April 01, 2005

Where's The Health Care Waste?

Via Tyler Cowen, Arnold Kling has written a genuinely thoughtful essay on health care spending that's worth a look. Do Americans pay so much for health care because the system is wasteful and inefficient, or are we actually getting better care for our money? I tend to think the former, Kling thinks the latter, and at the very least, he raises some good reasons to think twice about using infant mortality and longevity statistics to measure the actual quality of care we're getting. Point taken, though he doesn't have anything conclusive on that front.

My main bone to pick here, though, has to do with this passage:
Switching from a fee-for-service system [i.e., what the United States has] to a straight-salary system would reduce measured administrative costs. However, it produces a different kind of economic inefficiency. It breaks the connection between work effort and pay for health care providers. Doctors will be paid for showing up, not necessarily for putting in a full day's work.
In a way, that's true. The classic example is the Matthew Thornton Health Plan, described in this week's New Yorker, in which a group of doctors decided to run a mini single-payer health clinic up in New Hampshire. They bypassed insurance companies altogether, offered fixed fees to all their patients, and paid themselves flat salaries. At first, everyone loved it—patients signed up by the droves, doctors didn't have to hassle over billing and reimbursement, and even some specialists came aboard (the clinic paid specialists a fixed fee too). Costs were controlled brilliantly. Moreover, all doctors involved became more concerned with preventive care, since they didn't get any extra money for doing extra operations. It was perfect. Single-payer paradise! Soon, however, the problems started:
After a few years, the Matthew Thornton Health Plan started to be cheaper than other insurers. Employers caught on and enrollment soared. Berman had to bring in more doctors. That’s when things got more complicated. “In the beginning, we were all committed,” he said.

“We worked hard—long hours, a lot of dedication, young and hungry. Then, as we started to get bigger and bring in more staff, we found that others joined for other reasons. They liked the salaried life style—the idea that being a doc could be a job, rather than a day-and-night commitment. Some were part-timers. We began to see people looking at their watches as five o’clock approached. It became clear that we had a productivity problem.”

Over the course of thirty years, Berman told me, he’d tried paying physicians almost every conceivable way. He’d paid low salaries and high salaries and still watched them go home at three in the afternoon. He’d paid fee-for-service and watched the paperwork accumulate and the doctors run up the bills to make more money. He’d come up with complicated bonus schemes for productivity and given doctors budgets to oversee. He’d given patients cash accounts to pay their doctors themselves. But no system was able to provide both simplicity and the right balance of thriftiness and reward for good patient care.
Exactly as Kling predicted! So that's a real problem with single-payer. On the other hand, though, it's not clear that the current "fee-for-service" system is any more economically efficient. By which I mean, it's not clear that there's a direct economic link between the work doctors perform and their salary. For starters, insurance fee schedules, even in the private market, are largely driven by Medicare prices set by Congress, and these prices change relatively slowly—so they don't always reflect doctor effort at that point in time. (If, for instance, Congress decides that removing an appendix costs $X, based on how much work goes into the operation (they actually do try to measure this), but then new technology arrives that makes appendectomies even easier and quicker, then that operation instantly becomes overpriced compared to others.) Obviously there are some perverted incentives here.

Furthermore, many doctors have to do fierce, fierce battle with their insurance companies before they can actually get paid. Insurers can always refuse to pay for operations and treatments already completed. This seems in fact to happen around 32 percent of the time. Here in the real world, a doctor's salary correlates pretty well with how ruthlessly she can manage her billing system and squeeze every last possible penny out of her patient's insurers (who, in turn, have profit margins to worry about and spend all their time thinking up ways not to hand over that last possible penny). So to answer Kling's question, that's a likely reason why administrative costs are so much higher here in the United States.
-- Brad Plumer 3:21 AM || ||