Archive for December, 2009

Improving the Harvest: Farming and Health Care

December 15, 2009

I love Atul Gawande’s writings on health care.  He has a rare talent for describing technical details of health care, insurance and finances in terms that most people can understand.   His recent article in the New Yorker discussed the current health reform bills’ approach to curbing costs, using the agricultural industry as a potential model.

One of his basic points is similar to one I have made before.  He describes two kinds of problems: “those which are amenable to a technical solution and those which are not.  Universal health care coverage belongs to the first category . . . Problems of the second kind [referring to rising health care costs], by contrast, are never solved, exactly; they are managed.” I would frame it somewhat differently.  The two basic kinds of problems are those which are amenable to a government solution, and those which are best addressed using decentralized market forces.

There are two serious shortcomings in our current health care system: lack of access to health care and insurance coverage for many low-income people, and the rising costs of health care.  While private market forces do have the potential to address cost issues –”efficiency” in the jargon of economists – they don’t do very well at handling issues of “equity”.  Specifically, private markets can’t do the following very well in the health care system:

  • Provide access to insurance or health care to low-income or very ill people
  • Ensure that reliable standardized information is available to consumers
  • Maintain the appropriate balance of power between providers and consumers

This means there is an important role for government:

  • Ensuring that coverage or care is available to low income and very sick people
  • Providing information is reliable and available
  • Maintaining healthy markets.

In the latter role, it is appropriate for government to establish the rules for the structure of the market in order to create:

  • Real choice
  • Healthy competition
  • Incentives for improving value (quality/cost)

Government can also play a role in providing financing for innovations (i.e., start-up funding for pilots).  After this point, however, it’s probably better for government to get out of the way and let the market do what it can do best – drive improved value for consumers.

So far, so good.  I basically agree with Gawande’s observation that different problems should be addressed by different means.  But is Gawande correct in using the developments of the agricultural industry as a model for what might occur in health care?  While there are a lot of parallels (e.g., fragmented and inefficient production, resistance to change), I am concerned that there are some important differences between agriculture and health care.  I won’t offer a critique of the outcomes of U.S. agriculture (lower prices, yes, but also the growth of corporate farming at the expense of family farms and small town economies, as well as serious concerns about food safety); I want to focus on two other issues about the relevance of the agriculture model to health care.

First, the economic incentives in agriculture seem much more direct and consistent with consumer welfare.  If the farmer can find more efficient ways to produce crops, it will result in higher net income.  Lower production costs also allow the farmer to reduce prices, gain market share and increase revenue.  Other farmers then have a strong financial incentive to adopt better production methods; otherwise they will lose market share, revenues and profits.  This healthy competition results in lower prices and improved value for consumers.

In the health care world, however, the financial incentives for improving efficiency are much weaker.  The knowledge about how to be more efficient is available, but the adoption of these methods is very limited.  Simply introducing the health care equivalent of USDA extension agents and financing a lot of pilot projects are unlikely to change this.  The incentives are weak for a variety of well-known reasons: health insurance, which shields most consumers from the real costs of health care; federal tax policy, which excludes employer-sponsored health benefits from personal income taxes; the ability for insurers to use risk management strategies to avoid high-risk enrollees; the ability for providers to use payer-mix strategies to avoid low-reimbursement patients; the well-entrenched use of fee-for-service payments that reward volume instead of outcomes, etc.  Unless we make structural changes to address these issues, the financial incentives will not be aligned in a way that will cause the health care industry to embrace more efficient production methods.

The second potential problem is the difference in relative market power of buyers and sellers.  In agriculture, the sellers (farmers) are much weaker than the buyers (consumers and middlemen), which forces the farmers to compete aggressively on price and quality.  In health care, however, the sellers (physicians, hospitals, drug manufacturers) are more powerful than buyers.  There are several reasons for this: providers have professional knowledge and expertise that consumers rely upon, and many areas have a high concentration or even monopolies of providers.  Even if the provider payment incentives were aligned with consumer interests, health care providers would probably still be able to charge relatively high prices.

How do the current Senate and House bills line up with the issues raised by Gawande and my analysis?  The underlying philosophy of the legislation is consistent with the two-sector approach described above: government helps low-income people to get access to health care and sets the rules for the health care market, while private sector providers and insurers compete to offer the best value to consumers.  The bills also begin to address the issue of financial incentives, by encouraging alternatives to fee-for-service, eliminating the use of risk skimming by insurers, and taxing high cost health plans.  Not surprisingly, the bills do not directly address the market power issue, although the proposed strengthening of the Medicare payment commission would be a small step toward curbing costs.

Will all of this work?  We don’t really know, but at least the bills are built on a framework that has some chance of success.  We do know, however, that the current system is cruel in human terms and unsustainable in economic terms, and we have to try something.  We will have more work to do to get this right.