Off the Tracks

When did health care in this country go off the tracks? I would date it to the mid eighties when there was a seismic shift in how health care was perceived and provided. Getting healthcare back on track will require addressing this fundamental derailment.

Recall back to your days in Economics 101; you probably remember the golden rule of addressing exam questions: look to operate where the marginal utility of an item is equal to the marginal cost of that item. As a consumer, you will purchase another item where the utility of that item is equal to its additional (marginal) cost. As a business, you will employ labor up to the point where the marginal productivity (utility) will equal the marginal cost of that additional labor. As an investment banker, you will apply additional capital up to the point where the marginal revenue from that capital will equal the additional cost of that capital. As a manufacturer, you will make widgets up to the point where the marginal revenue from each widget equals the marginal cost.

To operate below the intersection of these two curves is to forgo maximizing your benefit; to operate above the intersection is to overextend yourself and actually lose utility (or money) by oversubscribing. Pretty simple stuff.

In health care, the marginal utility of something ( a medicine, a procedure, a therapy) used to be measured as the extra benefit that it afforded to the patient. It could be measured in extended life, improved quality of life, relief of pain, improved function or some other measure. Hence, healthcare gravitated to an equilibrium where the additional utility of some medical intervention was equal to its marginal cost. When I was in medical school, dialysis machines were in short supply; those needing dialysis were presented to a committee to allocate the scare resource. It was thumbs up for a high-school kid with renal failure and it was thumbs down for a 90 year old demented patient from the nursing home with bed sores and renal failure.

There was a sea-change in this way of thinking in the 1980's. Instead of operating where the marginal utility to the patient intersected the marginal cost, the new paradigm became to operate where the marginal revenue from a medical intervention intersected the marginal cost. In blunt terms, how much money can be made from an intervention as opposed to how much benefit can be extended to the patient.

Pharmaceutical companies lobbied for the right to advertise directly to the public; once secured, it became one of the most successful advertising programs in history. Scores of "me-too" drugs were developed and hawked to the public as new and improved. In fact, most were minimally different from preceding drugs but were priced at very high levels, armed with new patents or patent extensions.

Hospitals sought out and courted doctors who had lucrative "books of business". In other words, they could bring patients into the hospitals who need expensive and profitable procedures. These books of business were further categorized into sources of revenue. An orthopod who brings 100 cases per year to the hospital for knee replacements with Medicare is not the same as the orthopod who brings 100 cases with private insurance. Many procedures are of dubious value to the patient; yet, they are still performed.

Emergency rooms became revenue centers. Sprained ankles routinely get MRI's now when a simple x-ray will do. Colds get Chest X-rays and antibiotics.

Insurance companies are complicit; they figure out their costs (medical stop-losses) and tack on a percentage for profit and administrative fees. As costs go up, so do the profits.

In short, the next time that you wonder why health care costs are going up so much faster than inflation, just remember that health care is now operating where its marginal revenue intersects its marginal cost. In other words, the outcome sought is the maximization of revenue not the maximization of the patient's benefit. Until this is acknowledged and corrected, health care will continue to be dysfunctional. Unfortunately, Congress has been part of the problem instead of part of the solution.