Friday, October 15, 2004

Free-Market Healthcare

Arnold Kling writes today at Tech Central Station about "market-oriented reforms for health care." Some key points:
...On the demand side, I propose event reimbursement in health insurance instead of procedure reimbursement. On the supply side, I propose reputation systems instead of credential-based regulation.

Event reimbursement insurance would give you a lump sum if you become injured or seriously ill. The lump sums might be in multiples of $5000. You might get $5000 for a broken wrist that requires surgery, $25,000 if you are diagnosed with stage one breast cancer, etc. The insurance contract would spell out which events result in which dollar amounts....

One advantage of event reimbursement compared with procedure reimbursement is that it gives patients and providers the incentive to control costs. It also gets insurance companies out of the business of setting fees for services. Providers set fees, and consumers decide either to accept those fees or go somewhere else for service. Relative to current practice, this is a radical concept, and it would take some learning on the part of both consumers and health care providers to adapt. We seem to be able to handle this aspect of markets in other goods and services, so I am optimistic that this would work.

However, the primary advantage of event reimbursement insurance is that it is true insurance. As I pointed out in "You Call This Health Insurance," the traditional "health insurance" that we have today is really something quite different. The current system cannot deal with someone who develops a disease that puts him or her at risk for expensive procedures going forward. The competitive market breaks down at that point....

...Leaving aside medical insurance, for the medical field as a whole I believe that reputation systems would work better than our current system of credential-based regulation.

A friend who is an optometrist puts a lot of time into lobbying the state legislature. That is because the boundaries between what he can do relative to an optician or an ophthalmologist are determined by state laws. One group is constantly trying to use the legislative process to take territory away from the others.

These sorts of regulatory boundaries impose tremendous costs on consumers, without our realizing it. Like fish unaware that they are swimming in water, most of us go through life without ever thinking about the pervasive, murky regulatory swamp through which we swim when we seek medical care.

In most industries, government does not get involved in defining work rules. If a company decides to have a financial analyst do computer programming or a computer programmer do financial analysis, that is none of the government's business. In the medical industry, however, the government does dictate such work rules. This creates all sorts of supply bottlenecks. For example, if there is an increase in the number of patients needing help with starting exercise programs to recover from orthopedic injuries, the result is a shortage of "physical therapists." Any other market would adapt by coming up with a close substitute. In medicine, that is not allowed.

Another example is the rule that only a physician may write prescriptions. This protects the income of physicians, but by the same token it prevents lower-cost alternative health delivery systems from emerging....

Although medical work rules serve primarily to carve out economic rents for health care providers, they are not sold that way to the public. Instead, these regulations ride in under the banner of "consumer protection."

The free market principle is that as consumers we should protect ourselves. The key to protecting ourselves in a deregulated environment for medical care would be reputation systems. As Howard Rheingold discusses in his book Smart Mobs, the concept of reputation systems receives increasing attention in our information-rich, networked society.

There are reputation systems all around us. Consumer Reports ratings are a reputation system. eBay uses a reputation system to keep buyers and sellers honest. Mortgage lenders and other suppliers of consumer credit rely on a reputation system known as credit scoring.

In medicine, we already use reputation systems. The diploma on the doctor's wall is one. The referral that is made by friends or other doctors is another. All sorts of private systems are springing up to evaluate data on hospitals, doctors, and so on.

Reputation systems could provide us with an alternative to the strict, credential-driven structure that we have today. Someone could earn a reputation as capable of training you to do certain exercises without earning a license as a physical therapist. Someone could earn a reputation as a reliable prescriber for certain types of medications in certain types of situations without getting a full-fledged MD. In fact, the drug industry could be deregulated, with reputation systems for medicines replacing "FDA approval."

If you took away the centrally-planned regulatory system for medical care, my conjecture is that reputation systems would emerge as a more efficient Hayekian market response. In some cases, such as medicines, I would want to see a gradual deregulatory process, rather than lose consumer protection completely and suddenly.

Some of the expense of operating reputations systems could be offset by lower costs elsewhere. If bad doctors (and incompetent technicians as well) were dealt with by reputation systems, malpractice lawsuits would be needed much less, if at all.

If we took away the regulatory swamp, the changes would be dramatic. You could have your gall bladder surgery done by a dental assistant. That would not be a good idea, but it would be your responsibility as a consumer to make that decision. Your protection against making bad decisions would be common sense, information, and effective reputation systems.

My guess is that a lot of business process re-engineering would take place spontaneously if the regulatory swamp were replaced by consumer choice and reputation systems. I think that this is the best hope for allowing medical care to become as efficient as possible by taking advantage of the best technologies and practices our economy has to offer....
For more about the deregulation of healthcare, among other things, see my series "Fear of the Free Market" (here, here, and here).