reform are not stupid; they are just working for their own interest rather than for the wellbeing of the nation. ACA is not so bad if you take the perspective of those who are being benefited with this reform, and I am not talking about the patients that thanks to Obamacare are receiving treatment (I wonder if they exist?).

  14. Perry says:

    I don’t think Health Economists understand Health Economics.

  15. Centrist says:

    John, your principal beef:

    “There are only artificial “reimbursement rates,” negotiated or imposed by third party payers … [which]creates perverse incentives for all parties [Providers] and when people [Providers] act on those incentives they do things that make costs higher, quality lower and access to care more difficult than otherwise would have been the case.”

    Is what you are saying, Doctors do not like the revenue stream which they have agreed to and that they are going to cut the quality of service to make up for the loss and to vent their frustrations???

    Your attack on H.E.”

    Simply because a single source of information regarding health care economics doesn’t supply what you would like to see … does not mean that the profession is non-essential with regard to national health care regulation and legislation.

    “Fact 1: ObamaCare is based on advice given by some of the nation’s leading health economists.”

    The ACA is based on … Heritage Foundation Proposal ’89, [R]Chafee Bill ’93, [R] Nickels Bill ’94, Romney Care ’06, AMA, Insurance Industry, Pharmaceutical Industry, Demands from the American People, Ideas from both sides of the isle, and yes, even your ‘Health Care Economists’. The ACA is our nation’s attempt to remedy many ills and deserves time, not contempt.

    This post sounds like you woke up on the wrong side of the gurney.

    • Vince says:

      Let me address your first point, “Doctors do not like the revenue stream which they have agreed to and they are going to cut the quality of service to make up for the loss and vent their frustrations”

      As a provider often times we are forced to agree to a particular free schedule or risk losing a large portion of a population. Insurance companies hold this over out heads and force us to either take a lower rate or lose the patients. We have rent to pay, staff to pay, supplies to buy etc and we take the lower rate to stay in business and not have to lay people off. Our recourse is then to make adjustments in care that may/will decrease the quality of care. We do not do this purposely to vent frustration just out of business decisions. This illustrates why the price point is so artificial. It is not determined by the cost the provider to supply the service not the demand for the service. It is determined only by what the 3rd party payer – not a real stake holder in the transaction between provider and patient – is willing to pay so that they can profit. As things move on to larger entities controlling more lives, the power to reduce reimbursements is growing and therefore providers are forced to decrease the quality of services they can provide and still remain somewhat solvent. Many however will leave practice reducing the choice that the patients have, increasing the time costs, reducing quality even more.

      • Centrist says:

        Vince, thank you for your comment and I hold the medical profession in high regard. I understand the pinch which insurers place you in.

        I make my comments to question John’s terminology of ‘artificial’ and ‘perverse’ and continued attempts to discredit the ACA by attacking necessary contributors, health care economists.

        Even though reimbursement rates do not currently align with traditional supply and demand, they are, however, agreed to by the providers and are therefore not artificial. They are lower than reasonable … but actual. The term ‘perverse’ drifts more towards a frustrated perception than facts on the ground.

        Most professions, including my own, must deal with large customers securing bulk discounts. I must weigh the ‘economics’ of accepting this work but it is still within my control to refuse this work or simply supplement my down times with these lower paying customers. However, the reduced payments are not ‘artificial’ nor would ever induce me to reduce standard quality. Premium service and change orders are my financial recourse.

        Even though 3rd party payers are a permanent fixture and rates will continue to lower, how about legislation that lets the Federal Government provide all malpractice insurance for participating providers? Would that help your bottom line?

        • DoctorSH says:

          @Centrist

          Let me put my two cents in, or if the cents were coming from a third party, maybe perhaps a half penny.

          “I make my comments to question John’s terminology of ‘artificial’ and ‘perverse’ and continued attempts to discredit the ACA by attacking necessary contributors, health care economists. ”

          I happen to agree with John. As a physician, I treat and care for patients. As I do NOT participate in any third party contracts, I am not a provider and I do NOT have any “artificial or perverse” incentives in my practice. When my practice did contract with third party insurers there absolutely were contractual regulations whispering in my ear as to how to balance out the best care for my patient, keep their costs down and keep my business afloat. These whisperings rarely if ever aligned.

          “Even though reimbursement rates do not currently align with traditional supply and demand, they are, however, agreed to by the providers and are therefore not artificial. They are lower than reasonable … but actual. The term ‘perverse’ drifts more towards a frustrated perception than facts on the ground.”

