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Wednesday, May 26, 2010

More about prices

I get the TOC from the NEJM. I am very grateful for the editors of the NEJM for providing me with a constant source of nonsensical analysis which serves as inspiration for my blogs. This week at least two authors wrote pieces which clearly identified historical problems with pricing medical services as a source of problems which are at the heart of issues which we have yet to effectively address.

The problem boils down to this. Prices for health care services are by and large administratively set. Administrative pricing never gets prices set correctly. When prices are not correct, it creates perverse incentives by sending the wrong information to all parties involved.  The health care economy will continued to be screwed up as long as the prices are set incorrectly.

It would seem that the heart of the problem is not that the prices are incorrect, it is that the methodology used to define prices within health care is wrong. It is not that we have selected the wrong experts to set the prices, it is we have elected to use experts at all.  If this were a fuzzy arena in economics, with experts weighing in that there were many examples in history where administratively set pricing was the foundation of a robust and durable system, I could see how this analysis might be widely embraced. Heck, we just need to find just the right administrative entity or administrators!

However, history is completely and utterly devoid of ANY SUCH EXAMPLE. The administrative pricing model has perhaps one of the most perfectly consistent records of anything in the history. It has NEVER worked. Yet this indisputable fact appears no where in any of these discussions. We need to give Robert Berenson  credit in that he recognizes that present solutions to the pricing problem are woefully inadequate and that their correction is key to any future solution.
Paradoxically, it will be necessary to correct mispricing and other flaws in existing fee-for-service payment systems in order to ultimately dismantle them.
The challenge will be to know when things are fixed. As long as we use the administrative model to price health care, we can be assured that we will not need to worry about this any time soon.


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