Naive Talk about Healthcare from Adam Davidson in the New Yorker4 min read

Adam Davidson

Adam Davidson writing today in The New Yorker offered us “A BIPARTISAN WAY TO IMPROVE MEDICAL CARE – A straightforward change would save money and improve health. So why isn’t Congress talking about it?” This is an astonishingly naive misleading bit of chatter about healthcare.

Davidson summarizes William S. Jevons, a19th century British economist’s work on value and pricing in economics as: “The marginal revolution taught a seeming paradox: if industrialists lowered their prices, they could make more money; more people would buy their goods, enabling economies of scale.” He then goes on to point out facts that every developed nation except ours recognizes and has put policies in place to avoid:

There is one sector of the U.S. economy, however, that is stuck in the pre-Jevons conception of value: health care. The health-care crisis in the United States is in many ways a pricing crisis. Nearly all medical care is paid on a fee-for-service basis, which means that medical providers make more money if they perform more procedures. This is perverse. We don’t want an excess of health-care services, especially unnecessary ones; we want health. But hardly anybody gets paid when we are healthy.

Excepting the notion that US healthcare is stuck with an unfortunate conception of value, this is a very succinct and accurate statement about the structure of the system. In fact this understanding drives public policy in every developed country in the world except the US.

The naïveté here is that Davidson seems not to understand that marginal pricing and its beneficial consequences only work in a competitive market. Health can never be subject to market controls.

Health is not a commodity. Commodities are things like corn, oil, automobiles, smartphones. All items with fairly objective characteristics that almost anyone can evaluate without requiring a medical school diploma. Further, human beings, far from rational under ordinary circumstances, become crazed when ill. Combine that with the vast and insurmountable gap in knowledge between doctors and patients about health and you do not find a competitive market. Instead there is a relationship in which the healthcare providers will always understand infinitely more than patients about illness and treatments. There is no possibility that patients can be a rational evaluator of the merits of the proposed courses of treatment. More transparency in pricing, the free-market recommendation will not solve this problem.

The US healthcare system is arranged so that prices are set by the providers without effective countervailing controls by competition. And there is no way in which re-arrange the players to create a competitive market. Every other developed country long ago recognized this.  It is silly to think that the US healthcare system operates as it does because doctors, hospitals, pharmaceutical companies and insurance companies keep prices high because they lack a good pricing model. They keep prices high exactly because we allow them to, hiding behind the fictions of market competition that doesn’t exist.  And, they use every political technique available, marketing campaigns, buying politicians through campaign donations, lobbying everywhere, to make sure that they can go on charging high prices.

Americans need to understand that our healthcare marketplace drives the production of more and more tests, procedures, and prescriptions, not health. This is Davidson’s message in the section quoted above. Then, we need to combine that with the knowledge that we spend more then twice as much per capita (~%9,800 vs $4,600) on healthcare as our developed country competitors while producing health outcomes that are nearly Third World (48th in life span and 54th in infant mortality).

If we could accomplish that we would sweep away the incredibly expensive, grossly under-performing system that enriches doctors, administrators and executives. But, it is not for want of many choices of solutions, including capitation, that we have not done this. It is the fact that every Republican and most of the Democrats don’t have the political and moral will to face down the wave of money that comes to them from the healthcare industry.

The solution to our problems cannot be clearer. Look at Canada, Germany, France, Japan, Australia, Netherlands, UK, Denmark, Sweden, and others. Plenty of healthcare systems with decades of operational experience producing much better outcomes for every single person in these countries at less than half the cost!!


Also published on Medium.