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Thursday, August 9, 2012

Health care economics and the "fatal conceit"

I have to give the authors of the NEJM commentary credit. They have succeeded in taking unguarded optimism to new heights. They conceive of and attempt to design an entirely new world of health care economics, all using 3500 words or less. Never short on confidence, they do not let minor operational details  get in the way of some good sounding ideas. I selected key elements of this article for comment and have edited out sections for brevity. I believe that the message from the authors has not been substantially altered. The entire article is available at

Everyone (or at least almost everyone) agrees that we have a problem in health care. We are going broke because of costs. We have millions of uninsured. We have millions of under insured. We have problems with access to care, even among the ranks of the insured. We have problems with quality and safety. Have no fear, this elite group of very bright people can rebuild and rewire the house of medicine, even without having to turn the power off.  There is a small problem, however. It appears as thought they haven't a clue as to how they can actually accomplish this these tasks. Take for example their first charge:


Under our current fragmented payment system, providers can shift costs from public payers to private payers and from large insurers to small insurers.5 Since each provider negotiates payment rates with multiple insurers, administrative costs are excessive. Moreover, continued consolidation of market power among providers will increase prices over time.6 For all these reasons, the current system is not sustainable.
Under a model of self-regulation, public and private payers would negotiate payment rates with providers, and these rates would be binding on all payers and providers in a state. Providers could still offer rates below the negotiated rates."
I couldn't agree more that the current system is a mess and not sustainable, but let me try to understand this alternative. Who would negotiate and with whom would they negotiate if whatever deal they struck would be binding on other parties with whom they did not negotiate? Negotiation requires effort and information on costs, local factors, alternatives, and countless other details. Which entity would invest in amassing this information if there are no particular advantages.

But there is more...
"The privately negotiated rates would have to adhere to a global spending target for both public and private payers in the state. After a transition, this target should limit growth in health spending per capita to the average growth in wages, which would combat wage stagnation and resonate with the public. We recommend that an independent council composed of providers, payers, businesses, consumers, and economists set and enforce the spending target."
That's the ticket! An independent council. Now all of our problems are solved. All we need to figure out how  the members of this council could remain independent (of what?), avoid issues of regulatory capture, and be able to avoid the missteps associated with imperfect information which have bedeviled every other central regulatory entity that have attempted to set prices administratively since Diocletian. I shouldn't fret. We are obviously smarter than every else in history who has attempted to do something similar in the past. We will finally get price controls to have the desired effects.

No matter what the discussion might start with, we always end with:


Fee-for-service payment encourages wasteful use of high-cost tests and procedures. Instead of paying a fee for each service, payers could pay a fixed amount to physicians and hospitals for a bundle of services (bundled payments) or for all the care that a patient needs (global payments)."
Again, I will not defend the present fee for service system, but it is not a fee for service system alone which creates the current nightmare. It is the FFS system coupled with a third party payer which allows for providers to deliver and patients to receive often near worthless services without rapid feedback as to the cost. The global payment system will have its challenges and it is being foisted upon us on the assumption that it simply cannot be worse than what be presently have. It will succeed in its major goal by successfully stinting on care and not raising too much of a public protest.

When the RBRVS system was pushed forward, I recall someone describing it as the worst of Harvard dressed up as the best of Chicago. Next, various central planning exercises have been dressed up as market driven efforts. Here we go again.


Evidence suggests that prices for many products, such as medical equipment and devices, are excessive.9 Instead of the government setting prices, market forces should be used to allow manufacturers and suppliers to compete to offer the lowest price...... 
We suggest that Medicare immediately expand the current program nationwide. As soon as possible, Medicare should extend competitive bidding to medical devices, laboratory tests, radiologic diagnostic services, and all other commodities.12 Medicare's competitively bid prices would then be extended to all federal health programs.13 To oversee the process, we recommend that Medicare establish a panel of business and academic experts."
I am all for competitive bidding for things that are truly commodities but what is a commodity? By what criteria will the bids be awarded? I can only guess. Do we need to buy American? What about union vs non-union? Environmentally friendly?  Again we see the experts. Who is on the panels of experts? By what process will they be selected? This will be done within the political world by a political process with a political outcome. Success will be ultimately measured by the garnering of votes.

