Real Health Problem
by John Goodman

"Redefining Health Care" by Michael Porter and Elizabeth Olmsted Teisberg (P&T) is a must read for anyone interested in health policy. Granted, it's a bit daunting at 500 pages, but here's a hint: the first 100 pages or so give you the best return on your reading time.

Reviewers from left to right (Reinhardt, Enthoven, Wilensky, Robinson, Maynard, etc) have uniformly panned the book at the Health Affairs website. There are some things not to like.  My own complaints include: giving short shrift to HSAs, failing to give Regi Hertzlinger her due, and taking a naïve approach to some public policies.

But since everyone else has been so negative, let me point to a big positive: P&T have identified the single most important problem in health care and it is a problem health economists tend to routinely ignore. To wit: we don't bundle and price health services the way we would if the medical marketplace even remotely resembled an efficient, competitive market.

Take diabetes, for example.  Care tends to be delivered in discrete bundles, each with its own price.  No one provider is responsible for the end result (fewer ER visits, lower blood sugar level, etc). This is because no one has bundled "diabetic care" as such - taking responsibility for final outcomes over a period of time - in return for a fee.  P&T produce a rich smorgasbord of other examples of failures to bundle and price in sensible ways, and they argue persuasively that costs are higher and quality is lower as a result.

But as good as P&T are in analyzing problems, they are weak on showing us how to get solutions.  Where they go wrong is in thinking that many of these problems could be solved if only we had more entrepreneurship on the provider side.  Doctors in particular are unable to be entrepreneurial because the bundles and the prices have already been determined for them by third-party payer bureaucracies.

Most of us take it for granted that goods and services will naturally be bundled and priced in customer pleasing ways.  The restaurant market, for example, is teeming with activity - with bundling and re-bundling and pricing and re-pricing taking place almost continuously, all for our dining delight and delectation.  But suppose Blue Cross "negotiated" restaurant bundles and prices, making changes, say, every decade or so.  Then going out to eat would be about as pleasant as a visit to the Department of Motor Vehicles. This is a good way to understand health care.  Long before you ever reach the doctor's office (even with a HSA card), what will be paid for, what will not be paid for, and how much will be paid has already been determined.

To appreciate how bad that is, consider a counterfactual.  Here is an imaginary conversation with a doctor speaking to a diabetic patient (My own example, not P&T's):

"You do not need to come to my office as often as you do.  Most of our communication can be by telephone or email.  For these consultations you will pay less. I need to put your records on a computer so that I can take advantage of safety protocols and order your prescriptions electronically. For these quality improvements, you will pay a bit more.  I'm also going to teach you how to manage your own care and I'm going to charge for the instruction.  But you'll get your money back through fewer consultations.  Also, I'm going to show you how to cut your drug costs by shopping in a national online marketplace and I'm going to charge you for that advice as well. But you'll get that money back too through lower drug prices."

This conversation cannot take place in the current system.  Why? Because each of the bundles of care mentioned above are services Blue Cross does not pay for.  (No e-mail, no telephone, no electronic records, etc.)  Medicare doesn't pay for these bundles either. Nor do most employer plans.

This conversation, and thousands of others just like it, would take place if patients were managing their own health care dollars and providers competed for their business, just like every other market.

P&T are right to say that we need a real market for the care of sick people, and they give a number of examples of what they have in mind. However, one P&T example (cosmetic surgery) has no third-party payers. I suspect that many of their other examples are the result of a federal grant, a RWJ grant or the energy and enthusiasm of a few individuals, unconcerned with monetary payoff.

Here is the problem: when third-party payers pay every bill, resources are not allocated among patients by price.  When doctors do not compete for patients based on price, they do not compete on quality either.  In fact, they do not compete at all.  So the only opportunities for entrepreneurs are those outside the system.

The walk-in clinic is an example.  These services are spreading like wild fire around the country and they developed entirely outside the third-party payment system.  Entrepreneurs created their own bundles and set their own prices.  They charged half the normal fee and provided better quality. (More adherence to protocols.) Subsequently, most third-parties began reimbursing Minute Clinic fees because they have concluded the services are cheaper than the alternatives.  But, in doing so, they are paying for someone else's bundles at someone else's prices.

The same thing is likely to happen with medical tourism.  You will be able to cross the US border in any direction and get higher quality care at half the price.  Insurers will start paying (because it's cheaper) but, again, they will be paying for someone else's bundles at someone else's prices.

Entrepreneurship will eventually find a way around our bureaucratic third-party payment system.  The more dollars that are controlled by patients, the faster that change will come.

John Goodman is president of the National Center for Policy Analysis, an independent public policy institute and are not affiliated with any other organization, trade association or corporation.