Market Based Health Care, Patent Reform

George Will and Mike Leavitt think buying health care should be like buying a car:

“Leavitt says that until health care recipients of common procedures can get, up front, prices they can understand and compare, there will be little accountability or discipline in the system: “In the auto industry, if the steering-wheel maker charges an exorbitant price, the car company finds a more competitive supplier. In health care, if the medical equipment supplier charges an exorbitant price, none of the other medical participants care.””

Price should be part of the health care equation. The cost of everything should be up front and open to scrutiny. Insurers should bargain for the best deal for their customers. These negotiated prices should be common knowledge so that all needing health care can benefit.

What’s missing from Mr. Will’s analysis is an understanding that patients are not in a position to shop health care. Finding the “best price” for emergency care and most other health care needs is simply not possible and the patient has to take whatever is available from the local supplier at the demanded price. Furthermore, health care is not like other commodities that people can take or leave as they wish. Buying a car or even a new home is an optional expenditure, health care is not. Yet health care costs/year for an individual can now approach and exceed these large expenditures.

Patient’s health care decisions reflect their anxiety, personal bias, financial status and understanding of the situation. This last factor should not be underestimated. Patients in the majority of instances cannot fully understand the risks and/or benefits of treatments and the alternatives, much less concern themselves with cost efficiency data. He/she is thus greatly influenced by physicians, manufacturers, insurers, etc. all with superior knowledge of the situation. All these advisors have extreme conflicts of interest that interfere with unbiased advice and undermine the notion of a “free health care market”–it doesn’t exist.

Our health care market doesn’t encourage efficiency, but rather it promotes over utilization. Providers and suppliers make more when there is consumption of health care services and products. One only has to experience inaccurate and highly deceptive TV ads for pharmaceuticals and procedures to understand that consumption is the name of the game, not cost efficiency.

The failure of free market forces in health care is graphically demonstrated in the insurance market. Insurers, in the U.S., spend an estimated 30% of revenue on administrative costs while other industrialized countries manage with between 7 and 15% for administrative costs–that’s over 100 billion dollars wasted. Our expenditures/capita are similarly elevated. Even with these excess expenditures, 50 million of our citizens are uninsured. CEO’s of insurance companies understand they are in business to make money and not deliver and/or pay for quality economical care. Much less provide health care for all.

There is even worse inefficiency in the pharmaceutical industry where products are given generation long monopolies (patents) that eliminate price competition. Companies price drugs based on the severity of the condition rather than their costs of development. They figure more seriously ill people can be coerced into paying more. They have been correct thus far. In the U.S. free markets are interpreted to mean free to make maximum profit.

Ewe Reinhard correctly believes part of the problem is the inefficiency of physicians and their inherent conflict of interest. He proposes a very complex system to control payments to physicians and encourage the right pricing and monitoring of utilization of health care resources.

“Studies have shown that physicians are not impervious to the financial incentives inherent in fee-for-service payments. For example, on average, physicians who have a direct financial interest in the use of imaging services, like CAT scans or M.R.I. scans, recommend far more such services for their patients than do physicians without such financial interest.”

He also notes that:

“there is now a worldwide movement to replace the system with so-called “evidence-based case reimbursement”. Under this approach, one single payment would cover all of the supplies and services that are needed, under best, evidence-based clinical practices, to respond adequately to well-defined medical conditions.”


“For example, it is technically feasible to capture electronically every supply and service requisitioned by every doctor in a hospital for every patient, by type of supply or service ordered. It is also feasible to electronically capture detailed information on the health status of every patient admitted to a hospital.”

With due respect for Dr. Reinhardt, such a system seems likely to have unintended consequences because of it’s complexity. We are violating the KISS principle (Keep it Simple Stupid).

Paying a fixed amount per diagnosis seems simple and unbureaucratic. But it sounds suspiciously like the the DRG payment system currently used by Medicare other insurers. That system is an administrative nightmare that underpays providers and forces them to maximize diagnoses to increase reimbursement. Often providers decide that they cannot afford to provide care for the payment offered and increasingly are refusing patients covered by this limited rigid reimbursement system.

Similarly, scrutinizing every expenditure seems unreasonable and not really possible.

An additional problem with reimbursements is that the system as it is currently organized rewards proceduralists and doesn’t pay enough for patient contact time and intellectual effort. Most physicians have large debt from medical education; their office overhead and data collection requirements all cost big bucks; billing is complex as physicians are forced to justify their approach to each patient problems. As a result the underpaid primary care specialists are literally disappearing. This doesn’t change in Reinhardt’s proposed reimbursement system, and may actually worsen with the added billing oversight.

Health care expenditures will continue to rise as long as pharmaceutical and technology companies have patent protection for a generation and are not scrutinized for excessive pricing. These players are literally sucking the system dry.

I would favor providing support for medical education in return for some quid pro quo, whether several years working on salary or participation in government health care programs or a commitment to accept the fees offered by government sponsored programs. I certainly agree we must include methods of scrutinizing health care expenditures but also think the primary emphasis should be to provide incentives that promote careful cost-effective primary care, with appropriate use of new advances, while maintaining productivity.

Patent reform must also be part of the mix and I would suggest a market based reform. New technology’s pricing would be scrutinized by a board during the patent process. The product or procedure would be compared others. Companies pricing their new product or procedure reasonably would be rewarded with a patent for the full time period. Companies pricing their “advances” excessively,(based on efficacy, costs of development and comparable product cost) would still get patents but they would be for a proportionall
y shorter period of time –proportional to the excess pricing of their product. Price increases once the product is marketed would be limited to the cost of living or else the patent length would be reduced.

The greatest challenge is lining up incentives in the system to reward cost effective high quality medical care.

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6 responses to “Market Based Health Care, Patent Reform

  1. WRT Uwe Reinhardt’s comment regarding physician referral to imaging facilities in which they have financial interest – isn’t that a violation of Stark laws?

    WRT pricing – A patient with no insurance should not have to pay more than the lowest negotiated rate obtained by a private insurance company.

    DRGs have got to go, and PCPs need to be paid fairly for what they really do: help keep people healthy (and manage pts with chronic conditions) so they can avoid expensive procedures and/or hospitalization.

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