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The ironies of healthcare economics

11 Dec 2013 By Edward Hadas

Almost every healthcare system in the world is a lesson in how not to do it. The pricing-based model fails miserably in the United States. The rationing model works almost as badly in the UK. Both fail in the core task of ensuring that the right healthcare goes to the right people.

Price systems should provide clear information to consumers and producers, helping both make sounder decisions. They can help make hard decision about what care is worth giving, but only if the prices accurately reflect the costs. But that doesn’t happen in American healthcare.

Every service and each drug has many prices, depending on who is providing and who is paying. Almost none of the prices bear any clear relation to costs. The New York Times reported earlier this month that the price of a dose of codeine ranges from $1 to $20 in San Francisco. Hospitals routinely send much higher bills to uninsured patients than to people with insurance. The uninsured have less ability to pay, but they have no clout pre-treatment and less clout than insurance companies in the inevitable post-bill negotiations.

The price chaos in American medicine is much less economically sound than the haggling in a Middle Eastern souk, where the negotiations are largely ritualistic and the final agreed prices are basically fair. The final prices paid for American healthcare are so arbitrary that patients, insurers or would-be reformers cannot tell which services offer poor value for money.

Inept pricing is not the only reason why the United States dedicates almost 20 percent of GDP to healthcare, according to the World Bank, far more than any other developed nation – while experiencing worse basic health outcomes, in aggregate. But it certainly makes everything worse.

The British approach avoids the problems that stem from relying on inaccurate pricing. The National Health Service has a near monopoly, and it does not charge users anything. Instead, it relies on rationing. Demand is restricted intentionally by explicit limits on care set by management and politicians. It may be further dampened if patients are also kept away by an unpleasant environment and extended waiting times.

Rationing sounds like a good way to allocate healthcare. Experts are better placed to make good decisions than ill-informed and emotional customers. Also, most voters do not want people to be deprived of needed care just because they cannot afford it. Need-based and income-blind allocation can be arranged more directly through rationing than through the American mix of prices, insurance and government subsidies.

And in some ways, the British system works. It is reasonably popular and relatively cheap at 9.3 percent of GDP. However, in many ways the NHS delivers a poor outcome. There are long waits for basic care, massively overcrowded emergency facilities and some of the worst hospital infection rates in any developed country. General practitioners are overwhelmed and preventive care is underfunded.

Poor rationing techniques contribute to the problem. The NHS and its political masters hate to admit that some people’s ration of healthcare will sometimes be far less than citizens would like. So they try to do too much and are fuzzy about what they are trying to do. The result, in the words of a recent academic study , are “unclear goals, overlapping priorities … and compliance-oriented bureaucratised management”. These leave “staff struggling to deliver care effectively”.

It is all quite ironic. Modern healthcare is one of the great accomplishments of industrial economies. And those economies would never have been constructed without accurate price arrangements for some goods and services and shrewd rationing for others. Yet these tools fail in the provision of healthcare.

The underlying problem is easy to identify. Healthcare is connected with life, death and loved ones. In the contest between these cosmic matters and prices and rationing, the latter end up losers. Still, the allocation techniques could be improved massively without resolving the grand debate. Both the U.S. and UK models could work better.

American healthcare needs a big dose of cost accounting, which would ensure that prices fairly reflect the total costs of production. With standardised and realistic pricing, it will be easier to make the political decisions about what care should be available to all, and the personal decisions about what additional care to pay for.

In the UK, the rationing is half-hidden. It should be explicit. That requires political courage: a public declaration that the state will not try to satisfy all medical desires. If British people want more, they should be asked to pay for it.

In short, the British should learn from the Americans that prices can help allocate healthcare, but they need to avoid the U.S. mess. And the United States should admit that the British are right that governments must ration healthcare, even if rationing can be done more effectively.



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