by James Kroeger
I took an
“Economics of Health Care” course in graduate school that just might
have been the most enlightening economics elective I ever took.
It was the term paper in
particular that I found especially challenging. We were asked to
“solve” the health care crisis in America, given all that we had
learned about America’s health care industry and the comparative
health care systems found in Canada, England, France, Germany, and
Japan. The model I ended up embracing was certainly not one that I
had originally thought might be among the final two contenders.
What led me to my ultimate choice was
discovering that there were a couple of fundamental principles
I could logically base my choice on. Indeed, I eventually realized
that there was one principle above all others that the Democratic
Party should be embracing and promoting as primary to all other
considerations. We need to fix the incentives that
drive our health care providers.
Prior to the arrival of Managed Care
(HMO’s), America’s health care system gave doctors a financial
incentive to over-prescribe treatment. With the growing use of private insurance,
physicians were seldom discouraged from over-prescribing care.
Recommending more tests and procedures tended to increase their
incomes. The insurance companies didn’t ultimately worry about this so much
because they could always shift their increasing costs onto the
backs of policy holders. The result? Skyrocketing increases in
health care costs over several decades.
Then came Managed Care. Suddenly, the
incentives for doctors were reversed. Now doctors received a fixed
amount of income through their HMO contracts for services in a given
time period. Under these constraints, doctors now had a financial
incentive to under-prescribe treatment at a certain point.
Yes, this approach did manage to slow down the growth of health care
costs, but then we started to hear patients complain about receiving
inadequate treatment and physicians complaining about the
restrictions that were being placed on them by HMO numbers
Total health care costs were being
“brought under control”, but they were only being limited through a
reduction in the quality of health care being received.
Seeing this evolution in the incentives of America’s health care
providers focused my attention on the need to create a system that
gives primary care providers the right kind of incentives.
How might it be possible to set up a health care system that gives
providers a natural incentive to give patients the best care
possible while not also tempting them with financial incentives to
over-prescribe care? The answer is to put doctors on a salary.
If a physician gets paid a generous
salary for “just being a doctor”, for “doing what a doctor does” [a
certain number of hours per day] then she will not receive any extra
revenue if she prescribes extra tests & procedures. Nor will she be
rewarded financially for under-prescribing care. When physicians are
on salary, they are freed from their concerns about financial
matters and are able to fully invest themselves in the most
idealistic inspirations of their calling. They can simply focus on
healing people and not worry about all of the administrative
Once it became clear to me that
incentives should matter more than any other variable when Americans
are discussing health care reform, I was led by logic to the
“Socialized Medicine” model that Great Britain has embraced for over
50 years. In spite of the bad press that the National Health Service
(NHS) has received in this country (by the same people who give bad
press to Democrats & Liberals) it has actually proven itself to be
perhaps the most efficient provider of superior health care
in the free world.
In spite of roughly equal “health
America’s private health care system costs Americans more than twice
as much as the NHS costs the citizens of the UK. In 2002, UK
citizens spent only about 8% of their GDP on health care ($2,160 per
citizen). This compares to the approximately 15% of GDP that
Americans spent on health care that year ($5,267 per citizen). While
the Brits enjoy a quality of health care that is superior to that
enjoyed by Americans in many respects (no insurance policy
headaches, no frustrating discussions of “ability-to-pay” prior to
the provision of health services, no paperwork hassles) the overall
quality of their health service lags behind America’s in one
important respect: they must put up with far longer waiting times
for elective surgery.
What is wrong with the Socialized
Medicine model practiced in the United Kingdom that causes these
long waiting lists? Nothing. It is not perverse incentives or
imagined “inefficiencies” that are to blame for the waiting lists;
it’s the conservative legislators in Parliament who have used their
influence and pressure to underfund the NHS. If the British were to
decide tomorrow to start spending the same percentage of their GDP
on the NHS that Americans spend on their inefficient private health
care system, they would be able to dramatically reduce waiting times
for those elective procedures. If you hire more doctors and build
more operating rooms and support services, then you will reduce wait
times. It’s just that simple.
Adopting the British model of health
care provision would dramatically improve the quality of care that
most Americans receive. It would be able to reap many economies
of scale and eliminate much paperwork. It would also bestow a
great favor on perhaps a majority of our nation’s physicians, many
of whom would probably love to be freed from the headaches of being
“business owners” and be allowed to simply practice medicine.
Is this something that could be done in
2008 if the Democrats win the Presidency? Probably not. We all
understand the powerful lobbying efforts that would be launched to
defeat it. But in the long run, staking out your ideal vision and
defending it is the best approach for the Democratic Party. You
don’t start off your fight for expanded health care by first
proposing the compromise position that you are willing to settle
for, like the Clinton Administration did.
Perhaps the best long-run strategy is to
try to win over the doctors, first. Tell them that we'll guarantee
them a disposable income that places them in the top 5%-10% of all
income earners and take all of the 'non-medicine' burdens off of
their shoulders. Then, with hopefully the support of a majority of physicians, we could then take on
the insurance industry. The pharmaceutical industry may be the most
guilty of running up our health care costs, but it may be best to
take them on last.
For more on the topic of Government
bureaucratic waste vs. Private Sector efficiency, see
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