For Profit Medicine


People who have imbibed from the cup of free-market-fundamentalism get very confused about markets. They think "free" market means little government intervention - not that it means a market where the goods are essentially identical, where information is available to every one on price and quality, where there are almost no barriers to entry and where there are a pile of producers of the good or service in question, all of whom can easily be replaced by the other.

In such circumstances, indeed, the market will operate in the way free market fundamentalists think it operates. Otherwise... it won't.

I bring this up because the topic today is health care. Let's jump in with an example (hat tip: Lean Blog:)

...the hospital revamped how it treated some expensive ailments, cutting down high-tech tests and high-end specialists.

But a troublesome pattern emerged: The more cost-effective it became, the bigger financial hit the medical center took. "Everyone gained but Virginia Mason," says its chief of medicine, Robert Mecklenburg.

More After the Jump

With each MRI that Aetna and the employers avoided at around $850, Virginia Mason lost about $450 in profit. The payment system of government-sponsored Medicare, which private health plans also use as a template, tends to reward the big capital expenses of buying high-tech machines such as MRIs. The more the machines are used, the bigger profit margin they pack. Meanwhile, reimbursement fees for doctors' visits have stagnated.

"The payment system is so toxic," says Francois de Brantes, a former health-care program director at General Electric Co. "Unless you tackle it, any health-care reform doesn't have much chance." Mr. de Brantes coordinates a program funded by employers that pays doctors bonuses based on patients' outcomes.

Notice the perverse incentives? You could hardly miss them. When the goal of healthcare is to make profits - when doctors are individual contractors, when hospitals are profit making centers, then they will act to maximize profits - not the health of their patients, and certainly they won't act to reduce how much they can bill people by.

Then there's Dr. Hu, in China:

"Dr. Hu Weimin has attracted a wide following among the poor in this city by providing free advice on how to avoid high blood pressure and dispensing cheap drugs to treat the condition, one of the biggest killers in China.

His efforts have won him national recognition, and he counsels thousands of patients via the Internet. But Dr. Hu's public health message has turned him into an outcast at his hospital. Fellow physicians shun him, and administrators bar him from the wards."

The bottom line: Dr. Hu is bad for business at the Loudi Central Hospital. By making treatment widely affordable and talking up prevention, Dr. Hu says he has cost the hospital a small fortune in lost profits.

Like hospitals all over China, Loudi Central earns the bulk of its income from sales of drugs and high-tech testing. Doctors who pull in the most revenue earn the biggest bonuses. That gives them an incentive to pad the bills, not slim them down. Academic studies show that 50% of all Chinese health-care spending is for drugs. In the U.S., the figure stands at about 10%. "Every prescription is a money-making opportunity," says Dr. Hu.

I am here to tell you right now that this sort of thing happens all the time in US hospitals. Surgeons actively fight against cheaper alternatives to surgery, even when those alternatives have as good, or better, patient outcomes. Entire departments are underfunded in hospitals because they are not profit centers (for example, it is very hard to justify obstetrics, except as a loss leader).

In the US all the primary actors have as their main goal making money. That's what they concentrate on. It shouldn't surprise anyone, then, that the US pays more per capita on health care than any other modernized country, and gets the worst metrics - after all, you aren't trying to get good health care, you're trying to make money for health care providers and all of their hangers on like drug companies, insurance companies, appliance manufacturer's (whose markups, by the way, are often multiple hundreds of percent.)

The incentives are all wrong - the US does more surgery than any other country in the world, per capita, and that's not because it leads to better outcomes - that's because surgery pays the surgeon, and the hospital, more.

This is partially an information problem. Procedures and medicines are not compared against each other, they are generally compared against placebos. You can't tell if medicine X is better than medicine Y, because there's never been a trial comparing the two. You can't usually tell which of two surgical procedures treating the same problem are better, because there's never been a study comparing the two. And certainly there's rarely been a study comparing a surgical solution with a non-surgical one.

The information often isnt' available - even to doctors - let alone to patients or anyone else. And when it is, it is often deliberately ignored and downplayed - drug companies and appliance companies spend a lot of money putting doctors on their advisory committees and using them to fight any suggestion that their new drug or surgical appliance is only as good as, or worse than, some older and cheaper method.

Incentives matter - if there is anything that those who claim to understand markets should understand, it is that. And the incentives in the health care system right now are geared mostly towards making money, and not towards increasing the health of patients. As such, costs will continue to soar and health outcmes won't - because you get the behaviour you reward and that's the way the US system is set up.


