Actually, it’s not all that hard. Name a routine test or procedure and I can probably show you somewhere in the world where you can obtain it for a very reasonable price, provided by doctors who are U.S. board-certified, or have received training in the U.S. or Europe, and are meeting the highest quality standards.
Here’s the hitch. In order to find low-cost, high-quality medicine, you have to go to places where (a) the third-party payers are absent and (b) normal market forces have not been systematically suppressed. (The only exceptions to this rule are few and far between and appear to be distributed randomly.)
Now before reading further, I would invite you to stop and ponder how remarkable the previous paragraph is. It runs completely counter to everything we have been told by the leading health policy analysts for the last three decades!
|Conventional view:||Markets don’t work in health care and the only way to keep costs down and quality up is for third-party payers to tell doctors how to practice medicine.|
|Reality:||Low-cost, high quality medicine requires the presence of markets and the absence of conventional third-party payment.|
Inquiring minds will immediately ask two questions: (1) Why have so many people been so completely wrong for so long a time? and (2) What is it about the nature of markets and third-party payment that makes my observation true?
I’ll save the first question for a later day (although feel free to e-mail me any theories you have — especially any psychologizing you have to offer) and proceed to the second.
All insurance involves a pooling of risk. Since people are naturally risk averse, this pooling is potentially valuable. Once resources are pooled, however, people have incentives to change their behavior and do things they would not otherwise have done. People with life insurance may kill themselves, or allow themselves to be killed, in order to leave a substantial sum to a surviving wife or children. (Fans of “Damages” will know what I mean.) People with fire insurance may be less careful about avoiding fires — particularly if they would like to redo their home anyway.
In health care, people with insurance obtain tests and procedures and even undergo hospital surgeries they would not have opted for had they been spending their own money. Economists call this type of behavior “moral hazard,” although there should be some sort of penalty imposed on the person who came up with that term.
How perverse are these incentives? Very perverse.
On the average, every time a patient in the United States spends a dollar on health care, only 12 cents comes out of his own pocket. On paper, therefore, we have an incentive to consume health care until its value to us is worth only 12 cents on the dollar. But the reality is even worse than that. All too often, where patients have the most discretion they often face no copayment at all; and where they have the least discretion, their copayments are irrelevant. (More on this in a future Alert.)
Bad as these incentives are, the perverse incentives are even worse on the supply side of the market. Almost nowhere in the health care system are providers competing for patients based on price. And since they are not competing on price, they have no interest in reducing the cost of care.
To make matters worse, the structure of health insurance almost guarantees wasteful spending. In particular:
- There is almost no similarity between conventional health insurance and the type of insurance a rational person would want. As explained here, rational insurance assigns responsibility for decision-making to the person in the best position to make those decisions and wherever possible decision makers bear the cost and reap the benefits of the choices they make.
- Historically, the model for conventional insurance was not designed for the purpose of controlling costs; it was designed to ensure that providers got their bills paid. For most of the post-World War II period, commercial insurers paid claims the same way Blue Cross did. Even Medicare paid bills the way Blue Cross did. But the traditional Blue Cross approach was not the product of competition in a free market. Blue Cross was created by hospitals and Blue Shield was created by doctors.
- The conventional insurance market is not the result of competition in the free market; it is instead the result of suppressing normal market forces. Special interest legislation allowed the Blues to so dominate the market, that providers could refuse to accept insurance that paid in any other way. Today, we are still living with that legacy.
Bottom line: Successful cost control does not require more laws, more regulations, more bureaucracy and more nondoctors telling doctors how to practice medicine. To the contrary, it requires liberating the marketplace. Not only does the market work in medicine, where it’s allowed to emerge, it’s proving to work quite well.