When Market Incentives Lead to Bad Outcomes

One of our readers recommended a fascinating and important article on health care economics, “The Cost Conundrum,” in The New Yorker. It’s by Atul Gawande, a surgeon and a professor of public health and surgery at Harvard.

Gawande contrasts McAllen, Texas, which has some of the highest health care costs in the country, with El Paso, Texas, a demographically similar city with moderate health care costs, and with low-cost communities such as Rochester, Minnesota (home of the Mayo Clinic) and Grand Junction, Colorado. To simplify greatly, his conclusion is that the medical community in McAllen practices medicine as a business, while the community in Rochester or Grand Junction practices it as a way of improving health. But the aberration isn’t the profit-loving doctors of McAllen; it’s all the doctors who are not out there maximizing profits.

The real puzzle of American health care, I realized on the airplane home, is not why McAllen is different from El Paso. It’s why El Paso isn’t like McAllen. Every incentive in the system is an invitation to go the way McAllen has gone.

And the prognosis is not good:

In the war over the culture of medicine—the war over whether our country’s anchor model will be Mayo or McAllen—the Mayo model is losing. In the sharpest economic downturn that our health system has faced in half a century, many people in medicine don’t see why they should do the hard work of organizing themselves in ways that reduce waste and improve quality if it means sacrificing revenue.

In short, we have a health care system that motivates doctors to behave like businessmen and maximize their revenues from patients. In the long run, those incentives are wearing down whatever ethic of professionalism or feelings of altruism lead doctors to behave differently. But while the pursuit of profit in the free market is supposed to benefit the public – and probably does in most areas – here it has led to an explosion of costs with no measurable improvement in health care outcomes.

Let’s go out on a long excerpt designed to motivate you to read the whole article:

We are witnessing a battle for the soul of American medicine. Somewhere in the United States at this moment, a patient with chest pain, or a tumor, or a cough is seeing a doctor. And the damning question we have to ask is whether the doctor is set up to meet the needs of the patient, first and foremost, or to maximize revenue.

There is no insurance system that will make the two aims match perfectly. But having a system that does so much to misalign them has proved disastrous. As economists have often pointed out, we pay doctors for quantity, not quality. As they point out less often, we also pay them as individuals, rather than as members of a team working together for their patients. Both practices have made for serious problems.

Providing health care is like building a house. The task requires experts, expensive equipment and materials, and a huge amount of coördination. Imagine that, instead of paying a contractor to pull a team together and keep them on track, you paid an electrician for every outlet he recommends, a plumber for every faucet, and a carpenter for every cabinet. Would you be surprised if you got a house with a thousand outlets, faucets, and cabinets, at three times the cost you expected, and the whole thing fell apart a couple of years later? Getting the country’s best electrician on the job (he trained at Harvard, somebody tells you) isn’t going to solve this problem. Nor will changing the person who writes him the check.

About James Kwak 133 Articles

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

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