Ian Welsh January 17, 2007 - 11:49pm
( categories: Analysis )

into reductio ad absurdum in order to reinforce this -

Notice the perverse incentives? You could hardly miss them. When the goal of healthcare is to make profits - when doctors are individual contractors, when hospitals are profit making centers, then they will act to maximize profits - not the health of their patients, and certainly they won't act to reduce how much they can bill people by.

"When you make money from providing health care, what good are fully cured people to your revenue stream the day after their final bill is paid?"

That's the equation I'd never want flitting through anyone's mind - no matter if it's only one guy in a back office - who's in the chain that provides healthcare to my child.

Escher Sketch January 18, 2007 - 12:37am

Happens every day at the drug companies - that's why most new medicines are palliatives and not cures. What good is a pill that cures someone when they could have to take your medicine for life? And pay for it for every day of their life?

ie. It's not reductio ad absurdum, and there have been non pharmaceutical cases, especially in psychiatric hospitals.

(Can you prove you're sane?)

Ian Welsh January 18, 2007 - 12:47am

Canada vs. Denmark?

I understand that Canada has a single provider system but how is it administered, what are the basic logistics?

The Danish system is national. The funds come from federal taxation and are then distributed to the regions. There are 5 regions (similar to a province or state only much smaller of course). The regions handle all procurements, budgeting, locations of hospitals and number of hostpital staff, etc. Within the regions, there are counties. Each person MUST be registered with his/her county of residence. You choose your GP from within your county. Your GP is responsible for all your preventative care and cooridinates all medical procedures; surgeries, child births, physical therapy, ect.
The system treats everyone as a human being. The GP is truly the "family doctor" and the system covers everybody completely from cradle to grave. I'm not sure how a national system would best be organizied in the U.S., given the scale of the country.
STN

stuart noble January 18, 2007 - 2:31am

and everyone is covered.

Every province (10, and 3 territories) is responsible for their own health care plan. There is variance in premiums that are collected and the manner in which they are collected.

In Ontario, the premiums are collected annually at income tax time and employers that have payrolls of over $400,000 pay them at that time. Canada has equalization payments. Ontario has never received equalization payments from its inception. The wealthier provinces do not receive, the poorer ones receive funds that makes their healthcare equal to wealthier provinces. Premiums that people pay in Ontario are modest.

We choose our own family physician, but in reality, the decision relies on if the physician is taking patients. Family doctors refer their patients to specialists if the patient's treatment is beyond their expertise--no choice is given to the patient about the specialist, (unless the patient expresses dissatisfaction about the specialist--if so, usually another specialist is selected). Small, rural communities usually have community health centres where several family doctors are able to relieve one another so no one doctor is on call all the time. Hospitals in rural communities usually transfer patients to larger centres if more intensive treatment is needed. If an ambulance is called to transport a patient that lives in a rural community--the ambulance attendants would select whether to take the patient to a rural hospital or urban.

Quality care is accessible to everyone and no one is denied treatment.

Patients never see the bills--doctors send their bills to the billing centres within the provinces where the treatments were administered. There are agreements between provinces should a person travel from their home province to another province and require services from a doctor. There is no national plan for prescriptions. Not everything is covered on the national plan. i.e. eye and dental care, 'elective cosmetic',--patients either have supplementary insurance or they pay for those services. Drugs are covered if hospitalized. Ontario has ward coverage, but if a bed is not available and they have to put you in semi or private rooms, the province would pick up the tab. Seniors , age 65, get drug coverage after the first $100, they pay $6.11 for prescriptions (if the drug is covered--most are).

Preventative care usually catches diseases before they become major complaints. There are people who go to doctors for colds, but I would imagine that after a short period of time the doctor would instruct his receptionist to monitor their complaints before an appointment is made. That would be the physician's judgment and would not be taken lightly by the doctor involved. Usually there are nurses in the doctor's office who would act as a screener.

-----

I would think if the United States ever does go national--each state would administer its own plan--similar to your and my country with contributions from the federal government. There would have to be agreements between states because states are close together and people interact in neighbouring or often in distal states.

canuck January 18, 2007 - 1:14pm

The US system, at least, and perhaps all current health care systems, provide no financial incentives to the participant individuals and institutions to keep their clients healthy, so the system doesn't work towards that goal, though some physicians and patients do.

randolph January 18, 2007 - 12:29pm

You've got it right for the most part, Canuck. Except maybe the part on choosing your own specialist. With my physician, I can choose anyone I wish. Also, while the alternative route is gaining strength in Canada, some physicians continue to resist this trend whereas others encourage it. My physician never objects to my refusal to take "toxic" western drugs. In fact, she takes alternative supplements herself LOL. And so does my physician friend. I take the toxicity in western drugs very seriously as I suffered severe pain for 6 weeks and almost died from a drug reaction.

