HealthBeat FYI: Perverse Incentives in Health Care

April 05, 2007

Our public-school system and our health-care system may seem as different as night and day.  Yet both systems share something in common: Mediocrity is the rule and excellence, where it exists, is distributed randomly, says John C. Goodman, president of the National Center for Policy Analysis.

In both cases the reason is the same.  There is no systematic reward for excellence and no penalty for mediocrity.  As a result, excellence tends to be the result of the energy and enthusiasm of a few individuals, who usually receive no financial reward for their efforts, says Goodman.

Consider:

• Research by John Wennberg and his colleagues at Dartmouth Medical School suggest that if everyone in America went to the Mayo Clinic, our annual health-care bill would be 25 percent lower (more than $500 billion!), and the average quality of care would improve.
• If everyone got care at Intermountain Healthcare in Salt Lake City, our health-care costs would be lowered by one-third.

Of course, not everyone can get treatment at Mayo or Intermountain.  But why are these examples of efficient, high-quality care not being replicated all across the country?  The answer is that high-quality, low-cost care is not financially rewarding.  Indeed, the opposite is true.  Hospitals and doctors can make more money providing inefficient, mediocre care, explains Goodman.

In a normal market, entrepreneurs in search of profit would solve this problem by repackaging and repricing their services in order to make customer-pleasing adjustments.  Yet in health care, contracts and prices are imposed by large impersonal bureaucracies.  The individual physician has virtually no opportunity to offer a different bundle of services for a different price.  As a result, very little entrepreneurship is possible, says Goodman.

Source: John C. Goodman, "Perverse Incentives in Health Care," Wall Street Journal, April 5, 2007.

For text:

http://online.wsj.com/article/SB117573825899360526.html (subscription required)

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