Health care incentives

David Leonhardt writes a column in today's New York Times on health care in which he uses prostate cancer as an example of the problems bedeviling the sector. He begins by noting several different treatment options that exist for this type of cancer:

Right now, men with the most common form — slow-growing, early-stage prostate cancer — can choose from at least five different courses of treatment. The simplest is known as watchful waiting, which means doing nothing unless later tests show the cancer is worsening. More aggressive options include removing the prostate gland or receiving one of several forms of radiation. The latest treatment — proton radiation therapy — involves a proton accelerator that can be as big as a football field.

Logically in selecting treatment you would expect patients to simply go for the method that has been proven most effective. No conclusive evidence, however, seems to exist:

Some doctors swear by one treatment, others by another. But no one really knows which is best. Rigorous research has been scant. Above all, no serious study has found that the high-technology treatments do better at keeping men healthy and alive. Most die of something else before prostate cancer becomes a problem.

While disagreements may exist regarding effectiveness, far more apparent are the costs involved:

But if the treatments have roughly similar benefits, they have very different prices. Watchful waiting costs just a few thousand dollars, in follow-up doctor visits and tests. Surgery to remove the prostate gland costs about $23,000. A targeted form of radiation, known as I.M.R.T., runs $50,000. Proton radiation therapy often exceeds $100,000.

Now you can get a better picture of why health care is becoming more and more expensive:

And in our current fee-for-service medical system — in which doctors and hospitals are paid for how much care they provide, rather than how well they care for their patients — you can probably guess which treatments are becoming more popular: the ones that cost a lot of money.

...These costs are the single most important thing to keep in mind during the health care debate. Making sure that everyone has insurance, important as that is, will not solve the cost problem. Neither will a new public insurance plan. We already have a big public plan, Medicare, and it has not altered the economics of prostate care.

Thus, if you are going to control costs you need to change the incentive structure:

The current Senate bill would encourage doctors to give patients more information. But that won’t be nearly enough to begin solving the cost problem.

To do that, health care reform will have to start to change the incentives in the medical system. We’ll have to start paying for quality, not volume.

On this score, health care economists tell me that they are troubled by Congress’s early work. They are hoping that the Senate Finance Committee will soon release a bill that does better. But as Ron Wyden, an Oregon Democrat on the committee, says, “There has not been adequate attention to changing the incentives that drive behavior.” One big reason is that the health care industry is lobbying hard for the status quo.

Plenty of good alternatives exist. Hospitals can be financially punished for making costly errors. Consumers can be given more choice of insurers, creating an incentive for them to sign up for a plan that doesn’t cover wasteful care. Doctors can be paid a set fee for some conditions, adequate to cover the least expensive most effective treatment. (This is similar to what happens in other countries, where doctors are on salary rather than paid piecemeal — and medical care is much less expensive.)

Amazingly one option Leonhardt does not discuss is perhaps the most obvious -- ending insurance as a centerpiece of health care in favor of a system in which patients foot the bill and shop around for the best deal. Thankfully John Stossel picks up the slack:

Health care "reformers" keep talking about getting us more health insurance. Then they talk about cutting costs. This is contradictory nonsense.

Insurance, whether private or a government Ponzi scheme like Medicare, means third parties pay the bills. When someone else pays, costs always go up.

Imagine if you had grocery insurance. You wouldn't care how much food cost. Why shop around? If someone else were paying 80 percent, you'd buy the most expensive cuts of meat. Prices would skyrocket.

That's what health insurance does to medical care. Patients rarely even ask what anything costs. Doctors often don't know. Often nobody even gives a damn. Patients rarely ask, "Is that MRI really necessary? Is there a cheaper place?" We consume without thinking.

By contrast, in areas of medicine where most patients pay their own way, service gets better, while prices fall.

Take plastic surgery and Lasik eye surgery: Because patients shop around and compare prices, doctors work hard to win their business. They often give customers their cell-phone numbers. Service keeps increasing, but prices don't. "In every other field of medicine, the price is going up faster than consumer prices in general," says John Goodman of the National Center for Policy Analysis. "But the price of Lasik surgery, on average, has gone down by 30 percent."

Read the whole thing. It's really unfortunate that the problems with insurance aren't even on the table for discussion. Instead the focus continues to be on the expansion of this broken model that will do little do either control costs or improve the quality of care.

Update: And be sure to read this short anecdote about insurance!