The Canadian healthcare system has some disadvantages. Because people perceive healthcare to be free, the waste of supplies in hospitals is enormous. Also, unneccesary vistis to the doctor's office or to the Emergency department drain funds from the healthcare system.

"Those who can live on little money are rich". - Adrena

adrena January 18, 2007 - 3:36pm

of a specialist that I wanted to see, my doctor would refer me to him/her.

No way do I perceive healthcare as free. I take absolutely nothing...no pills, no herbal medicines, no artificial vitamins, and my health is fine. Had my last check up a couple of months ago. I am careful with what I eat and grow my own vegetables. The stuff in the store is usually devoid of vitamins and lacks taste. Unfortunately in winter, fresh produce and fruit has to be bought and I do not buy stuff that is labelled organic, because usually it's not--why pay extra for produce that has been subjected to chemicals? Whenever more than fifteen pounds overweight, I go on a diet and lose it. (last year did not do that and now have to lose 25, which means staying on it longer--lost 5 pounds last week. I do not exercise and am very sedentary.

There are very 'few' people that abuse the healthcare system in Canada. Why would they...it does not cost them anything to either go or not. Going to the hospital or to your doctor is not a big deal! I'm sure hospitals take pilfering into account when inventories are taken -- stealing exists in all parts of society and healthcare is no exception. Drugs are counted and only those with a key have access. When drugs and valuable equipment are missing, security is increased.

I hope one day America does get single-payer, non-profit national healthcare.

canuck January 18, 2007 - 5:25pm

Corporate welfare.

Free market or privatisation, the means remain the same. Health care in U.S. is a heavily subsidized system to support a private sector mechanism. The same holds true for just about any so-called private sector. Our beloved Internet was tax payer funded via defense and the Ivy League, and hopefully the Iraq War will bring fruitful civil transitions. But my goodness, what a terribly inefficient way of supporting a pseudo or maybe, mythological model called capitalism. The Lord blessed America with such great wealth and what does she do in such a very short period of time-- redistribute it everywhere but for the purpose of her own span of life.

union1 January 18, 2007 - 11:57pm

Agreements between states?

Canadian/Dansih indeed very similar.

Dental and Eye also not covered, however, dental covers children up to age 18.

Before Denmark joined the EU there were ageements between the Nordic countries. Today there are health care agreements with all member states so one is covered anywhere in the EU. It seems that there is a consensus that U.S. states should admin. their own systems but I can see how this potentially could create tensions between the states. The EU model is meant to cover people who are on holiday or short stays abroad. It doesn't cover non emergency surgery, etc... For longer stays outside of ones home country one is required to either buy insurance or register with host country's health plan which would cover anyone who is working and thus paying taxes. I can certainly imagine a universal health care scenario in the U.S.in which some states provide significantly better and more extensive care than others. What would prevent a financial strain on states giving treatment to "non-residence"? Furthermore, how does one address the problem of disparity to begin with?
STN

stuart noble January 19, 2007 - 1:43am

federal input and involvement. It is not reasonable that poorer states can offer the same services as richer states. How they work that out would be up to the Federal and State governments. To tell you the truth, I don't know how Newfoundland and the eastern provinces are able to compare their system to Ontario's. It has to be virtually impossible to compare services in the Northwest territories, Inuvit and the Yukon to Ontario's or for that matter any other province. They have a miniscule population, but very high transportation costs because of the amount of land mass between settlements and also experience extremely unfavourable weather conditions. No idea if the Federal government puts a ceiling on how much they receive? Northern parts of all of the provinces, with the exception of Nova Scotia, New Brunswick, and Prince Edward Island, because their latitudes do not go North far enough to experience like conditions as the territories and Northern parts of the rest of th provinces. My assumption is there is disparity within our enormous-sized provinces.

canuck January 19, 2007 - 6:14pm

creating lean systems for improved patient care. I was VM's initial lean consultant in 2001. They have taken a very aggressive, purposeful, and long view of removing waste from their complex system, and have done it WITH real regard for the long-term value of their medical center and clinics and not for the quarterly bottom line. they also have been astute in refusing to trumpet their early accomplishments until they could point to substantive and permanent changes.

trob January 19, 2007 - 3:03pm

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