Tuesday, November 18, 2008

Certificates of Need, Free Market Principles, and Health Care Reform

Most health care reform proposals gaining currency in a Democratically controlled federal government address the number of people who will have medical coverage, but they do not really effectively address the issue of health care system costs. This is a mistake, as it means that costs will basically just be rearranged, with universal access providing an upward pressure on prices.

This blog post will not attempt to offer complete solutions to the question of costs -- that will require several posts -- but will only set out some important ideas to keep in mind.

In most states, before a hospital (and sometimes other kinds of health care facilities) can be built or expanded, a certificate of need must be obtained from the department of health. Sometimes, conservatives, based on the general way that market principles work, express a knee jerk opposition to these requirements based on the idea that limiting the number of available hospital beds has the effect of limiting competition, therefore driving up costs.

However, the best studies show that those conservatives are wrong. Increasing the number of hospital beds results in higher costs. The supply and demand curves do not work in the same way that one usually expects. Instead of the increase in supply lowering costs, demand rises to fill the increased number of beds.

So, does this mean that classical economics is wrong when it comes to health care? No, it just means that some conservatives have failed to account for all of the facts in looking at the situation. The reason that the usual rules for supply and demand don't work is that the consumer -- that is, the patient -- does not really direct his own health care. Health care choices are really directed by health care practitioners. And, the way that such care gets directed is influenced by the way that those practitioners get paid.

Before I go on, it is important to state that I am not alleging anything unscrupulous here. However, it is hardly controversial to suggest that the way that doctors are trained and the way that they learn to practice are influenced by how they are paid. Under both our private and public health care payment systems, doctors are paid for running tests and providing diagnoses. They are not paid for patient education and care. The result is that we get what we pay for.

Thus, we have a health care payment system that encourages medicalizing patient issues and over utilization of testing and diagnostic procedures. Even when someone is terminally ill and on the brink of death, providers will continue endlessly drawing blood, performing imaging, running tests, even when it is past time for anything plausible to be done. Again, it is not because they are unscrupulous. It is what they are trained to do.

This is not meant to be an argument for rationing care: indeed, the opposite. Rationing care, regardless of the initial intentions, invariably ends up becoming a financial calculation, not a medical one. Rather, I am making an argument for changing the way that we pay medical providers. We need to pay for patient education and care, not for running tests.

I'll build on this concept sometime down the road.

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