More Perverse Incentives


(image (c) by KT of Lake Orion)

I was shocked to read an analysis in The Economist which among other things showed that the “stagnation of middle-class incomes in recent years is in large measure caused by health-care inflation.” Remember all those articles wondering why there was no wage growth considering the productivity gains? Now we have the answer…

Health-care must be on my mind. Not sure why, perhaps my Mom’s situation is playing into it, but my last post was about an article in the New Yorker, which described a feedback system designed to make health care costs spiral upwards:

  • doctors make recommendations on treatments
  • no patient is ever going to want less treatments
  • doctors get paid on what they recommend

While doctors need to take the Hippocratic Oath, many studies have shown that doctors are not immune to commercial influences.

Then when you throw in the zinger from the New Yorker article — namely that more procedures, tests, medicines and specialists do not statistically yield better results — you see how crazy the system already is.

Then the article from The Economist pointed out a whole new perverse incentive involved:

…most Americans get their health insurance through their employers. This dates back to the era of post-war wage controls, when firms offered benefits instead of pay rises. Today’s tax code sets it in stone. Employers can buy health insurance with pre-tax dollars. Individuals cannot.

When a typical patient goes to the doctor, he has no idea what anything costs. He pays only about 15% of the bill, so if the doctor recommends something he will probably say yes. The doctor gets paid for everything he does, so he has a powerful incentive to perform costly, unnecessary procedures. Besides, he may be socked for damages if he omits a test that a lawyer subsequently convinces a jury might have been useful. The costs are passed on to insurers, who pass them on to employers in the form of higher premiums, who then pass them on to workers in the form of lower pay.

What can we do about this? Surely there is some way to break these crazy loops of cycling costs.

How about removing companies from providing health insurance and allowing individuals to deduct the costs of heath insurance from their taxable income? That would help, but most people say isn’t practical. But in a world where General Motors can go bankrupt, why not give it a full hearing?

And how about banning doctors from receiving incentives or having a fiduciary interest in the procedures they’re recommending? We banned the drug companies from “spiffing” doctors for prescribing their drugs. Why not take this further?

When I hear politicians talk about “health care reform” these topics rarely come up. Massachusetts‘ “revolutionary” health care reform was all about making sure that all people had access to health care. A great goal all by itself, but don’t tell me it had brought down costs in the Commonwealth.

Since I’m pretty sure Obama isn’t reading Adam Honig Dot Com, I’m going back to writing about music, traveling and M’bar, like usual.

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