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Saturday, January 16, 2010

Another example of a blind spot

After perusing my blog feeds, I came upon Greg Mankiw's blog and a two hour symposium on health care reform at Harvard.  It is well worth reading.

I particularly enjoyed David Cutler's presentation highlighting the lack of increased productivity in health care, despite huge increases in spending. He highlighted the perverse effect of the payment system on this, stating what everyone has come to realize; the payment system as presently constructed rewards those simply for doing more things. He also notes that the present system has huge administrative burdens. This is not surprising since the return on investment is much greater from investing in billing clerks than RNs. His presentation can be found at:

I have a hard time with his firm conclusions that the demand side is not where to operate. He does cite a few studies where patients, when faced with higher out of pocket expenses, elect to cut back on care in some form or another. This is stated to be unquestionably an undesirable effect but these studies do not actually demonstrate worse outcomes. They are short term effects which may in fact create improved outcomes overall but applying price pressures and perhaps creating more affordable health care in the longer term.

My major beef is with his conclusions regarding how health care reform will impact the problems at hand. I completely agree that the major issues are information, incentives, and people. The present payment system creates all the wrong incentives. However, Cutler fails to recognize a key element of the perverse incentives is embedded in the faulty information created by the administrative pricing structure. The proposed reforms simply replace one administrative pricing structure with another. I don't care that he and his colleagues are smart Harvard guys. They are no more capable of creating a workable administrative  pricing structure than any of the other very smart people who have failed throughout history.  Claims to the contrary amounts to hubris of the worst kind.

Prices are nothing but information which, within market based economies, serve as the critical information required to effectively coordinate human activity. He recognizes that access to information is key to improve productivity and efficiently allocate resources in essentially any industry. Despite frequent claims that health care is different and cannot be allocated primarily via market mechanisms, the recognition that information is key to effectively reform our system is an implicit recognition that we have little choice but use market based pricing mechanisms. What is our choice? How will we figure out the prices otherwise and how can we determine when they are wrong?


  1. I think that if patients had some 'skin in the game', that this would be an important element of cost control and restraint of unnecessary care. At present, when the physician advises an MRI study to a patient, neither are paying for it. If the patient had bore some financial responsbility for the test, you bet that more questions and discussion would result. "Doctor, is the test really necessary, or can we wait a few days?", would be a common inquiry.

  2. Remarkably, this is what Dr. Cutler suggests is NOT TRUE! The studies which he cites to me represent very weak data. Yet it forms the basis of critically important public policy decisions upon which literally trillions of dollars will be directed.