The Perverse Incentives of Our Health-Care System

healthcare costsAn article in the September Atlantic does the best job I have ever seen of describing why health care is so resistant to cost-control efforts.  At 11,000 words, “How American Health Care Killed My Father” is not a quick read, but it’s not a dry policy treatise by any means.  (Hat tip: TigerHawk.)

When David Goldhill’s father died from an infection he contracted in the hospital, Goldhill went looking for someone to blame.

But my dad’s doctors weren’t incompetent—on the contrary, his hospital physicians were smart, thoughtful, and hard-working. Nor is he dead because of indifferent nursing—without exception, his nurses were dedicated and compassionate. Nor from financial limitations—he was a Medicare patient, and the issue of expense was never once raised. There were no greedy pharmaceutical companies, evil health insurers, or other popular villains in his particular tragedy.

As a business executive, Goldhill is no enemy of capitalism or market-based systems.  As a self-identified Democrat, he is no enemy of government.  And while he may have started his year-long research effort in anger over his father’s premature death, he has produced an absorbing essay that is remarkably measured and clear-eyed. Anyone of any political stripe who cares about America’s health-care system would benefit from reading it.

Some excerpts, with emphasis added:

But health insurance is different from every other type of insurance. Health insurance is the primary payment mechanism not just for expenses that are unexpected and large, but for nearly all health-care expenses. We’ve become so used to health insurance that we don’t realize how absurd that is. We can’t imagine paying for gas with our auto-insurance policy, or for our electric bills with our homeowners insurance, but we all assume that our regular checkups and dental cleanings will be covered at least partially by insurance.

Insurance is probably the most complex, costly, and distortional method of financing any activity; that’s why it is otherwise used to fund only rare, unexpected, and large costs. Imagine sending your weekly grocery bill to an insurance clerk for review, and having the grocer reimbursed by the insurer to whom you’ve paid your share. An expensive and wasteful absurdity, no?

Is this really a big problem for our health-care system? Well, for every two doctors in the U.S., there is now one health-insurance employee—more than 470,000 in total. In 2006, it cost almost $500 per person just to administer health insurance. Much of this enormous cost would simply disappear if we paid routine and predictable health-care expenditures the way we pay for everything else—by ourselves.

The unfortunate fact is, health-care demand has no natural limit. Our society will always keep creating new treatments to cure previously incurable problems. Some of these will save lives or add productive years to them; many will simply make us more comfortable. That’s all to the good. But the cost of this comfort, and whether it’s really worthwhile, is never calculated—by anyone. For almost all our health-care needs, the current system allows us as consumers to ask providers, “What’s my share?” instead of “How much does this cost?”—a question we ask before buying any other good or service. And the subtle difference between those two questions is costing us all a fortune.

How would the health-care reform that’s now taking shape solve these core problems? The Obama administration and Congress are still working out the details, but it looks like this generation of “comprehensive” reform will not address the underlying issues, any more than previous efforts did. Instead it will put yet more patches on the walls of an edifice that is fundamentally unsound—and then build that edifice higher.

You get the idea.  Read the whole thing.

(Illustration from The Atlantic.)

6 thoughts on “The Perverse Incentives of Our Health-Care System

  1. Pingback: Twitter Trackbacks for The Perverse Incentives of Our Health-Care System | All That Is Necessary... [] on

  2. DJ Black Adam, I understand the sentiment, but like it or not health care IS a commodity. It's about one-sixth of our economy, that money has to come from somewhere. Free market principles may not ALWAYS be the best way, but I certainly believe they USUALLY are. I would much rather have a competitive marketplace for health care and health insurance, as we have now, rather than a soulless government bureaucracy pulling all the strings.

  3. This post is dead-on! Ever since the HSA/High-deductible legislation was passed, I have had one and love it. I do not believe health care is an entitlement (although life is a right). I do not agree with those that say that health care is a public service like the fire department.

    I agree that health care is a cost-of-living. I pay extremely low premiums (that actually went down the last two years), and pay for all of my family of four's health care out-of-pocket. We over-fund the high-deductible health savings account so that if something tragic does happen, we don't go bankrupt, we dig into the tax-free fund we used to save up for just such a thing.

    The money I put into the HSA is less than the difference between a low out-of-pocket PPO plan and the high-deductible plan I have. So it costs me less overall, has tax advantages and does not overburden the system with numerous claims, bills, administrative overhead and the like. I wish this is how we all thought of health care and that all would be responsible for their own costs of living, but alas… too many feel they are entitled to too much. Their entitlements are infringing on my rights to life, liberty and pursuit of happiness.

    Rich Mitchell
    The Plain, Hard Truth
    An information engine for Conservatives

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