          Reimbursement rates do actually follow the supply and demand of economics, just not between the patient and the health care professional. The supply demand is between the insurer and whoever pays for the insurance which is rarely ever the patient. Therefore costs are hidden to the patient (consumer). So how do we make a supply demand curve when the actual costs to the consumer are hidden?

          “Most professions, including my own, must deal with large customers securing bulk discounts. I must weigh the ‘economics’ of accepting this work but it is still within my control to refuse this work or simply supplement my down times with these lower paying customers. However, the reduced payments are not ‘artificial’ nor would ever induce me to reduce standard quality. Premium service and change orders are my financial recourse.”

          No argument here. When I did contract with insurers I never let my services suffer. But seeing that the insurers and govt were grabbing more and more control, I decided to remove my practice from their control and go direct to my patients. My fees now follow a supply and demand curve.

          “Even though 3rd party payers are a permanent fixture and rates will continue to lower, how about legislation that lets the Federal Government provide all malpractice insurance for participating providers? Would that help your bottom line?”

          3rd party payers have control now, but there is always a tipping point. They may not be as permanent as you think, or there may be other systems outside the present one that gains traction as an alternative to the messed up healthcare payment system we have now, one that leaves the third party in the background, far removed from the doctor-patient exam room.

          Not sure I would support govt paying for malpractice. Anything the govt gives, they usually ask for a whole lot more in return with too many strings attached. If there were no strings, then we could talk.

        • Vince says:

          Unfortunately as providers we cannot have Premium services and charges to offset the lower contracted rates. The vast majority of patients have insurance that contracts the rates for them and we are prohibited by that contract to charge more.
          Instead of making another federal program that would be subject to waste and abuse why not eliminate networks and contracts and let the providers set their own rate. The insurance would reimburse at their fee schedule and we could charge based the market and our costs similar to the old indemnity products of years gone by. Let me compete for business based on quality of services and price instead on my needing to sign onto insurance A because they control 75% of the lives in my community. If our services have a value based on the service and price we will thrive if not then we will need to adjust or die.

          • Uwe Reinhardt says:

            Relax, Vince. We are going in that direction with private exchanges, coupled with reference pricing.

            Of course, this will work only with full price transparency, an idea the medical profesion so far has not embraced. But it will be forced down the professionals’ throat anyhow by young IT entrepreneurs, like Castlight Health.

            • DoctorSH says:

              @Uwe

              You either have a strange sense of humor or you are way off!

              I’m hoping it’s that you are just not a funny guy!

              • Uwe Reinhardt says:

                I am not sure what made you laugh, but ex ante price transparency is the sine qua non of the kind of market John and his disciples dream about. You can’t have a market with blindfolded shoppers.

            • Vince says:

              I fully support price transparency. I’d like nothing more than to post my prices and compete on quality / price point. If my prices are higher than the practice down the street, I need to offer superior service so that the customer will pay.
              As far as the medical profession being driven by IT professionals. We are seeing a lot of that in the EMR aspect and it is not going well. They believe that through better IT all the problems will be solved without involving the 2 entities – the provider and the patient – that drive the transaction.

              • Uwe Reinhardt says:

                If you’d like nothing more than to post your prices, have you done it? If so, can you send me the link? If not, what has stopped you? Is there a law against posting your prices?

                • Vince says:

                  We do post our prices. We have them framed and at the front desk. But as you know these prices are meaningless. BCBS, Aetna, UHC etc all have rates that they pay us regardless of our prices. We do not expect to get anything close to what our posted prices are and everybody knows it. Based on our posted prices a visit would be say $250 but we would get $58 from Cigna so posting the prices and more transparency is not the answer in the real world. Allowing the providers to post realistic prices and receive payment based on that posted price is.

  16. Quintus says:

    Let’s have a look at the word “Scarcity”. As Dr. Mankiw says, economics is all about how to manage scarce resources. Healthcare apparently is a kind of scarce resource that emerges based on the seek for health.

