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Saturday, January 26, 2013

Extracting value versus creating value in health care

One of the pitfalls we fall into when we discuss health care and health care financing is the implicit assumption that health care activities can be distinguished from non-health care activities. This is simply wrong. However, this assumption is almost universally accepted (passively but not actively) and allows for further acceptance of such nonsensical statements as "Health care is different" or "Markets don't work in health care". These statements are nonsense because the critical term health care remains undefined.

Labor specialization and exchange are essential elements of human societies. As societies become wealthier, they become more complex and ever more dependent upon specialization and exchange. Unless we desire to move back to eking out a subsistence existence (along with hunger, disease, and a vastly shortened life expectancy), there is no turning back the clock. Within the web of exchange, there are goods and services which are all linked to some degree to human health. Everything is part of the health care industry. To state that free markets don't work in health care is a non sequitur; it implies that free markets do not work to fulfill human needs.

Markets work for the simple reason they are the best vehicle to create value. Free, non-coerced exchange of goods and services results in goods and services ending up in the hands of those who value them the most. Free exchange creates value and wealth.

In my 30 years as a physician, I have witnessed an increasing divergence between what brings value to patients and what brings value to the health care system that purportedly cares for patients. The increasingly command and control health care system combined with a payment system that divorces the cost of care from recipients has served to drive practitioners and health systems toward simply extracting value from patients and payers, often without actually delivering value to patients. Payments for many services were determined before value to patients was known and questionable interventions were deployed on large scales. We saw this in the past with cardiac bypass surgery, hysterectomies, carotid endarterectomies, and bone marrrow transplants for breast cancer. One not need to look for dramatic and expensive interventions to find resources wasted on activities which create little or no patient value. Find a well person going to the doctor and you are likely to find someone who is receiving little value unless they are getting their vaccinations.

A price coordinated economy rapidly sends signals to producers or goods and services, letting them know whether their products are valued by those who exchange their personal resources for what is being marketed. In domains embedded in free markets, falling out of touch with what is valued by consumers is a quick ticket to extinction.

However, segments of the economy serviced by entities locked into price controls lose the most valuable feedback tool which allows producers to know whether they are bringing value to customers.

That is where much of medicine resides now. We do lots of things to patients, some of which may fulfill patient needs and are worth whatever investment is made for them. I suspect that many simply create very little value for their recipients and much more value for the people and systems that deliver them. We within the field are terribly fearful to allow patients to absorb anywhere near the entire cost to deploy these services as now delivered because we know that patients would not value them sufficiently to pay for them using their own resources. Hello! There is a message there.

Perhaps the contrast between extracting value and creating value is not so black and white. In free markets, for an entity to be enduring and successful it must create value before it can extract value required to maintain itself. The problem with the portion of our economy designated as health care is that creation of value is random and to a great degree irrelevant to the ability of those particular portions of the delivery system to extract value from patients and payers.

As the realm of health care expands capturing ever larger portions of the overall economy in the command and control, administrative pricing trap, the waste and extraction without clear value creation will only aggravate our current economic situation. Economics is all about the allocation of scarce resources and no method has proved superior to free markets in directing resources into the hands of those who value them most and can create the most value.

This is not a trivial intellectual spat. We either fix the problem associated with health care payments or we go broke. We will not fix this problem until we understand the difference between creating value and extracting value, and come to realize that markets are the best tool we have at our disposal to work best to foster free exchange, allocate scarce resources, and create value in all realms of human activity.

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