Did the Supreme Court create the health care mess?

How to fix health policy.
July 29 2009 7:06 PM

Did Warren Burger Create the Health Care Mess?

The 1975 antitrust decision that gave you physician-owned hospitals.

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But in general, especially after Ronald Reagan became president, there was a paradigm shift. Where once government had sought to police the health care sector mainly to protect patients, now it sought to police it mainly to protect a competitivehealth care marketplace. A thriving health care bazaar, it was assumed, would serve patients' interests. This is the theory that bequeathed us doctor-owned hospitals, the endless churning of marginally valuable medical tests, and dermatologists' waiting rooms where patients are bombarded with video infomercials in which their very own doctors market skin creams and facelifts. "The same investors who started Kentucky Fried Chicken," Relman complains, "started the Hospital Corporation of America!" (The common link is Jack Massey.)

The failure of market-driven medicine was foretold by Nobel Prize-winning economist Kenneth Arrow in a 1963 paper ("Uncertainty and the Welfare Economics of Medical Care") that is widely credited with inventing the discipline of health care economics. (In 1963, the health care sector was so sleepy financially and so dominated by nonprofit do-gooders that economists saw little reason to study it.) There were several factors making it difficult to impose a market model on medicine, Arrow wrote. Demand for services was "irregular and unpredictable," and the buyer was physically vulnerable. Judging the value of the product (i.e., medical treatment) entailed a degree of uncertainty "perhaps more intense … than in any other important commodity," which was compounded by the presumption of an extreme asymmetry between the doctor's knowledge and the patient's. Complicating matters even further, the patient didn't pay; his insurance company did. The doctor "acts as a controlling agent on behalf of the insurance companies," making sure the patient didn't overuse his services, but only up to a point; "the physicians themselves are not under any control and it may be convenient for them or pleasing to their patients to prescribe more expensive medication, private nurses, more frequent treatments, and other marginal variations of care."

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In an online interview last week with Conor Clarke of the Atlantic, Arrow (now 87) said  that "the basic analysis hasn't changed," but "[s]ome specifics have changed." Arrow explained that in his 1963 paper he emphasized that market forces were supplemented by

professional commitments to provide a service, to engage in services that aren't self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of health care, and that has led to some of the problems we have today.

I'm no economist, but what I think Arrow is saying here is that health care today conforms a little better to standard economic theory than it did in 1963, but that the invisible hand's gain has been medicine's loss. Goldfarb isn't the only reason for the change, but it's a major one.

Relman believes that the health reform bill, if it passes, won't do much to solve the problem, because it does almost nothing to inhibit medical entrepreneurship. "The idea that health care is a legitimate arena for investment is monstrous," Relman says. "Things are going to have to get a lot worse and the costs are going to have to become absolutely intolerable, and then people will finally begin to realize that the system we have doesn't work right." Part of that change, Relman says, should come from the Supreme Court. If Congress outlawed for-profit medicine, perhaps "the Supreme Court would be willing to take another look at this." The Supreme Court? Where the Chicago school is king? Relman's answer skirts thrillingly close to violating the Hippocratic oath. "Where there's death, my friend, there's always hope."

[Update, July 30: In today's New York Times, Kevin Sack and David Herszenhorn report on  an energetic lobbying effort by the doctor-owned Doctors Hospital at Renaissance in Edinburg, Texas, that helps explain why existing doctor-owned hospitals (as opposed to future ones) would be permitted to continue participating in Medicare under the House and Senate bills. Suffice it to say that traditional market economics, while not easily applied to health care (a point explored further by Alec MacGillis in today's Washington Post), apply all too well to the legislative process. The Doctors Hospital at Renaissance is not a specialty hospital, but it was criticized for wasteful spending in Atul Gawande's much-cited New Yorker piece about excessive Medicare spending in McAllen, Texas, which is next door to Edinburg. ("[I]t has a reputation," Gawande wrote, "for aggressively recruiting high-volume physicians to become investors and send patients there. Physicians who do so receive not only their fee for whatever service they provide but also a percentage of the hospital's profits from the tests, surgery, or other care patients are given.") Overall, the Washington Post (citing figures  from the Center For Responsive Politics) reports that the health care sector is spending close to $1.5 million a day to influence health reform.]

Timothy Noah is a former Slate staffer. His  book about income inequality is The Great Divergence.

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