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Saturday, May 26, 2012

Unintended consequences of not profit seeking in medicine - The Fable of the Bees all over again

Paul Rubin wrote a nice piece in the WSJ Op-Ed section last Thursday. In it, he addresses the bias against profit seeking behavior and the lack of understanding this appears to indicate (http://online.wsj.com/article/SB10001424052702303610504577419970054445432.html?mod=ITP_opinion_0).
We economists assume that firms always maximize profits, and that profit maximization by firms (all firms, not just private-equity ones) is a very good thing. But this is not because profits are in themselves good. Rather, profit maximization is good because it leads directly to maximum benefits for consumers. Profits provide the incentive for firms to do what consumers want.
Consider what contributes to profit maximization. In simple terms, profit maximization means producing the products earning the highest returns, and producing these products at the lowest possible cost. Both are socially useful behaviors that benefit consumers.
Which products produce the highest returns? The answer is the products that consumers want and are currently underproduced. If there are excess returns (profits) to be earned in some market, that is because consumers are willing to pay more for those products than the current cost of production.
Profits are earned by producing more of these products—that is, by satisfying unmet consumer demands. 
The last line is is the punch line. Ideal economic systems reward those who meet unmet demands. While Dr. Rubin's purpose was to link these concepts back to Bain Capital and the presidential election debates, I could not help but reflect upon how the profit motive is viewed by leadership in health care. It is viewed in an extremely negative light. Legitimate health care entities are not for-profit entities and for profit health care entities who strive to maximize shareholder returns lack legitimacy. They are only in it for the profits they can earn.  

At a superficial level, this might feel right. Medicine should be a calling and the motivation which drives those of us who devote our lives to delivering care to the sick should not be in it for the money. However, Professor Rubin's words highlight what may be counter intuitive; that striving for individual gain may be the best way to accomplish the most good for the greatest number. Bernard Mandeville in his 18th Century work "The Fable of the Bees; Private Vices, Public benefits first attempted to popularize this concept (not very successfully) while this was ultimately built upon by Adam Smith. This concept has been controversial and not widely accepted.

Obviously one of the realms it has not been accepted is within health care leadership. What is the problem with taking the profit motive out of what now is approaching 20% of the US economy? The problem is the loss of the unintended consequences of the search for private gain. No where is the misalignment of  what the public wants and what an industry strives to deliver more evident than in health care. What other industry creates large marketing budgets to sell services with a paucity of buyers when simultaneously there is huge unmet demand  for services the public is clamoring for?

If the profit motive within a market system existed within medicine, there would be a rapid re-deployment of resources where there was limited demand and these resources would be deployed to where maximum profit could be made by offering services which the public clamored for at prices which attracted new entrees into the market. Those interested in maximizing profits would be also be incentivized to cut prices and costs to maximize their own returns while be able to deliver services to the public at lower costs as well. Too many expensive scanners and not enough primary care physicians, let the power of supply, demand, and price find a better equilibrium.

That basically does not exist in health care. Floors to prices are set by Medicare. Only a fool would charge less than Medicare will pay. Profit seeking happens but via mechanisms divorced from responding to consumers, unless one views health insurers as the customers, which may hold more than a shred of the truth. It has been said that if you are not paying for the service, you are not he customer but are the product.  That is where many patients now stand.

If we want to create a better health care system, we need to re-infuse the profit motive back in with the idea being we will be rewarded for providing better service to patients at lower cost. Without recognizing the role of profits in moving toward this end, the outcomes will almost certainly be less optimal than if we recognized the basic concepts which Paul Rubin reminded us of.  

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