Phillip Longman has a brilliant new cover story for the Washington Monthly, about how the Veteran's Health Administration may be a great new model for what our health care system should be. I'm surprised Kevin Drum hasn't started touting it yet. Anyways, one part really interested me. After illustrating quite nicely how better technology and whatnot can improve hospital care immeasurably—reducing errors, improving detection rates—Longman tries to figure out why private health care providers don't resort to such a thing. The answer is large-scale market failure:

Suppose a private managed-care plan follows the VHA example and invests in a computer program to identify diabetics and keep track of whether they are getting appropriate follow-up care. The costs are all upfront, but the benefits may take 20 years to materialize. And by then, unlike in the VHA system, the patient will likely have moved on to some new health-care plan. As the chief financial officer of one health plan told Casalino: "Why should I spend our money to save money for our competitors?"

Or suppose an HMO decides to invest in improving the quality of its diabetic care anyway. Then not only will it risk seeing the return on that investment go to a competitor, but it will also face another danger as well. What happens if word gets out that this HMO is the best place to go if you have diabetes? Then more and more costly diabetic patients will enroll there, requiring more premium increases, while its competitors enjoy a comparatively large supply of low-cost, healthier patients. That's why, Casalino says, you never see a billboard with an HMO advertising how good it is at treating one disease or another. Instead, HMO advertisements generally show only healthy families.

For health-care providers outside the VHA system, improving quality rarely makes financial sense. Yes, a hospital may have a business case for purchasing the latest, most expensive imaging devices. The machines will help attract lots of highly-credentialed doctors to the hospital who will bring lots of patients with them. The machines will also induce lots of new demand for hospital services by picking up all sorts of so-called "pseudo-diseases." These are obscure, symptomless conditions, like tiny, slow-growing cancers, that patients would never have otherwise become aware of because they would have long since died of something else. If you're a fee-for-service health-care provider, investing in technology that leads to more treatment of pseudo-disease is a financial no-brainer.

And this brings us to markets—by which I mean the role of choice and competition in the health care system. Markets can certainly be good for some things in health care—like controlling costs. For instance, it doesn't get talked about much, but one of the reasons health care spending is fairly high in the United States boils down to wages. Health professionals must be recruited from the same talent pool used by other high-paying industries (law, finance). That drives up wages, and since health care is so labor-intensive, that drives up the cost somewhat. Now we could fix this by promoting true free trade and lowering quotas and professional licensing requirements that prevent many foreign doctors from coming to America. Voila! Real free trade would lower costs! More obviously, market competition really does force HMOs and insurance companies to drive down prices, though at a cost (they tend to avoid the sickest people in society.)

But that's just cost. Quality is a different story. The sad fact is that most health consumers don't care about quality—they care about cost and choice. During the 1990s and Cleveland, the city tried to publicize information about which hospitals performed best. But nothing happened. So, not surprisingly, private health care providers respond in the appropriate way—by catering to cost and choice rather than quality. It reminds me of something Robert Crandall, CEO of American Airlines, once said to people who complained that airline quality (food, size of seats, etc.) sucked. I'm copying a friend's old paraphrase:

You know what, the airline industry is the most responsive industry to customers demands. we get you the lowest fare we can. There is no customer loyalty. If you can find a ticket that’s $30 cheaper but you have to sit in a slightly smaller seat you'll buy it. We've done all the optimization studies and based on customer behavior we are offering you exactly what you demand.

Indeed, and health care provides are offering exactly what consumers demand. As are pharmaceutical companies—it's not they're fault that they cater entirely to fat, balding and impotent men. That's where the demand is. The problem, of course, is that not everything consumers want is good for them. And when it comes to health care, what consumers want certainly isn't good for our looming health-care fiscal crisis. Certainly there are small things you can do to tweak the incentives here and there, but it's not enough. Maybe we need to start looking more closely at the VHA model.

At any rate, read Longman's piece. I'll have more to say about it later, I think.