Joe Nocera and Bethany McLean Fiasco: The pandemic reveals who America will protect and who it will leave behind There has been a lot of criticism about how healthcare institutions are operating (and in general) during the pandemic. I sometimes hear that the United States shows why the free market in health care doesn’t work. (I confess, this is very upsetting to me, because the US health care system is not even a light year away from a free market. (That’s still a terrible idea.) With all due respect, Mr. Nocera and Mr. MacLean are perfecting the American health care system as an example of free market capitalism. I will never explain it to you. The closest they come is to calling the system a “perverted version of free market economics” or “an adulterated form of capitalism.”
Here’s one example of this in action:
The second reason the poor and uninsured end up in safety-net hospitals is a series of public policy decisions that sound logical in theory but are callous and misguided in practice. For example, consider the decision many states make to reduce the number of hospital beds. They did so in the belief that by reducing the number of beds, they could reduce the soaring costs of Medicare and Medicaid. In theory, it makes sense. However, the game was rigged. Hospital closures were dictated by profitability, which was already determined by government reimbursement policies.
So Alan Sager, a health care management expert at Boston University, said the main consequences of closing entire hospitals and cutting beds were that wealthier hospitals, which were rarely affected, and wealthy hospitals, which bore the brunt of the cuts, It pointed out that the aim was to further separate hospitals from poorer ones. . This was a classic example of policy being passed down by elites who are not influenced by it, and then imposed on people who have no say in decisions.
What are the consequences of this policy? “In fact, Medicare spending actually increased.” Why did this public policy aimed at reducing spending actually result in increased spending? The authors write:
The answer was very simple. The types of hospitals that could be easily closed down, those with little or no power or prestige, were not the types of hospitals that could save the government money. The same number of people will still need to go to the hospital. They just need to visit the stores that are still open…
…The same pattern played out across the country. Hundreds of hospitals in disadvantaged areas closed, ostensibly to save money, but neither hospital costs nor overall health care costs went down. All that has actually been accomplished is a significant reduction in hospital beds in areas in need.
A casual reader might skim through this book and get the idea that it shows that markets don’t work in the medical field, but a more careful reading of Nocera and McLean reveals the problems they point out. It can be seen that this occurs precisely because the government’s regulatory structure is unique. healthcare market. A whole book on this subject is in Christy Ford Chapin’s book. Securing America’s Health: The Public Creation of a Corporate Health System. As Chapin says,
Insurance companies play a central role in healthcare. Insurance companies determine which services and procedures are covered, influence physician salaries and hospital profits by setting reimbursement fees, and influence treatment plans in order for providers to obtain compensation. Shape medical practice by requiring compliance with. Many scholars take this power for granted, assuming that insurance companies play an essential role in private health care. However, the insurance company model was only one option among a range of possible organizations that could have created a private market. And compared to alternative arrangements, the insurance company model is less efficient and more expensive in delivering health care services.
So how did insurance companies acquire such a dominant role in health care? Politics, not market logic, placed insurance companies at the center of American health care.
Chapin shows why the American health care system did not develop into its current form. That’s because medical markets are naturally organized. It was built incrementally from the top down through an endless series of policies and policy reforms that created a system with the worst combination of incentives for everyone involved.
Nocera and MacLean recognize this and cite this book in the affirmative. Overcharging: Why Americans Pay Too Much for Health Care, The paper, written by Charles Silver and David Hyman and published by the Cato Institute, argues that the way the government has regulated and structured health care payments has resulted in an incredibly dysfunctional system. claims. Nocera and MacLean write:
In fact, the flaws in the payment system and the government’s failure to correct the flaws effectively encouraged hospitals to extort from the government. The fundamental problem was that hospitals were historically paid to perform procedures, and the more procedures they performed, the more revenue they made. The 1965 law that created Medicare and Medicaid did nothing to change that. On the contrary, the government agreed to pay hospitals on a cost-plus basis in exchange for capping the amount it would pay for surgeries.
(As an aside, Nocera and MacLean find that the “fee-for-service” model, in which “the more procedures you perform, the more money you make” is a serious cause of medical dysfunction. And they continue to do so today. As Jonathan Gruber aptly put it, “The issue is not letting doctors tell you how much medical care you should get, but letting the butcher tell you how much red meat you should get. The United States has a broken pay-for-fee health care system, where doctors and health care providers pay less attention to how healthy they make you. However, this fee-for-service system itself was created as a result of government regulations,” Chapin writes in his book. )
Simplified, a cost-plus basis works like this: The government would pay hospitals an additional percentage on top of the “cost” of performing some procedure. Let’s say 10% to make the numbers easier to understand. Therefore, if a hospital performs a surgery for $100, the government will pay the hospital $110 and the hospital will earn a profit of $10 on the surgery. But if the hospital instead spent $1,000 performing the surgery, the government would pay the hospital $1,100, making a $100 profit instead of a $10 profit. This payment method gave hospitals a very strong incentive to inflate costs as much as possible. That’s exactly what happened.
A similar issue was also noted on EconTalk episode There, Russ Roberts interviewed Keith Smith of the Oklahoma Surgical Center. role of michael humer summarized problem:
Later in the podcast, he discusses some of the scams that are taking place in the industry. If hospitals claim they were underpaid (patients didn’t pay the full cost of treatment), they get money from the government. I think that’s reasonable, right? They should be rewarded for their good work.
This has allowed hospitals to inflate their prices to exorbitant levels and regularly claim that they are only being paid a fraction of their costs in order to obtain more funding from the government.
Hospitals enter into contracts with insurance companies, which pay only a portion of the exorbitant fees. This is also great for insurance companies. Because insurance companies can claim that they have negotiated incredible discounts (like 80% or 90% discounts) for their customers. Additionally, patients receiving care without insurance can be cost-prohibitive, which is no problem for insurance companies.
Now, looking at the attitude of hospitals and insurance companies towards these regulations, you may feel that they deserve blame. You may also read Mr. Nocera and Mr. MacLean’s comments and feel the same way about the activities of the various health care organizations they describe. But I think this is the wrong reaction. To quote an old adage I often heard when I was young: don’t hate the player, hate the game. If the government creates a rulebook that heavily incentivizes companies to raise costs, and companies respond to those incentives by raising costs, the best response is not to yell at the companies that respond to the incentives given. . Instead, we should be angry at the people who wrote the rulebook and created such incentives.
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