Tuesday, February 24, 2009

Creating a real healthcare market

MASSACHUSETTS healthcare costs are a problem. The state has virtually the highest costs in the country and insurance premiums that rise more rapidly than national rates. The state's near-universal health coverage shows that no good deed goes unpunished: As the state lowered the number of uninsured, costs increased.

After the Globe reported that Partners hospital system attained higher prices based primarily on its clout with insurers, Attorney General Martha Coakley began an anti-trust investigation. But the remedies will be a long time coming should she decide to prosecute and then win her case.

To spur more immediate solutions, a memo written last summer by former governor Michael Dukakis urged the return of the halcyon days of the 1970s and 1980s, when Massachusetts regulated hospital fees for services and construction. Although most economic reviews of this regulation had reached negative or uncertain conclusions about its impact, and these regulatory schemes have been mostly dismantled, some argue that the problem may not have been with the regulation per se, but rather in its limitation only to hospitals. The memorandum advocated that the state regulate all health insurance premiums - essentially a single payer system. It concluded that ". . .it should be unmistakably clear by this time that market forces don't work in healthcare."

Nothing could be further from the truth. Real markets, like those for computers or cars, feature many competitors who offer differentiated products, and consumers who search for the best value. Innovators easily enter the market. Consumers separate the good from the bad with readily available information about quality and prices. They use it to reward the good guys and penalize the bad. That is why the Digital Equipment Corporation is no longer among us.

These conditions are absent in the Massachusetts healthcare market. Boston hospitals form an oligopoly, dominated by an almost monopolist Partners Healthcare, which last year earned around half a billion dollars in profits. As for health insurance, many employers offer a choice of one - or a choice of firms with virtually identical policies. And if you need an operation, there's no way to learn about histories and prices of potential surgeons. If this is a market, I am Angelina Jolie.

In the long run, the appropriate role for governments in controlling healthcare costs is to use their existing powers to correct these problems through vigorous prosecution of antitrust and the provision of relevant information.

There is a more immediate solution, however. Insurers could require integrated hospital systems to give fixed price bids for providing all the care needed for specific chronic diseases or disabilities, such as Type II diabetes and high-risk pregnancies. Insurers would offer these bids to consumers. They could, for example, choose hospital A's diabetic team in preference to hospital B's, which costs $500 more a year. The effectiveness of such integrated networks is illustrated by Duke Medical Center's congestive heart program. In one year, it lowered costs by an astonishing 40 percent by improving the health of its patients through innovative procedures that decreased the number of hospital visits.

Our oligopolistic hospitals could create these teams. After all, they own all the resources needed to provide this care, and they have sprawled into convenient neighborhood locations. These integrated facilities (which I call focused factories) are feasible even in small areas. For example, if 10 percent of a town is diabetic and the average diabetic costs $10,000 a year, an area of only 50,000 residents could support $50 million of competitive diabetes-focused factories. In addition, transparency about the quality of care for a disease or a disability could be more easily attained from these focused teams eager to demonstrate the competitive excellence of their care. Accordingly, consumers, armed with relevant information, would pick those facilities that give them the best value for their money.

And here's another bonus. Because these teams would effectively and efficiently treat those with chronic illnesses, which normally account for at least 75 percent of healthcare costs, this would give the Commonwealth a shot at finally controlling expenses while improving quality - a potent combination. What do you prefer: giving more power to the state government, which fiddled while Massachusetts healthcare burned, or a transparent consumer-based healthcare system based on real market forces?


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