Today I touch on an issue of concern to every business, and most every citizen, politician, and economist…
I just watched an excellent “town hall” session where President Obama talked about his goals for health care and education. I believe that people at both ends of the political spectrum understand how important making changes in our healthcare and healthcare finance system are. And I believe everyone agrees that one of the most critical challenges, within this very complex issue, is bringing down the cost of health care and the rate at which it is going up – far faster than inflation in most other parts of the economy.
In an excellent and provocative article in the June 1 New Yorker, Atul Gawande discusses the American healthcare system, with a focus on the costliest healthcare location in America, at least by the measures used in the article. Gawande, a doctor, takes a hard look at what is going on there and what might be causing it. There is no question that the extra spending does not lead to better healthcare or better results such as more successful surgeries, and that the system is “broken.” I do not think anyone could argue with that. But I challenge the conclusions that Gawande reaches, which are conclusions I have read before.
I urge you to read the article yourself, which can be found here: It is a complex issue and worth taking the time to understand and consider. Gawande is no extremist, he is just a smart guy trying to understand and shed some light on the problem.
However, his ultimate conclusion is that the single most important issue is a “culture of money” that has taken over healthcare in certain times and places, such as the South Texas County he investigates in the article. I believe his conclusion could be summed up as, “What we need are doctors and medical industry leaders who put the patient above making more money.” What he found were doctors in this community having patients take more tests, doing more expensive procedures more often, running up bigger bills which result in more pay for the hospitals and doctors, than in comparable nearby communities.
I am not in favor of any of these, and ultimately I agree with Gawande that too many tests and procedures are a significant part of the problem. But I challenge the idea that “If we just put service ahead of money everything would be ok, everything would be less expensive.”
My conclusion comes from looking at the rest of our economy. 
In the last 30 years, since airline deregulation, we have seen airline prices drop while the airlines’ safety record has gotten better and better. 
We have seen the overall quality and durability of automobiles improve dramatically without the prices going through the roof. That trend forced dramatic changes on the less-responsive American car makers in recent months. 
We have seen computers – hardware, software, and Internet services – get better and better and easier to use, at no increase in expense and usually a decrease. 
Our options in grocery stores and restaurants grow each day, while the prices remain under control. 
Even washing machines and clothes dryers cost no more than they did 40 years ago, at the same time that they have significantly improved.
Each of these industries and companies, from restaurants to airlines, from Google to Maytag, are run by hard-headed business people who work hard to maximize their profit. An idea first described by Adam Smith, that working to help yourself, in the right system, will result in helping others.
In short, I believe there are just too many real life examples all around us to come to the conclusion that “If you place a high value on maximizing your own income you will end up making shoddy products or overcharging the public.” That does not seem to be the paradigm that is at work in most aspects of our life. Why would medicine be any different? Are doctors greedier than the venture capitalists who backed Google? Are they greedier than the folks who run the airlines? Unlikely.
(I should parenthetically note that I believe that the greatest, most durable, and most profitable enterprises are those which do indeed put the customer first. That’s why John Deere is healthy at age 172 and General Motors is dying at 100, why Procter & Gamble is strong and most of the banks are in the ditch. We need to better educate our future leaders – including doctors and the people who run hospitals – about the sources of long-term success. Recent books by the Hopper brothers, Michael Strong, and Roy Spence – noted at right – are preaching the same message; these are all great books and I plan to review them in future posts. Therefore I would join Gawande in advocating higher goals.  However we cannot rely on this to “fix” the system in the short run, or expect laws and regulations to override the natural human urge for a better life for ourselves and our families.)
I believe that the key difference between healthcare and most other industries is in the way we price and evaluate health products and services. I have had repeated experiences in which none of my health service providers had a clue what things cost. Under our present system, very few patients/customers even ask.
Recently, a doctor’s assistant said I should get a test done, and was about to take some blood and send it out to the lab. Since I have not yet reached my health insurance deductible for the year, I asked what it would cost. The doctor did not know, their office staff did not know; nobody ever asks. I left the office with a prescription for the tests and the unheard-of approval to shop around on my own.
A few weeks later I clumsily broke my foot – a small fracture. Upon visiting the foot doctor, he prescribed a big plastic boot, outfitted me with one, and sold it to me, for around $500. Within 24 hours, just out of curiosity, I found that the exact same boot was available online for about $60, certainly from a greedy dealer.  Even including the overnight express charge my cost was under $100. My doctor was nice enough to undo the deal and take back the boot, but was shocked at the price difference. Never had a customer done the research I did. This is a $400 cost difference, to me, to the insurance company, or to government-funded programs. Maybe those big “payers” negotiate a discount, maybe they get the boot for $200 or $300! No one seems to be aware of these egregious cost differences.
Perhaps my most vivid memory is of my late father, after a quadruple bypass operation. He was a child of the depression, and knew not only the value of a dollar but the value of a penny. Yet when I asked him how much his surgery cost, he said $2500 – he only knew the portion he had to pay. If he had paid the whole $30,000, he would have asked a lot more questions.
All these things lead me to believe the problem is not greedy medical practitioners, it is the lack of competition, information about prices, information about quality, and overall customer involvement.
There is a major movement called customer-driven health care which talks at length about these ideas. Several books have been written, including some excellent ones by Harvard’s Regina Herzlinger – see the links to the right. 
I have to believe that getting customers involved in understanding health care pricing and quality would have a huge impact.
Interestingly, the New Yorker article does touch on this. While Gawande digs deeply into most questions he asks, he does not challenge the doctor who rants, “And now they’re supposed to haggle over the price (of a bypass surgery) as if he were selling a rug in a souk? ‘I’ll do three vessels for thirty thousand, but if you take four I’ll throw in an extra night in the ICU?” Who comes up with this kind of stuff?”
Such silly and impulsive reactions reflect neither deep thought nor understanding of how the world normally works. It is unfortunate the Gawande did not challenge this rant, but seemed to accept it as making sense. This points up the poor job we do of educating ourselves, including doctors and journalists, about the most fundamental workings of economics. 
I grew up in a General Motors town during the era that GM dominated American car sales. You just “believed” them that a Cadillac was better than a Chevy, and that you should work hard to move on up the GM product line. The ideas of checking Consumer Reports, Motor Trend, or J.D. Power were unheard-of. 
If the doctor said mom was sick, she was sick, and took whatever medicine she was told. The ideas of getting a second opinion or looking things up on WebMD or the Walgreen’s website were unheard-of. Let alone looking into alternative medicine.
But we live in a different age today. The share of our citizens with high school and college diplomas is dramatically higher. The number with internet access continues to grow daily. People rich and poor, highly educated and less educated, each day make choices about what kind of house to live in and how much to pay for it, what kind of car to drive and what to pay for it, even increasingly whether to school their kids at home, at parochial or private schools, or at public schools. We take significant life decisions into our hands each day, and we do pretty well at it. Because we are engaged consumers we study up, we check into things; at minimum we ask questions and expect our product and service providers to know the answers or know where to find them.
This is not about haggling over the price of heart bypass surgery with the one doctor in town, this is about having health information services which let us know what the rates are in our county and the next county, what the success rates are of different doctors and hospitals, about knowing what questions to ask.
I have recently searched the Internet for price information on health products, prescriptions, and surgical procedures – what the experts call “price transparency.” The field appears to be embryonic, but is making progress. It looks like almost every radio and TV station in the nation has tried to find the best deals on prescription drugs – discovering great pricing discrepancies, and often the best deals at profit-seeking Costco. More and more states are legally mandating that the prices of surgery and other procedures be made readily available and comparable. Easier to understand. More insurance companies and HMOs are posting such data. It looks to me like the evolution of this information segment is about where Internet search was in the “CompuServe days,” before Alta Vista, if you are old enough to remember that far back. The future holds Google-like possibilities and beyond (Bing? WolframAlpha?).
Any understanding of how to improve our health care system must look at the world realistically, but also with an understanding of how information moves in the modern world, how people use it, how fast things can change.
I am not the only American still below my annual deductible. I am not the only one who does not want to waste my insurance company’s money. More and more people have health savings and similar accounts, giving them great incentives to watch how their money is spent. Millions more have no health insurance, so every penny counts to them.
Determining which tests to take, how many to take, and where to get them done are decisions that can no longer rest solely in the hands of health providers, any more than we delegate our car choices to car salesmen or our housing choices to realtors. This logic applies to most every penny we spend on healthcare.
This, along with many other issues such as uniformity of healthcare information, is at the core of improving our healthcare system and making sure we get more bang for our buck. As President Obama and the New Yorker article properly point out, figuring all this out is critical to the economic future of America. 







