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Saturday, April 23, 2011

Throwing down the gauntlet - Are you a market denier?

There is a piece in today's New York Times highlighting the bipartisan resistance to the Medicare Independent Payment Board proposal. What sounded like a good idea in the heat of contentious discussions regarding health care reform now sounds problematic to basically everyone when they have a chance to reflect and ask basic questions such as "Now how is this going to function?".

I can see how parties were seduced to buy into this initially when there were so many contentious issues on the table. The question arose as to how pricing and cost issues would be dealt with in the brave new world of health care reform. About the same time the AMA linked RUC was widely revealed to be a source of perverse pricing which has undercut the ability of primary care to survive. No one could resist the temptation to use the simple add another layer of bureaucratic control to fix this problem ... viola, let's make an independent board and hoping for the miraculous success of deus ex machina worthy of Greek tragedy, and move on to some other sticking point.

Now that we have moved on to actual implementation, the folly of administrative price controls and the ramifications of the deployment of a politically driven board creating prices for one sixth (and growing) of the American economy has begun to hit home. This issue is not specific for the newly conceived payment board. It has been a long-standing problem with the RUC as well, as could be expected for any mechanism that attempts to set prices for an entire industry through administrative means. However, this issue is now front and center since it is part of a larger problem of how growing health care spending is bankrupting our economy.

There are criticisms from both Democrats and Republicans. For the most part, they are off base from both sides of the political spectrum and display a remarkable ignorance of basic economics. I am not surprised. I am sure they would characterize my comments as being completely ignorant of basic politics. I view that as being proof of my contention that this issue needs to be moved out of the political realm as much as possible since as far I am concerned no political solution is compatible with basic economics.  Political entities are best for setting the basic rules we should operate under and they rapidly become untenable management tools when they assume primary control of allocation of scarce resources.   History is filled with examples of failure and I challenge anyone to identify examples of ANY successes.

The problem with administrative pricing, whether concocted by the RUC or some other "independent" board is that prices are supposed to reflect value to the buyer of services and value is entirely context dependent. Administrative entities are inherently incapable of factoring context into their calculations because context is always changing and has essentially infinite variations. Because of this inability to account for the most important element associated with understanding value, there is only one thing that can come from any attempt to fix prices through such entities. The prices will virtually always be wrong and not reflective of actual value to the consumer. On the rare occasion that the price is right, one can ascribe this to the blind squirrel principle.

The stakes are high. There are always more wants than there are resources to fulfill them. While mentioning rationing is the political equivalent of touching the third rail, denying we need a mechanism to allocate scarce resources is like denying the existence of gravity. No amount of political angling will make it go away. Politicians want to promise they can use increasingly complex bureaucratic interventions to create a world where the laws of economics can be skirted. Just one more rule and we can get people to behave the way we want them to behave. Hope springs eternal.

Prices are simply signals. They tell people that the rest of the world believes that items priced highly have value while those with lower prices have less value. No independent board can figure out what the value of literally an infinite number of services which will be delivered in ever changing and infinite number of contexts. They will send the wrong signals and prompt those providing medical services to to waste their time delivering things to patients which provide little or no value and fail to provide incentives to deliver services which patients need, want, and will add value. This is where the real waste is produced.

Within educated classes, there are certain concepts which are viewed as litmus tests. If you believe that the extermination of six million Jews did not happen in WWII, you are labeled as a Holocaust denier and viewed as a crank (rightfully so). If you fail to accept the evidence that the world is billions of years old and the product of processes which have gradually shaped and changed the world, you are a denier of evolution. There are those who refuse to accept that HIV is caused by infection by a retrovirus, despite mountains of data in both humans and animal models.  It is hard to be in the intellectual mainstream if you fail to accept these concepts. However, it is the norm within the intelligentsia to be a market denier, despite the overwhelming evidence that no entity implemented by humanity is superior in allocating scarce resources than price coordinated markets.

Are you a market denier? Is this a matter of an informed decision, a belief system which you are loath to question, or something which you have given little thought to despite embracing strongly? The only way one can buy into payment boards setting prices in health care is to be a market denier, whether you realize it or not. As we move into the next stage of contention in the political realm, I would simply appreciate it if those who are market deniers are simply transparent about it, state that they do not trust markets to allocate scarce resources within the health care realm, define the mechanism which they propose to replace the market, and identify examples in history where such approaches have worked better than markets. Good luck, you will not find any.

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