  17. Uwe Reinhardt says:

    As faithful followers of this blog know, I hate to agree with John Goodman; but this time I do.
    The shortcomings he highlights are not confined to health economics. They apply to many areas in economics – most likely to most. Indeed, I wrote about that problem on the NYT Economix blog on January 9, 2009, although in a manner not likely to please the disciples of this John’s blog. (see http://economix.blogs.nytimes.com/2009/01/09/an-economists-mea-culpa/?_php=true&_type=blogs&_r=0)
    John writes that textbooks on health economics “force health care into the traditional toolbox of economic analysis.” As a Princeton professor I would have expressed the same idea more eloquently thus: “These text books force the analysis of our health system – which, alas, is an injudicious amalgam of half-assed markets with half-assed regulation (Altman) — onto the Procrustean bed of the neoclassical economic paradigm.” How is that for Princeton vs Columbia?
    Although I do not use the fairly popular text by Santerre and Neun, but instead Folland, Goodman and Stano, for the most part these authors also follow the traditional style. Students often would not recognize the real world of US health care – or health care in Europe– emerging from a study of these texts.
    It is why I liberally supplement the text with my own lecture notes. For example, I do address the issue of rationing, pointing out that there are different styles of rationing. Thus, one can ration scarce resources either by money-price and ability to pay, or by such non-money-price rationing mechanisms as queues and time prices or other administrative algorithms. The distributional effects and underlying distributional ethic vary among these styles of rationing.
    I devote two sessions to what is meant by “equity” and how notions of equity differ among different overarching theories of justice (Utilitarian, Libertarian, Rawlsian, Communitarian).
    In another lecture, accompanied by a write-up, I point out that in many instances the economist’s concept of “efficiency” is a value-laden concept and that modern welfare analysis as it is practiced is not objective, value-free scientific analysis, but just one particular ethical doctrine.
    I devote a lecture to describing in detail how Medicare and Medicare set prices, with appeal to some well written fact sheets put out by Medpac. We do discuss the shortcomings of the approach. In fact, I point out that under the RBRVS—which really should be called RBRCS for “resource based relative cost scale) a transurethral tonsillectomy pays physicians much more than a trans-oral one.
    I then present descriptions and data on the price-discriminatory scheme of pricing in the private sector, where the prices paid by private insurers for the same thing can vary by a factor of 10. Explaining why that is superior is a challenge.
    John writes: “Factor inputs, therefore, are not independent of demand. To the contrary, how you produce a service determines what revenue you can expect to receive.” With all due respect, this is hardly a novel idea. I know it, because I just taught it in my freshman economics course, with the help of a 4-quadrant diagram and a giant equation of which we then took some derivatives.
    By the way, time prices play a central role on Grossman’s model of the demand for health capital, from which economists derive the demand for health care. Therefore they do get treatment in most good textbooks.
    Finally, John claims too much when he argues that “you can’t find a decent explanation of managed competition and its perverse incentives anywhere outside of the NCPA’s publications and blogs.” I wish we could desist the urge of self-praise, as I have noted before. He would be more effective that way.
    Perhaps John and I should write a textbook together. He’d write the first part of a chapter and I would be the shovel brigade writing the second part, or vice versa,
    I once co-taught a course with former Senator Frist. We had a great time together, and the students benefit from our exchanges, I am sure.

    • Perry says:

      “a transurethral tonsillectomy pays physicians much more than a trans-oral one.”

      I’m sure that’s not how you meant this, but if a surgeon’s doing a transurethral tonsillectomy, they should not be getting paid for it.

      • Uwe Reinhardt says:

        You are taking the V in RBRVS too seriously. V stands for “value.” But the payment is based on relative costs.

        In fact, for a transurethral tonsillectomy you can bill two codes: a coronoary bypass and a tonsillectomry.

        Here’s how the procedure works: a miniature Mitsubishi lithotripter is mounted on a long probe which is pushed up through the urethra, past the heart — hence a payment for a coronary bypass — into the area near the tonsils. The lithotripter then shatters the tonsils in situ, whereupon 4 ozs of Jim Beam administered to the patient (the FDA recently approved also McCallan 18 for that purpose) so that the patient can expell the tonsils the way beer is expelled.

  18. Ron says:

    Every system is perfectly designed for the outcomes achieve.

    The vested interests in higher costs of medical care services and products have overridden normal economics. I am afraid we passed to tipping point 49 years ago when Medicare and Medicaid put the government in charge of health payments.

    I will root for the downfall of Goliath, but won’t hold my breath.

  19. Devon Herrick says:

    I used the Santerre and Neun textbook when I taught a class on health economics 20 years ago.

    I am a little surprised that Santerre and Neun have never added a discussion of cosmetic surgery, retail clinics, concierge medical practices and free standing ERs. I would assume these would be very interesting to someone who has written about health economics for decades.

  20. Wanda J. Jones says:

    John, Uwe, Charlie and others..