Value is now the buzzword. Everyone wants to purchase and deliver high-value products and services.


The market dominance of select providers often drives substantial price variation.14 To address this problem, insurers can offer tiered plans. These insurance products designate a high-value tier of providers with high quality and low costs and reduce cost sharing for patients who obtain services from these providers........
Transparency and consumer education are essential.17 Quality and cost measures must be standardized and publicly disclosed, and standards must be set for how these measures are used to create tiers. Whenever possible, quality measures should use data from all payers. Finally, in contracts between insurers and providers, clauses that inhibit tiered products must be prohibited."
It is like Lake Wobegon where all the children are above average. Since value will be defined as high quality and low cost, and no one really can measure quality, it is all about cost. I agree that price transparency is essential and I have nothing against tiers in pricing, as long as the information transmitted by differential pricing contains useful information. Which leads us to the next recommendation..


If exchanges passively offer any insurance product that meets minimal standards, an important opportunity will be lost. As soon as reliable quality-reporting systems exist and exchanges achieve adequate scale, it is critical that federal and state exchanges engage in active purchasing — leveraging their bargaining power to secure the best premium rates and promote reforms in payment and delivery systems.
 Note all of this in contingent upon the existence of reliable quality reporting systems which do not yet exist!  Also remember that these exchanges are not about the purchase of actual health care services, they are involved in the purchase of insurance. They will be charged with the task of driving prices down first and examining their effect on quality later, if an when the tools become available to do so.

This is almost laughable if it were not so serious.


The United States spends nearly $360 billion a year on administrative costs,19 accounting for 14% of excessive health spending.20 Section 1104 of the ACA requires uniform standards and operating rules for electronic transactions between health plans and providers.11 Although plans must comply with these standards and rules, the law does not require providers to exchange information electronically.
First, we suggest that payers and providers electronically exchange eligibility, claims, and other administrative information as soon as possible. Second, public and private payers and providers should use a single, standardized physician credentialing system. Currently, physicians must submit their credentials to multiple payers and hospitals. Third, payers should provide monthly explanation-of-benefits statements electronically but allow patients to opt for paper statements. Fourth, electronic health records should integrate clinical and administrative functions — such as billing, prior authorization, and payments — over the next 5 years. For instance, ordering a clinical service for a patient could automatically bill the payer in one step.
Most important, we recommend that a task force consisting of payers, providers, and vendors set binding compliance targets, monitor use rates, and have broad authority to implement additional measures to achieve systemwide savings of $30 billion a year.21
Yes there are gains to be had from uniform credentialing, common information exchanges, and streamlined eligibility processes. But they must be joking!  The informatics infrastructure to implement all the above will make the $360 billion in administrative costs look like chump change. This will require huge investments and complete re-engineering of workflows in millions of separate offices. They miss the obvious here. The inclusion of insurance into more and more transactions which should be be insured is the driver of the ballooning administrative costs. And yet another task force of experts working within the political realm.

Sounds like a good idea. It may not be so easy to make sure we are comparing comparable services. Replacing a hip in a 90 year old may not be the same as replacing it in a 60 year old.  I would take it one step further and allow for balance billing for providers who are not afraid to advertise they are more expensive.  

Now for the absolute mother of wishes on the wish list...