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  1. Great, practical insights, Gary.

    The most puzzling aspect of the current debate is not that people feel that something should be done, but that many believe that greater interference by the government will improve quality and reduce cost, despite the fact that even those in the political class are hard pressed to point to any time that the government has been able to do either of those things, let alone achieve both at the same time.

    As noted above, the presence of money (or profit or “greed”) is not the issue. In fact, it’s the absence of any normal market for the goods and services that is the problem, and for that we largely have government, both Federal and state, to blame.

    Sadly, nearly all of the current proposals being discussed create further distortions and transfer more control of private (profit and non-profit) transactions to politicians and regulators.

    No proposal likely to pass will have any effect on the rate of increase in health care costs over the intermediate or longer-term, and this will be used as an argument for still more government control.

    Eventually, we’ll end up no better than Canada or the UK, with growing dissatisfaction with the various forms of explicit (approved procedures and medicines) and implicit (waiting times, quality, innovation) rationing in government-run health care.

    The dark irony here is that while the big-government types here in the States use Canada and the UK as models in pushing for the Federal take-over of medical care here in the States, as they become successful, the residents of those two countries will lose one of their most important alternatives to their state-run health care.

    Savvy entrepreneurs will expand private clinics outside the geographic reach of US Federal regulations; the best will fly in specialists from brand name U.S. medical institutions (Mayo, Cedars Sinai, Johns Hopkins, others) to treat the affluent.

    Overall, the result will be that those on the left can take smug satisfaction that there is now “universal healthcare,” the political and legal/regulatory class will be even more more powerful, the vast middle class will have fewer choices and (often) lower quality care, and the pace of breakthroughs in medical research and the adoption of innovative approaches will decline globally.

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