Defragmenting Healthcare

Einer Elhauge, a healthcare expert at Harvard University, argues that we can lower healthcare costs and cut the deficit by “defragmenting” the system, by which he means replacing small group physician practices with large companies that combine hospitals and salaried physi-cians, similar to the HMO concept, but with fewer restrictions on integration. According to Elhauge, such integrated entities would operate more efficiently than small practices to coordinate patient care, improve quality, and dramatically reduce costs.

Large integrated organizations may indeed generate efficiencies, although liberals like Elhauge may be overstating the potential benefits, perhaps due to wishful thinking. But increased efficiency by providers will not, by itself, solve the cost problem. To lower costs, it would also be necessary to insure that these entities operate in competitive markets because any savings resulting from efficiencies would not be passed along to consumers, in the form of lower prices, in the absence of competition.

Of course, any government can contain costs without relying on markets and competition. It’s just a matter of implementing price controls and restricting access to care. But then what do we get? The historical evidence (as well as theory) shows that central control and planning leads to low quality, stagnation, and eventual decline. In healthcare, this would affect almost 20% of the economy. And the European experience, with apparently lower costs, doesn’t prove otherwise.

Because centrally planned economies do not work very well, the quality of healthcare in European countries with highly centralized systems most likely is not very good. If it seems that quality is high, then we have to suspect the reason is something other than central planning. For example, we might wonder if the quality could be due to free-riding on American innovation and the cost-shifting implied by this. If America goes the way of Europe, however, there will be no one left to shift costs to, and again, we can say hello to stagnation and eventual decline.

So Elhauge is only giving us half the story on controlling healthcare costs, which is very strange in so far as Elhauge, in addition to healthcare, is an expert in antitrust law. The WSJ has reported on the wave of consolidations in the healthcare industry due to Obamacare, yet Elhauge is silent on the prospect that our large, integrated, efficient healthcare companies might turn out to be monopolists in their respective geographic markets. But then again, maybe that’s not an issue for liberals:  after all, a small number of large companies would be easier for the central government to control.

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3 Responses to Defragmenting Healthcare

  1. You would do well to remember that there is no country called “Europe.” There is no “European healthcare system” to compare to. Every advanced nation, the US now included, has some form of universal healthcare. Some use private systems like the US and Switzerland, some are fully socialized, like the UK, and some are are a blend.

    That being said, the US underperforms in nearly every area of health. We are consistently ranked among the lowest in the advanced world in health outcomes, yet we spend the most per person on care, twice as much as Switzerland does, who are #2.

    http://www.who.int/gho/countries/usa/country_profiles/en/index.html

    The US has the most amount of market competition and the most fragmentation and the worst outcomes at the highest prices.

    • alsanblog says:

      You’re right, the EU does not impose healthcare on the citizens of its members states, but leaves healthcare up to the government of each state. In this regard, the U.S. is going far beyond the Europeans when we insist on placing 315 million people under the thumb of a central government. This approach is one of the least defensible aspects of what’s coming in healthcare.

      It’s odd that you mention Switzerland apparently as an example of a market-based system, which it is not. Switzerland is a highly regulated centralized system that simply uses private contractors rather than government employees to implement healthcare. For example, insurers must offer a basic plan, but cannot make a profit from it although they can profit from “supplemental” insurance. And there are other restrictions on policies and profits.

      Centrally planned economies cannot compete with market-based economies. Either the statistics that claim otherwise are faulty (meaningless in some way) or healthcare somehow is the exception to the desirability of markets and competition (i.e, it’s a natural monopoly). If you don’t question the statistics and what they mean, then you have to argue that healthcare represents a natural monopoly, but you don’t.

      • Once again, creating an allegory where the EU is the Federal Government and each individual country is a state is inaccurate. I do think your criticism is valid about the ACA possibly being too sweeping across states, although I don’t really agree since each state can set up their own insurance exchanges.

        Just to add some nuance here: “Centrally planned economies cannot compete with market-based economies.” With all respect, this isn’t 1955. We are not fighting Soviet communism. Of course no one wants a centrally planned economy. We’re all capitalists here. I more than anyone.

        The issue at debate is not an question of absolutes, where we have only the choice of a centrally planned economy or a free-market economy. The question is how much we want government involved, on a sliding scale. I’m sure you don’t want anarchy any more than a progressive would want communism.

        Switzerland uses a structure similar to the ACA. Individuals must buy private health insurance with subsidies used to offset costs, based on incomes. In that they don’t rely solely on single-payer, they are on the market based side of the scale. No advanced country has a full free market based healthcare system.

        Now, to your point, fully socialized systems like in the UK, have severe drawbacks. I would not want to see that implemented here. That side of the scale is where we do not want to be, as you pointed out.

        My point is that I would not want to see a healthcare system on the other side of the scale either. Healthcare affects people’s lives to such a degree that there is the moral question when the poor are sent home to die because they lack proper funds, or an entire class citizens buried in debt from medical bills, unable to participate in the greater economy.

        Because of the moral issues at hand, we cannot treat healthcare as any other commodity. No other industry I know of has a legal and ethical requirement to offer its services to people regardless of their ability to pay. Any discussion of healthcare policy has to acknowledge that reality, and build from there.

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