ECONOMIC ANALYSIS Mike Hicks: What it takes to make our health care system healthy

June 30, 2008

The U.S. health care policy debate has been strangely quiet the past few months. But the underlying problems grow ever more serious. Here's some background.

First, health care costs are rising rapidly. A huge amount of the increase stems from greater demand for the most costly services. These services include advanced end-of-life care, much more extensive neonatal care, and high-end elective surgery. Higher use of these services represents perhaps the largest single contributor to overall health care costs.

Second, we live in a bifurcated world of health care payment. There are those of us with insurance and those without. For those without health care insurance, a wide range of services is available. Hospitals cannot turn away patients in need, and so folks who need care can get it. Unfortunately, the care they get is usually in the wrong place (emergency rooms instead of doctors' offices), and at the wrong time (when they are ill). This makes it more costly, but since most folks without insurance don't end up paying, there is little incentive to go to the right place at the right time for health care. Guess who ends up paying the bills for the uninsured?

Third, health care already is the most regulated industry in the United States. It is the industry most subject to occupational and geographic monopolies. U.S. physicians have a ruthless and wellorganized mechanism for stamping out competition, either from foreign physicians or other health care professionals. Local hospitals defend their turf in ways no other regional monopolist would ever consider. Medicaid rules are arcane and ill-designed and fear of legal action clouds even trivial medical decisions. All this raises costs.

So what can we do?

There are only three ways to cut down on demand for expensive health care services. The first is to let consumers make their own choices through the price system. These are likely to be tough choices for families. Second, we could have hospitals and insurance companies make choices for us. They do much of this already, by limiting some procedures (such as extreme neonatal care) or placing lifetime caps on benefits. Third, we could let the government make the decisions (like no cancer treatment for anyone over 70). The downside of that option is obvious.

To fix the payment problem, we could make everybody buy health insurance. This wouldn't be easy, since perhaps half the adults who don't have health insurance cannot read and write. As for regulations, we could force more competition in medicine. This would mean more doctors, more equitable licensing and more extensive use of physician assistants and nurse practitioners. We also have to reform the Medicaid and Medicare payment systems.

Fixing health care is not going to be easy.

Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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