Medical Gremlins
William Baldwin 10.30.06

There's a beast that haunts the corridors of hospitals, clinics and HMOs. It warps the thinking of patients and doctors; it wastes money and makes people sicker. This animal is the Perverse Incentive.

A patient whose insurance covers hospital visits but not doctor visits has an incentive to take trivial problems to the emergency room. Since employer-paid health insurance is exempt from income tax, there's an incentive for these plans to cover things like sunglasses and marital counseling. Stingy Medicare fees give doctors a warped incentive to overmedicate and overtreat; they drag the patient in for a second visit when a phone call would suffice.

In her story on Amgen (click here), Kerry Dolan describes how manufacturers of lifesaving (and insanely expensive) anti-anemia drugs were perversely motivated to compete not by cutting prices but by paying "rebates" to the doctors who decided which drug to use. Bribes, one doctor calls them. The cash took the form of markups that doctors could collect on drugs they dispensed. Congress tried to reform this process by shrinking the markup. Result: Some clinics lose money dispensing the drugs. Now another Perverse Incentive has crept out of the woodwork. These clinics ship patients off to the hospital for the anti-anemia hormones, squandering resources in the process.

Perverse Incentives run loose through Medicare and Medicaid,
http://www.manhattan-institute.org/thecure/reviews.htm says David Gratzer, M.D., a fellow at the Manhattan Institute and author of The Cure: How Capitalism Can Save American Health Care. Example: Hospitals get paid for procedures, not for making people well, so they have an incentive to cut corners in their surgical wards. When they make a mistake, they collect more money for a second operation to repair the damage done in the first one.

Controlling the epidemic of Perverse Incentives will mean giving the patient a bigger economic stake in efficient health care.

Congress has taken a halfhearted step in this direction by permitting health savings accounts that reward patients for spending medical dollars wisely. A real reform, though, would demand that the tax system stop subsidizing employer-paid health insurance that goes beyond catastrophic coverage, and it would mean redesigning Medicare so that it looks more like the insurance we'd have in an unsubsidized free market. Voters, however, don't want their tax deductions or their freebies tampered with. In short, the politicians have a perverse incentive to do nothing.