I believe that a lot of people on the left hate economics. There are even economists who hate economics. (At the New York Times, for example.)
Economics is the science of incentives. And most economists learn early in their careers that an efficient, workable society is one in which individual incentives are aligned as closely as possible with desirable social goals (Adam Smith’s observation, for example, that in most markets producers find it in their self-interest to meet other peoples’ needs).
This is why most economists reject socialism — a system in which everyone at the bottom has a self-interest in undermining a plan imposed by a few people at the top.
Turns out, there is something worse than socialism. It involves giving everyone an incentive to undermine the top-down plan and then imposing a collective punishment on all of them when they respond to the perverse incentives. Believe it or not, that is the way President Obama proposes to control health care costs.
President Obama is not alone. This is the way a lot of European countries try to constrain health care spending. It is also the way our federal government tries to control Medicare costs. At the risk of oversimplification, it works something like this.
The federal government sets the fees for all doctor services, but leaves the doctors free to decide how many of those services to perform. The fee for a patient visit is strictly regulated, for example, but the number of visits is not. Then the government announces that if total collective Medicare spending fails to moderate, it will impose an across-the-board percentage reduction in all doctor fees. This sets up a vicious cycle in which everyone’s incentives are perverse. The more doctors act in their self-interest, the more social waste there is and more they are collectively punished.
From the individual physician’s point of view, there is nothing he or she can do to affect the total amount of spending. The doctor’s own behavior is such a small part of the whole system, it is imperceptible. But the doctor knows the only way he can increase his own income — or just maintain his standard of living — is to increase the number of services. Care that might have been more efficiently delivered in a single patient visit, for example, gets spread out over two or three visits. Then when the collective spending fails to meet the target, the government imposes another across-the-board fee reduction and the cycle starts all over again.
Suppose we could magically put the doctor in a room with a Medicare official and free them to agree on a different compensation system. Given that opportunity, every primary care physician in the country could think of ways to save taxpayers money and increase his own income at the same time! Services provided over three visits, for example, might be provided with one visit plus a phone call or two, or one visit plus an e-mail exchange — provided that the government pays more for the one visit.
In the language of economics, if doctors could freely recontract with Medicare, they would repackage and reprice their services in ways that are mutually beneficial to themselves and to Medicare. They would substitute higher-quality visits for lower-quality ones, economize on the use of real resources and economize on the patient’s time as well.
What makes all dysfunctional systems dysfunctional is that people do not have the opportunity to make such mutually beneficial adjustments. And, unfortunately, most of the private payers are every bit as bureaucratic as Medicare and they tend to pay the same way Medicare pays.
What Obama should be doing: thinking of ways to free doctors in the manner just described. My advice on how to do that is here. What Obama is going to do instead: impose more perverse incentives on all providers.
In his speech to Congress the other night, he endorsed the idea of an “automatic trigger” to cut payments to hospitals and physicians if Medicare spending fails to meet a target. According to the New York Times, this idea stems from a paper written last year by Obama advisor David Cutler and single-payer advocate Judy Feder.
C’est la vie.