Health Care: When Market Incentives Lead to Bad Outcomes, Continued

A couple of weeks ago, I wrote a post about Atul Gawande’s New Yorker article about health care spending and outcomes. I didn’t claim to have any particular insight about health care economics; I just thought that people should read his article – which, to summarize greatly, argues that there is no correlation between high spending and good outcomes, because the current system does not motivate doctors to seek good outcomes. (Apparently Barack Obama agreed, since the Times reported that “the article became required reading in the White House.”)

That post got a lot of interest, so here is a follow-up.

A lot of the data on regional variations in spending and outcomes come from the Dartmouth Atlas of Health Care, whose findings are summarized in the first paragraph of Jonathan Skinner’s Economix post:

“For the last three decades, John Wennberg and his Dartmouth colleagues have documented regional variation in Medicare spending and a puzzling lack of association between spending and better health outcomes. Regions that spend more on medical care don’t necessarily have sicker people, and they don’t get better results. It isn’t clear what benefit they are receiving for all the money they’re spending.”

Skinner’s post cites and then responds to criticisms mentioned in the aforementioned Times article and in a Wall Street Journal editorial. The most direct criticism, it seems to me, is that the Dartmouth study does not control for the sickness of populations; however, as Skinner says, studies that do control for population differences still find major spending gaps. In Economix yesterday, David Leonhardt provides an overview of this debate.

Finally, Leonhardt’s column yesterday addresses the political flavor of the same issue: rationing. His position is summed up here:

“Milton Friedman’s beloved line is a good way to frame the issue: There is no such thing as a free lunch. The choice isn’t between rationing and not rationing. It’s between rationing well and rationing badly. Given that the United States devotes far more of its economy to health care than other rich countries, and gets worse results by many measures, it’s hard to argue that we are now rationing very rationally.”

Leonhardt argues that the current health care “system” implements three kinds of rationing. First, businesses faced with higher health care costs compensate by reducing wage growth (to zero, in some cases) – so expensive health care comes at the cost of everything else. Second, higher health costs mean that many businesses do not provide health insurance; the rationing here is that some people get semi-comprehensive health care, and some don’t. Third, the current economic incentives lead doctors to provide some types of care (expensive procedures) at the expense of other types of care (spending time with patients, preventive medicine), even though the latter may be more important than the former; here, rationing is preventing access to some forms of care.

With financial reform watered down to “minor technocratic tweaks” (although I hold out some hope for the Financial Product Safety Commission, or whatever it will be called), the established health care interests must be encouraged.

Update: Atul Gawande was on Fresh Air yesterday.

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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.

Visit: The Baseline Scenario

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