Indignant about inevitable arbitrage

Gilbert Welch penned an indignant piece in the Op-Ed section of the New York Times yesterday (link) titled "Diagnosis: Insufficient Outrage". I am generally a fan of his work, much of it focused on the limits of screening approaches to disease. In this piece Dr. Welch expresses profound dismay regarding the lack of professionalism serving as a brake on undesirable but not necessarily illegal activities in health geared toward extracting value from patients as opposed to delivery value to patients.

He is correct in his assessment that perverse incentive structures inflates the cost of health care in the US, driving costs through the roof and making it more expensive than anywhere else in the world. He notes particular examples:

"Consider another recent shift in health care: hospitals have been aggressively buying up physician practices. This could be desirable, a way to get doctors to use the same medical record so that your primary care practitioner knows what your cardiologist did.
But that may not be the primary motivation for these consolidations. For years Medicare has paid hospitals more than independent physician practices for outpatient care, even when they are providing the same things. The extra payment is called the facility fee, and is meant to compensate hospitals for their public service — taking on the sickest patients and providing the most complex care.
But now hospitals are buying up independent practices, moving nothing, yet calling them part of the hospital, and receiving the higher rate."

Well duh? This is to be completely expected based upon how the rules are presently written. It is called arbitrage, buying a product in one market and moving to a different market where you can sell the same product for more money. What in the history of mankind would lead you to believe this would not happen  in health care markets?

Yes, at the outset many if not most hospitals might balk at doing this, but if the activity is not illegal, the most entrepreneurial parties will jump on this. In the absence of the ability to sanction them, they will quickly become wealthy and influential within their fields and spheres.  Generous profit margins bring resources, credibility and soon those early adopters become the darlings of the industry, and find lots of other parties trying to emulate what has become "best practice". Given this, who would ever want to "leave money on the table". The reality is no one, except parties who are so principled they go out of business. Like it or not, the health care business has selection pressures.

This is inevitable, no matter how steeped a profession may be in "professionalism". Human nature is to look out for one's own interests first and then others later. There may be unique exceptions but to build a large system of exchange based upon altruism over self interest is to base your system on delusion. This is why markets tend to work better than other systems of resource allocation. They explicitly recognize that we work based upon the principle of self interest but the brilliance of markets is they also reward one's self interest by bestowing the highest rewards over time on those who figure out how to deliver what the public wants. It is not perfect but it is less imperfect than the alternatives.

Want to "sell" EKG's? Figure out how you can convince individual members of the public that they receive sufficient value from this test to justify spending of their own resources up front. Similar to colonoscopy, I suspect there would be no problem with overuse if people paid their own money or at least had a larger financial stake in the test. Based upon other markets, the costs would drop and better tests at lower cost would become available, assuming the public became convinced that these test actually added value to their lives. I predict many services will need to become much less expensive for the public to value them sufficiently to justify widespread use. The NNT calculus will need to change.

Dr. Welch has a prescription for the problem, one that I don't necessarily buy into:

"We could make the system better. We could ensure that everyone has access to the same set of prices, like the Medicare fee schedule. We could end the “fee for service” positive feedback loop — in which doctors and hospitals earn more for every procedure they do, which leads to overtreating patients — and instead have a flat fee. But the incentives will never be perfect. Ultimately, society needs individuals to be guided by ethical standards. And in medical care, those standards are getting pretty darn low.
Too many of us have passively accepted the situation as being beyond our control. Medical care in America could use a dose of moral outrage. It would be best for all if it was self-administered."

It is not going to happen. Richard Epstein's work on simple rules highlights a key point. As we deal with larger groups, the rules need to become simpler and more explicit. All sorts of parties are now part of the health care delivery systems, with almost 1 in five dollars of the economy involved in health care delivery. Physicians do not control this, not by any stretch and even if there could be some consensus among doctors that a common vision as to what is ethical vs not ethical could be reached, there is no way this could be imposed on the broader health economy. There is no way the consensus could be reached anyway.

We could try to resort to rule of experts. This idea was floated by Plato in form of philosopher kings, based upon the assumption that the public was too stupid to know what they should want. I won't contest that people may make bad choices, in matters relating to their health as well as other important matters. However, any attempt to delegate those decisions as a default to other expert parties runs into the self interest principle. Just look at the RUC. 

Indignance makes one feel good and self righteous. It might muster political forces which might harness this to guess what...further their own self interest. Who can look out for the interest of patients best? Patients empowered with information, their own financial resources, and incentives to spend them wisely. I can be pretty certain they would NOT spend their own money the way it is being spent now. That should be reassuring.