Health Care: The McAllen Problem

What is the lesson of McAllen, Texas, the focus of Atul Gawande’s celebrated article (discussed here and here)? This is my attempt at an answer:

Currently, our health care system has high-cost and low-cost areas; the high-cost areas have no better outcomes than the low-cost areas. So theoretically we can solve our health care cost problem by making the high-cost areas behave like the low-cost areas.

However, the market incentives go in the other direction; the economically rational thing for providers (doctors, hospitals, etc.) to do is to run up procedures and thereby costs. It would be better if providers focused more on patient outcomes or organized themselves into accountable care organizations, as Gawande prefers; but there is no economic reason for them to do so. People are not magically going to become more altruistic overnight. Even shame has only a temporary effect on behavior. Here’s Gail Wilensky from a Health Affairs roundtable:

It’s only by being able to offer compelling evidence that it’s the physician that is the outlier relative to his or her peers, that the patients really aren’t different, and in fact they are not having better outcomes, that you are able to pull back physician behavior — although there seems to be a high recidivism rate.

(Emphasis added.)

In some ways McAllen isn’t the aberration; according to the old Chicago economics department, everywhere should be like McAllen.

Remember all the people who said that you can’t blame mortgage brokers and investment bankers for being greedy, because that’s how a capitalist economy works? Well, you could make the same defense for the McAllen doctors. We long ago stopped expecting lawyers and accountants to behave contrary to their economic interests; now we simply expect them to conform to the law and to certain professional codes of conduct, and otherwise make as much money as possible. Why should we expect anything different from doctors?

In a capitalist economy, the thing that is supposed to keep prices in check is the buyers. If someone offers me a product that costs more than it is worth to me, then I won’t buy it. But we can’t count on patients to play this role in health care, because there is no way to make patients internalize all of the costs of their care; they simply don’t have the money. Furthermore, most people don’t understand the health production function (the relationship between treatments and outcomes), so they don’t have the ability to select treatments that provide benefits that are worth their costs. (And, in many cases, it’s not obvious even to professionals that a treatment isn’t worth the cost; it’s only obvious when you look at the data in aggregate.)

What about payers (health insurers?) A “market” solution would be to change the reimbursement rates for different procedures – increase payment for things that doctors should do more of and reduce payment for things that doctors should do less of. Theoretically, payers should be doing this already. However, in the current situation, a private payer who tried to reduce the rates for popular, expensive procedures would find itself unable to attract providers. The only payer with any real negotiating power is Medicare. The private payers have little ability to control costs. Or, if they have the ability, they aren’t exercising it.

In short, prices will only go up. As a result, the cost of health insurance goes up, and the market finally kicks in in the crudest possible form: people who can’t afford it become uninsured. At some point, if we have enough uninsured people, the health care industry will hit a point where it cannot increase revenues anymore, because it has fewer and fewer paying customers.

The proposed public health insurance plan would have the power to negotiate lower rates with providers. That’s why some providers don’t like it. That’s also why private payers don’t like it; they would be at a cost disadvantage to the public plan. (They can live with Medicare because Medicare leaves them the entire under-65 market.) Maybe that’s unfair. But the current situation isn’t working.

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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

1 Comment on Health Care: The McAllen Problem

  1. I just read the Atul Gawande article. Very informative and well thought out, but I can’t bring myself to believe that patients can’t become intelligent enough to spend their dollars wisely. The decision support tools on the internet are only going to get better. is a very powerful decision tool for the value buyer traveler. Google Shopping is valuable in as well. With the right government policies I believe support tools coupled with patient history,empirical studies and empirical hospital performance, we can equip patients with the tools they need to make intelligent decisions.

    Let’s be honest, medicine is way too complicated for most doctors any way. They do their best, but more often than not when I have visited a doctor, I have left with absolutely nothing more than I could find spending 1 to 2 hours on the web. Sometimes I get less, and sometimes even get a doctor with an ego, who is frustrated that I took the time to read. Doctors in my experience are very often useful for writing a prescription, and NOTHING else.

    I see a world, not very distant, where patients could really be put in the driver seat. And like education, they won’t be limited to the doctor in their town or state, they can have access to the expertise and knowledge of the world’s leading physicians in every area.

    Eliminating waste (misdiagnosis, miscommunication, too many hands in the pot, etc.) in hospital procedures also needs to be tackled full force. Between waste elimination and patient empowerment through smart online tools – we can see waste go away. And yes patients ABSOLUTELY should haggle with doctors. Atul’s logic for why patients shouldn’t haggle is by far the weakest argument he made in his whole article. It’s my body; I did my homework; I have access to aggregate empirical data, I know my body and am using powerful online technology to track my health, and happen to know that 7 out of 10 doctors would recommend a certain procedure given my situation. And if my doctor is one of the three that advises against it, then s/he better have a very good reason why. This is a healthy discussion that can and should take place between every patient and doctor! For Atul to say this is an impossibility and to even imply it is ludicrous, is disappointing. It feels as if he has completely written off patient empowerment. Given past information technology it may have been impossible to conduct critical long-term studies on the economics of patient empowerment. The capability to do so in an expansive and very interesting way is just becoming available, and it is a crying shame that government is taking over healthcare right at a time when patients taking over healthcare yields the most promise. Set the right policies and give the problem to thousands of American entrepreneurs to fix it. The government elite (Atul is becoming one of them) need to trust the American people more.

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