Markets and Medical Care

(...) At this writing, link the newest “market-oriented” proposals come from Porter and Teisberg (2006), who postulate a world of integrated medical records, providers specializing in services of greatest competence, and patients flocking to the highest-quality providers, forcing the others to improve or get out of the business. The experience described in this article gives many reasons to believe that the market will not give us that kind of rationalization, either. As Donald Berwick (2005, p. 329) has noted about the need for integrated medical records, “The market will only add variation, which is the last thing we need more of.” Following in the footsteps of the managed competition theorists, Porter and Teisberg assume away the difficulties of organization building, postulating that competition will drive transformation. Imagine that a new world of measurement means that a hospital can compete on coronary care but not on orthopedics. That would be realized only through losses on the orthopedic service, which would make the hospital a bad investment risk. Moreover, simply closing the orthopedic service could cause a capacity shortage, which, according to market logic, would be met by the remaining suppliers raising prices. Porter and Teisberg assume that high-quality providers will expand by absorbing the best personnel from the failed institutions and will move into areas that have shortages. But this ignores all the managerial, cultural, and capital difficulties of expansion. “Competition” is not some sort of magic wand that solves organizational problems. In reality, any positive and significant reorganization of American health care delivery, especially of the hospital system, would need to be slow; the fixed costs of the hospitals would have to be managed; and a minimal supply of all services would have to be maintained. The capitalist market simply is not designed to do those jobs.
It should be impossible to observe American experience over the past decade and still imagine that control of capital is unimportant. Much of what happened in the United States depended on decisions by investors who flocked to for-profit HMOs and then rushed away from them; or by drug companies that offered new income sources for physicians through clinical trials; or the capital sources that allowed some hospitals to expand or specialty hospitals to be created. It should be obvious, but I’ll say it again: capitalism means capital has power. If “the market” is to strongly influence American health care, that means the capital markets will wield much of that influence. Readers are free to conclude that is a good idea, but it is hard to see what events in the United States since 1993 would justify that conclusion.
Effective reform will require restraining the market, not relying on it. The following measures are especially important:

First, any kind of equitable guarantee of access to care requires the strong hand of government to mandate the necessary redistribution.
Second, any form of cost control requires effective limits on prices, and that will work better through some sort of coordinated payment system than through relying on selective contracting by multiple purchasers (White 1999). During the mid-1990s, selective contracting did successfully restrain prices, but that was temporary and the approach is inherently unreliable. Government should take the lead either in setting prices or in coordinating payers to create monopsony power.
Third, the proliferation of organizational forms—especially the rise of Independent Practice Association HMOs and Preferred Provider Organizations—appears to have added very little value to the health care system. There is a reasonable case that traditional HMOs of the prepaid group practice form could manage treatments in productive ways. Ironically, recent experience in the Veterans Health Administration may confirm the advantages of a coherent and hierarchically managed organization (Asch et al. 2004; Oliver 2007). Yet such approaches are at a great disadvantage in the market, owing to both beneficiaries’ preferences and the Kaiser model’s relative inflexibility and high capital requirements. Gray argues that the other forms of HMO did not have the cost-containment advantages of prepaid group practice and had to intervene in care in ways that were visibly intrusive and so provoked backlash (Gray 2006, p. 329). From a health policy perspective, PPOs make no more sense. Therefore, believers in the original vision of system rationalization through prepaid group practice should support simply banning all other forms of selective contract plans.
This would create a system in which Kaiser-like models competed with all-payer fee-for-service. The government could do a better job of creating an integrated medical record and reasonable performance measures than the private sector has managed to date. To the extent that quality could be measured, patients could vote with their feet more easily in such a system than in a system in which they had to first choose plans and then could only choose among providers within those plans.
Fourth, there is a need for some sort of controls on capital investment in medical services. A proliferation of specialty hospitals and imaging centers is highly unlikely to improve the overall delivery of care. Churning, with services closing in some places and opening in others, normally produces more disruption than improvement. Both the financial markets and government planners can make bad decisions, just as both private and public payers may create payment rules that have perverse health policy consequences (Ginsburg and Grossman 2005). Government, however, at least is likely to make its mistakes more slowly and also is in a better position to gather information and consider the risks of innovation. One of the problems with financial markets is that money moves too quickly, allowing boom-bust cycles such as occurred with Physician Practice Management companies and with health plans that discounted to gain market share. Any responsible restructuring of medical care delivery would require the kind of patience, attention to the long term, and knowledge of individual businesses that in the political economy literature has been associated with the postwar model of German, bank-based capitalism but not with the equity-based model of American capitalism (Doremus et al. 1999).

If American politics allowed government to ban some health plan designs, so as to limit both shopping and entrepreneurship; if it arranged for government to have a directive role in the capital allocation aspects of any transformation, so as to reduce the role of capital markets; if it eliminated much of the competition now existing around information systems and subsidized standardization across the provider universe; if it allowed government to mandate the subsidies needed to guarantee coverage; if it allowed the government to make most contracting about prices unnecessary by setting up a structure that set most prices; and if it took a series of other measures to eliminate less useful aspects of market strategies, such as risk selection—then perhaps such market forces as remained could contribute to creating a more efficient, higher-quality American medical care system. I greatly doubt such measures would be considered legitimate by many advocates of “the market” as an answer to America’s health care challenges. Yet the immense amount of innovation in the United States since 1993 offers little reason to believe that “the market,” without such stringent limitations, will improve American health care. (...)
Markets and Medical Care: The United States, 1993-2005,By Joseph White