Tilting at health care windmills.

I wrote a few weeks ago on the massive backfire that is electronic medical records, i.e., driving costs up rather than down. Via Meadia has a great post yesterday on a related topic: Washington's perennial confidence in wonky schemes to revolutionize health care.

The wonks in Washington have no shortage of miracle fixes for America's health care system. One is performance rewards, where doctors are rewarded for the quality and efficiency of their treatments. As usual, the theory is sound: paying doctors based on outcomes rather than treatments should reduce the use of expensive or unnecessary medical procedures.

Alas, the P4P programs tested so far have largely failed to deliver on their promise to raise quality and control costs.

The largest public experiment happened between 2003 and 2009, when the administrators of Medicare teamed up with Premier Hospitals nationwide to see if financial incentives would improve the quality of care for Medicare patients with certain ailments.

Studies of the program have shown mixed results.

Participating hospitals initially improved, but after five years there was no significant difference between them and the hospitals without the incentive, according to a University of Pennsylvania study.

A separate study from the Harvard School of Public Health found that there was no significant difference in the mortality rate for heart attacks, heart failure, bypass surgery or pneumonia between patients treated at hospitals participating in the program and those that were not.

There is no shortage of exceptionally bright, talented, smart people in health care with great ideas on how to improve the system - people working for government, insurance companies, and hospitals. And some organizations - like Geisinger or Intermountain Healthcare - really seem to work effectively to drive high quality at lower cost .

But health policy wonks too often ignore the massive disincentives that distort behavior across the health care system in favor of instituting a few "best practices" based on pilot programs or oranizations with unique cultures. As David Goldhill puts it in his exceptional new book, Catastrophic Care, health care wonks on both the left and the right are "confined to the impossible task of overcoming the negative effects of bad incentives without changing the fundamentals of the system."

What would change the fundamental incentives of the system? Goldhill thinks (and I agree with him) that real change won't be accomplished until health care operates much more like the rest of the economy. He explains:

Modern economies handle the extraordinary complexity of balancing the diverse needs and preferences of large populations and massive but varied production resources by relying on the diaggregated decision making that implicitly arises from trillions of individual market decisions. This is also known as the free market.

Today, patient's needs and preferences are suffocated by the demands of payors (governments, employers, insurers). What gets done is what gets reimbursed, even if what gets done is expensive, unsafe, and downright crazy.

Normal market mechanisms that punish bad quality or terrible customer service
are short-circuited in health care because the person using the service isn't really paying for it. Regulations and rules try and compensate for this basic asymmetry in power between the user and the provider, but the proliferation of rules leads to rent seeking, complexity, and waste.

A truly consumer oriented health care system would turn this on its head. Who wants to be treated in a hospital with terrible infection scores? Or that is twice as expensive as its competitor across the street?

Critics of consumer oriented health care reforms argue that health care spending is concentrated in a small number of patients with high costs, often who may be less than rational. But people are always irrational, including across the rest of the economy, and yet market forces work pretty well everwhere else.

Some patients - the homeles, the mentally ill or disabled, and other disadvantaged people - may need more help than others. But this is hardly an argument for designing the health care system to meet their needs rather than the 90% of the population who can navigate the system effectively on their own (or with help from intermediaries like Best Doctors.)

On the contrary, a consumer driven system would free up massive amounts of resources and attention to focus on the small number of high needs cases rather than trying to micromanage the vast majority of people who can manage their own care.

This isn't the direction the country is going in today. Instead, we're seeing a massive controlled experiment in top-down health care management - at the federal level and in states like Massachusetts and Vermont. With enough well meaning experts, maybe everything will turn out all right.

Count me skeptical. And maybe when this latest experiment in top down social planning goes awry, we'll finally be willing to try something a little different.

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