    More topics that should be explored in a healthcare economics textbook:

    1) Product: A goodly percentage of healthcare cost escalation is derived from new science, which essentially produces a new product. Sometimes these replace more expensive procedures, (open heart surgery and closed heart procedures) and sometimes they introduce new procedures (Lithotripsy/brain stimulation to treat blindness, paralysis). These changes take place randomly along the whole list of clinical programs, so are nearly impossible for external observers to track, so, obviously, it is easier to leave them out.

    2) Capital: When people spend (invest) capital, they expect to obtain a return that on that investment, a return that should exceed the “opportunity costs” of not investing it in something else. As capital is not a paramount cost in healthcare, amounting to a range of between 1.5% (Government facilities) and 12-15% of the operating budget, it obviously leverages a huge cash flow for the 30-50-year life of the building, and has historically produced predictable profits. The actual value creation, however, is in a professional workforce, which is not recorded as capital. Parenthetically, the principal actor in the healthcare workforce, the physician, is typically independent of the organization that owns the facility in which he practices. So an investment in the facility tends to redound to the benefit of a non-owner. Not true in all industries and hard to explain in terms of economic theory. In today’s healthcare world, however, there is a genuine trend toward what is termed “capital substitution for labor” such as actual use of robotics in hospital work. See best recent example at El Camino Hospital in Mountain View–robots take food, labs, supplies, and medications to the floors. In the lab, most tests are now automated that once were done by trained lab techs. And so on. These trends are not mediated by the government, as they simply do not recognize natural evolutions of the healthcare industry but seem to believe that if they did not order it, a change will not occur.

    3) Knowledge as Asset. Another prime shift that is not appreciated by economists or policy-makers–the fungiblity of knowledge. The real value in healthcare is the knowledge component of the medical guild system. That’s why there are so many protections giving them exclusive rights to their knowledge. Obviously, these are not strong enough to limit the flow of knowledge to the patients themselves via Google, Wikipedia, MedPulse, and by availability of diagnostic tools at the nearest pharmacy. With the movement of so much funds flow back to the customer via Health Savings Accounts, this knowledge flow will accelerate. This is another glaring omission in the studies and judgments of health economists and policy-makers. Add to that the peripheral knowledge-based conversion of other products from organizations not normally labeled as being in the healthcare industry, as when fast food firms cut out saturated fats, and makers of cough drops remove sugar. This is huge.

    If I were teaching healthcare economics, and I salute Uwe, who can stand it, I would send my students out into the world to trace the flow of the healthcare dollar from the Earner, then through the Purchaser, then through the Health Plans, and on to the Provider, where it is converted to services. As economists tend to focus only on the health plan sector, they are as unaware as the public about whether these other sectors add value or detract from it.

    Further, economists seem to come unglued when mergers in this field seem to concentrate market share, which they apparently believe always leads to higher prices. Of course, when this happens in the computer world, it is pronounced good, as it can lead to improved products at lower prices. Healthcare systems should get credit for taking old, uneconomic facilities out of the market, investing in facilities to substitute for high-acuity hospitals, and managing the supply of the physician workforce. For the most part, their training and experience only leads them to condemn the high salaries paid to hospital administrators.

    The other factor needing better understanding is the enormous spider web of laws and regulations that are created at the national, state and local levels, imposed, then seldom retracted.

    Such an important topic, John, as we can easily see the damage that has been done by “economists” practicing on gullible lawmakers. To augment their “textbooks” I recommend the following:

    Cannon, Michael f, and Michael D tanner, Healthy Competition, What’s Holding
    Back Healthcare and How to Free It. CATO Institute, Wash, D.C. 2005.

    Halvorson, George C., and George J. Isham, M.D., Epidemic of Care, Jossey-Bass, San Francisco, 2003.

    Health & Health Care 2010, The Forecast, the Challenge, Institute for the Future, Jossey-Bass, San Francisco, 2000.

    Topol, Eric, M.D., The Creative Destruction of Medicine, Basic Books, New York, 2012.

    If anyone weants a more extensive reading list, I’ll be glad to supply it.

    Sorry for the length…

    Wanda J. Jones, MPH, President
    New Century Heatlahcare Institute
    San Francisco

  21. Paul Nelson says:

    In 2007, Karyn Stitzenberg uniquely studied the travel distance to health care as a measure of accessibility. Her research (Archives of Dermatology. 2007. 143(8): 991-8) looked at the severity of malignant melanomas as measured by depth in millimeters and it relationship to a variety of factors. The most significant factor was the distance between the person’s home and the place where the biopsy was performed. This study defines most clearly the devastating effects of poor accessibility on the effectiveness and efficiency of health care as defined by travel time.