Health Care and Markets, Part 2

May 17th, 2011 at 12:38 pm

My last post focused on ways in which the private insurance market doesn’t operate like much of a market at all.

This one, based on a smart NYT editorial this AM, is about how markets actually could and should work to lower health costs, if we let them.

During the debate over health care reform, we talked a lot about a key missing piece of the health market: the ability of doctors and patients to actually know what works for what ails ya, and at what cost.

Obscurely referred to as “comparative effectiveness,” it’s actually extremely simple.  Here’s a real life example.  I recently bought a smart phone and there were about 30 to choose from.  I found one that had the features I sought when the salesman pointed me to a different one with the same features at a fraction of the cost (I know—I was amazed too—then this guy spent a long time teaching me how to work it—miracles still occur, even in retail).

And that, my friends, is comparative effectiveness in action.

It’s harder in medicine, but the Times editorial explains a study between two drugs that turned out a lot like my smart phone case.

So what’s the problem?  It’s this:

“Unfortunately, in the effort to win Republican support (support that never materialized), the bill’s sponsors agreed to bar Medicare from using comparative studies to determine which treatments to pay for. Critics charged it would mean more bureaucratic interference and a step toward socialized medicine.”

For markets to work—for capitalism to work!—you need price signals that reflect the underlying value of one good relative to another.  Without that, we’re toast.  And unlike the insurance case, there’s actually a potentially competitive market for drugs.

At least from an economic perspective, the key to this whole health care question is figuring out where markets work and where they fail.  When it’s the former, let ’em rip; when it’s the latter, craft alternatives as does the Affordable Care Act.

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6 comments in reply to "Health Care and Markets, Part 2"

  1. freesoft says:

    Thank you..really informative!!

  2. Alexa Corben says:

    Congratulations on the blog

  3. Alexa Corben says:

  4. readerOfTeaLeaves says:

    The dearth of information about ‘what works’ should change; with the increasing digitization of medical records (including hospital records), it should become easier to determine what works.

    Someone involved in administering health care was telling me that since surgeons tend to be competitive, they all like to know ‘what works’. A hospital used to carry 13 kinds of sutures, because there were so many requests from surgeons (and if you are hospital, you cater to surgeons, so you carry all 13 types of sutures).

    But surgeons talk to other surgeons about ‘what works’; everyone wants good outcomes for their patients. Once they started seeing that some sutures did appear to have fewer complications and lower risk of infection, those types of sutures became more popular and the hospital thinks that it can now carry only about 5 types of sutures.

    This is a tiny, almost infinitesimal example of how searchable databases may be creating the basis for valid comparisons using good data. Data that never existed before because it was either not collected at all, or too expensive to collect.

    However, I’d still argue that talking about health care in terms of fee-for-service leads to suboptimal health outcomes for large populations over time. For better outcomes, you need to break fee-for-service, you need to focus on ‘wellness’ and that requires a different economic and social model (see also: Cleveland Clinic, Group Health, Kaiser Permanente). Significantly, Group Health has digitized their medical records for a number of years now, and it is producing improved health outcomes – plus good data for docs.

    • Chris Call says:

      to readerOfTeaLeaves-

      Actually, there is already a whole department (at most hospitals) dedicated to what you’re talking about. The utilization review department basically does an actuarial analysis (largely based on CPT codes if im not mistaken) to determine the most cost effective course of treatment (including how long the visit will last, what procedure is newest and cheapest, etc) based on an average patient with the same diagnosis. This system explains the explosion of OP procedures over the years. Whenever a doc recommends a patient stay beyond or receive non-standard advanced interventions, the UR dept will negotiate between the doc and the insurance co. (which UR usually works for).

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