Code Red: Two Economists Examine the U.S. Healthcare System

December 3, 2010

If I Ruled the World

Filed under: Health IT,Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 12:10 pm

This blog is dedicated to my brother Joel, who has inspired me more than he knows. His journey into the undiscovered country will soon begin. May he go in peace.

I recently had a chance to speak at length with Mark Duggan, a University of Maryland economist who spent 15 months in DC working on health reform. After discussing all the promises and pitfalls of the new legislation, Mark asked what I would have done differently. My response nibbled around the edges of the existing legislation. I should have been bolder. This is what I would have said:

If you study previous attempts to reform healthcare delivery through the private sector, there is one common thread. These attempts all failed because of an absence of proper management information systems. We need integrated electronic health records. And not just to improve medical decision making. We need EHR that can be used for management decision making – for contracting, measuring costs, measuring and rewarding quality; I could go on and on. We are trying to solve management problems in a $2 trillion industry using management information systems that would be an embarrassment in nearly any other sector of the economy.

Of course, the industry has been pushing EHR for decades and there are places where EHR is really first rate. Kaiser is a great example but also a special case because of its thorough vertical integration and long history. And even Kaiser has been unable to replicate itself outside of its core markets. The sad fact is that most providers have little incentive to adopt EHR, and even when they do, they have little incentive to be compatible with other providers. Unfortunately, the network externalities benefit purchasers and consumers a lot more than they benefit providers, so don’t expect the compatibility problem to solve itself.

My proposal is simple. Assemble a panel consisting of medical professionals, managers, and insurers. “Lock them in a room” for 72 hours and tell them to choose from among the many fine existing EHR systems. Tell them they can combine the best features of each if they wish. Once we have settled on an EHR system, give every provider one year to adopt it. If they refuse, deny them Medicare and Medicaid payments. Combine the stick with a carrot – subsidies to providers who have limited financial resources. I believe the total one-time subsidies would be less than $50 billion, a drop in the bucket compared with the size of the system.

And then let the system work. We will see new organization forms emerge, not based on the dictates of Washington, but the workings of the market. We will see rewards for quality and efficiency, again driven by market forces. Waste will be cut out because that is how markets normally work, provided you can find the waste in the first place. EHR will make that happen. If Mark Duggan and his task force colleagues are correct, the current system has hundreds of billions of dollars of waste. I think it is realistic to expect savings of this magnitude. And with proper outcomes measurement (something that EHR will make possible), we should see quality go up.

The only other change I would make would be to greatly expand the presence of managed care in Medicare and Medicaid so that private sector doesn’t reap all the benefits of EHR.

That’s it; my whole proposal. Yet I believe it far reaching. The resulting efficiencies will translate into huge savings for government payers, freeing up existing resources to provide vouchers for the poor so we can expand coverage to the uninsured without expanding Medicaid. (I suppose I would endorse some minimally regulated exchange as a way for individuals to use their vouchers.)

Is it a leap of faith to believe that effective management combined with market forces can save the health care system? Of course it is. But no more so than the leap we take every day when we wake up in a capitalist society and buy our bread and our clothing. In these and most other markets, sellers and purchasers are empowered by information and motivated by the free market; consumers seem to like the results. It is time for healthcare markets to catch up to the rest of the business world.

That is what I wish I had said. Even if I had, it would not have made a difference. According to Mark, the folks who had the final say over Obamacare would never have taken that leap of faith.

3 Comments

  1. Definitely agree. My thoughts are with you and the rest of the D-clan.

    Comment by Justin — December 5, 2010 @ 5:32 am

  2. Might these kinds of EHR mandates push providers toward consolidation? Consolidation seems like it might also make continued monitoring, interoperability, etc. of EHR systems easier. There would be fewer providers to discipline, and perhaps lower operation costs. I’m not necessarily convinced by these arguments, but have heard them made – I’m just hoping you can provide some more thoughts on how you think EHR issues relate, if at all, to ACO/provider consolidation issues.

    Comment by Matt — December 9, 2010 @ 9:35 pm

    • Matt,

      I hope that interoperability makes consolidation less important. But you are correct that providers could use EHR as an excuse to consolidate when their real motives are to limit competition. I know that the antitrust agencies have been wrestling for the past decade with this difficult tradeoff. With the advent of ACOs, clear antitrust guidelines will be more important than ever.

      DD

      Comment by dranove — December 9, 2010 @ 9:43 pm


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