Flatlined: Resuscitating American Medicine

Chapter 18. A Workable Plan for Reform

212 If I believed that the unaided market forces of 247 million people (the U.S. population minus those enrolled in Medicare) would drive down the cost of health care and extract waste, I would not have been impelled to write this book. But the medical industry does not operate like a conventional market. Lowering cost and improving quality are not as simple as unleashing market forces. As I have shown in previous chapters, waste and poor quality thrive because the health care system is highly insulated against external pressure. Hospitals by their nature enjoy a privileged position in the community ; they are regional monopolies or oligopolies. If market forces were at work in medicine, an empty hospital bed would sit idle until the price was right, but an empty bed always gets filled. If the sale of hospital services were like the sale of cars, then hospital revenues would not increase just because prices were increased. Regions of the country with a plethora of hospital beds and specialists spend 60 percent more for the same care at lower quality than do regions with the fewest beds and specialists. In a standard business model, the demand for services drives the supply of those services. In medicine, the standard relationship is reversed: increased supply produces increased demand and use. In two situations—urban monopolies and rural shortages—competitive hospital pricing is probably impossible to achieve by consumer power. In large cities, oligopolies can be created when only two hospital systems control health care rather than a larger group of hospitals and hospital 18 A Workable Plan for Reform Consumers will need some help from the federal government to keep health care costs manageable. CH018.qxd 10/7/08 10:10 AM Page 212 A WORKABLE PLAN FOR REFORM 213 systems, and the result can be particularly inflated prices and little consumer choice. On the other hand, 15 percent of Americans live in rural areas where they are lucky if they have access to a hospital. Rural hospitals barely hang on financially because they cannot pick and choose the most profitable patients like their big-city cousins can. For instance, bigcity hospitals can increase their margins by promoting the performance of highly paid procedures and discouraging admission of low-paying patients who need medical, not procedural, management. Rural hospitals admit everyone in their community but lose high-margin procedures to big-city hospitals. They suffer high overhead because they are small and have no economies of scale. Rural hospitals are regional monopolies, but they can’t always price-gouge because they are money-losing community resources. Thus, there are some inherent limits on the ability of competitive pressure to drive hospital performance. Doctors have a monopoly on information because they know what patients don’t. Doctors are able to promote the application of technology by the information they present to patients and how they present it. Although excess treatment is not entirely to blame, 46 percent of the increase in health care costs from 2000 to 2003 was the result of increased application of technology per capita.1 In a perfect market, if individuals paid for medical services, doctors would be forced to compete with each other on price and perhaps quality as well. But as a patient, who knows whether or not she really needs a procedure ? A treatment or test can be prescribed or performed for just about any ailment. The matter is more complicated because a patient whose life is in a doctor’s hands must be comfortable with the doctor. Finding the right doctor is not like shopping for a car. It is more like seeking a relationship , and relationships are difficult to price. The resistance of doctors and hospitals to the consolidated power of insurers and employers is another testament to medicine’s rigid opposition to change. Insurance is more consolidated than any other segment of the medical industry, yet it has been unable to reduce health care costs. Fifty-five percent of those with employer-based health insurance are directly funded by their employers, with no insurance middleman.2 Even self-funded large employers have been unable to bring health care costs within bounds. Despite these failures, there are powerful reasons to turn CH018.qxd 10/7/08 10:10 AM Page 213 REFORMING AMERICAN HEALTH CARE 214 direct responsibility for the purchase of health care over to the individual backed...