Restrictive state scope-of-practice laws prevent nonphysician providers from practicing to the full extent of their training. ........
We recommend that the federal government provide bonus payments to states that meet scope-of-practice standards delineated by the Institute of Medicine.
Implementation of this would require a complete rethinking of licensing of professionals throughout health care. Don't get me wrong on this. The present licensing structure needs to change. There is no question that many of the tasks required to take care of patients can be delegated to workers without medical degrees. The authors propose to bribe states to loosen professional licensing standards. I cannot imagine where this will end up but wherever that might be the path will be littered with the debris of serious political battles. The winners may not include the public. When do the chiropractors get privileges to do colonoscopies as well as colon irrigations? When do the acupuncturists and message therapists get prescribing privileges. When do the optometrists get to do Lasik surgery? When will nurses run patient care teams in acute setting devoid of any physician oversight? When will they be directly supervising physicians?   


Many studies show that when physicians self-refer patients to facilities in which they have a financial interest, especially for imaging and pathology services, they drive up costs and may adversely affect the quality of care.24,25 
Except for when we are dealing with ACOs. In that case self referral is exempted. This is an unnecessary level of complexity. Everyone else in the world refers to themselves. The major difference is when this happens, people sharply examine the transaction since they personally pay the bill. Give patients more skin in the game and the Stark Law becomes irrelevant.


The Federal Employees Health Benefits Program (FEHBP) provides private health insurance to 8 million federal employees and their families. 
Sure, make federal employees play by the same rules as the rest of us. Throw Congress in there as well. And make the Feds use the same accounting rules that everyone else uses as well. I am a reasonable guy.


More than 75% of physicians — and virtually all physicians in high-risk specialties — face a malpractice claim over the course of their career.28 .......
A more promising strategy would provide a so-called safe harbor, in which physicians would be presumed to have no liability if they used qualified health-information-technology systems and adhered to evidence-based clinical practice guidelines that did not reflect defensive medicine. Physicians could use clinical-decision support systems that incorporate these guidelines.
Under such a system, the physician could use the safe harbor as an affirmative defense at an early stage in the litigation and could introduce guidelines into evidence to avoid a courtroom battle of the experts. The patient could still present evidence that the guidelines were not applicable to the particular situation, and the judge would still determine their applicability.
It is critical to develop guidelines with credibility. A promising step is an initiative called Choosing Wisely, in which leading physician groups released guidelines on 45 common tests and procedures that might be overused or unnecessary.32 Given the important role of guidelines, physicians who participate in developing them must be free from financial conflicts of interest.

Interesting idea. Throw a bone to the docs. Give physicians immunity (partial?) from malpractice if they adopt tools and guidelines of care which likely have not been demonstrated to improve the quality of particular outcomes. I should not be so critical of the guidelines since they have yet been developed. That is what politics is all about. Alas, more experts.


These are the types of large-scale solutions that are necessary to contain health costs. Although many in the health industry perceive that it is not in their interest to contain national health spending, it is a fact that what cannot continue will not continue.
Americans therefore face a choice. Payers could simply shift costs to individuals. As those costs become more and more unaffordable, people would severely restrict their consumption of health care and might forgo necessary care. Alternatively, governments could impose deep cuts in provider payments unrelated to value or the quality of care. Without an alternative innovative strategy, these options will become the default. They are not in the long-term interests of patients, employers, states, insurers, or providers.

Price signals are the most effective means to communicate dispersed knowledge to each other, in order to solve the economic calculation problem. When prices are administratively created they lack useful coordination information and send the wrong signals to economic players. For these authors, the path forward is paved with experts and planning. To entrust allocation of scarce resources in health care to true markets is inconceivable. This is the fatal conceit as described in Freidrich Hayek's book "The Fatal Conceit". We can only hope that they do not suffer from this conceit and really are smarter than those who have tried and failed before. I am not so optimistic. 

1 comment:

  1. The most perverse element of the system, but absolutely critical for its success, is that it precludes independent practice by physicians outside of de facto state control. Essential because if independent practitioners provide either perceived or demonstrably higher quality care the majority of the population under the collective system will realize they are being shortchanged, conceivably of some years of life itself if the statistics from western countries with socialized medicine are accurate. You don't know how bad off you are unless you have some metric to compare it to.