Health care reformers should look to the banking collapse as a cautionary tale.

Health and medicine explained.
Jan. 27 2009 6:58 AM

Sicko-nomics

Health care reformers should look to the banking collapse as a cautionary tale.

Operating Room.
Health care workers

The condition of the U.S. economy can be described generously as bleak. But while unemployment is on the rise and the Big Three automakers struggle to remain afloat, the business of making people well seems relatively insulated. While some discretionary health care sectors are not growing, such as LASIK eye procedures and plastic surgery that patients pay for out of pocket, most health care workers still have jobs and can afford the occasional $4 latte.

But the health care industry is no oasis. The very problems that brought our country to its financial knees are still at work today in health care. It comes down to the disordered competition that exists in both the mortgage and health care industries.

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If you pick up your college econ textbook, you'll read all about Adam Smith and how competition is fundamentally good. When companies compete, it results in a better product for the consumer: McDonald's competes with Burger King to make a better, cheaper hamburger. Problem is, in both the old, defunct mortgage business and current health care industry, the "invisible hand" fails to produce low-cost, high-quality, sustainable products.

In the mortgage industry, this competition failure produced the banking crisis. During the housing bubble, banks competed with one another to sell risky mortgages that had a high likelihood of default. Now, entire neighborhoods have been left nearly deserted because of waves of foreclosures. In health care, competition similarly fails to produce better community health. Instead of competing with one another for the best outcomes, providers compete for patients with the most profitable diseases. Hospital care for cancer and heart surgery makes more money than hospital care for diabetes, pneumonia, or mental health. While all these services get reimbursed, some bring in more cash than others—in effect, cancer care is like gold while diabetes is like silver.

As a result, form follows finance: Gilded diseases get the best care while the silver diseases are given lesser priority. (Ever notice that hospitals have hardwood floors in some areas, like the cancer units, while general medicine gets linoleum?) Mining gold generally means doing high-volume elective procedures and state-of-the art care—the stuff patients think will make them better in a short period of time. Mining silver involves primary and preventive care, like managing blood pressure. Because it's less lucrative to mine silver, even patients with comprehensive insurance are made to wait for doctors' appointments and often get bumped to E.R.s for regular care. In Redefining Health Care,economists Michael Porter and Elisabeth Teisberg detailed how this gold-mining scheme interferes with creating the best health outcomes because it devalues certain treatments and marginalizes patients with particular diseases. Improperly treated diabetes can be just as lethal as untreated cancer, but while hospitals roll out the red carpet for cancer patients, diabetics get the shaft.

E.R. patients make less money for the hospital than elective admissions. Therefore, running an overcrowded E.R. is a passive form of cherry-picking: By restricting the influx of these second-tier patients, the hospital can focus on the gilded cases by preferentially reserving space for surgical and cancer patients at the expense of others who suffer  for hours in E.R. hallways. This is perfectly legal and increases profits but does not produce a healthier overall community. The University of Chicago Hospital has taken gold-mining to the next level, according to reports: The Urban Health Initiative is designed to actively cherry-pick by shipping out "routine cases" (read: less profitable) from the E.R. to local community hospitals so they can reserve inpatient beds for more complex patients (read: more profitable). But there has been some push back by regulators: Government officials may actually challenge the hospital's "nonprofit" tax status. And, as of this month, Massachusetts hospitals will no longer be able to use ambulance diversion (which is also profitable) to divert E.R. cases to other facilities.

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