I Am Very Tall

This is going to be a nerdy, armchair economist type of posting, so be forewarned.

I was just reading an article in the Economist about Regina Herzlinger, an HBS professor who is a chief agitatator for market-driven, consumer-oriented health care reform. A few years ago, I couldn't have given a hoot about the cost of health care. However, as someone that now has to pay for healthcare and recently got the bill for what I thought was a standard check-up, I'm now paying much more attention to all of the stories about healthcare's skyrocketing costs.

At first blush, I'd be inclined to agree with Professor Herzlinger's approach. According to the article, her book opens as follows:

“The US health-care system is in the midst of a ferocious war. Four armies are battling to gain control: the health insurers, hospitals, government and doctors. Yet you and I, the people who use the health system and who pay for all of it, are not even combatants.”

Sounds pretty good, right? After all, in almost every efficient business, progress is driven by the customer, not the various links in the supply chain. Why shouldn't it be the same in this case?

This is the sort of thinking that's driven the latest push in healthcare - consumer directed health plans. The driving hypothesis is that insurers have essentially taken cost out of the equation for the average American. This has resulted in ballooning costs of provision, as the costs are never directly passed back to the consumers. Hence, you get stories about elderly hypochondriacs that spend an inordinate amount of time at the doctor's office, primarily because they're lonely and have nothing better to do.

For the most part, I'm on the same page as this theory. However, I think that certain preconditions need to be met before this consumer driven dream can become a reality. Consumer price pressure generally comes about when the consumer can look at an array of objects and determine that some are of roughly equivalent value. Moreover, the consumer must also choose to go with the cheaper of the two objects. I'm sure that an economist could probably put a finer point on all of this and start talking about the actual requirements for "perfect competition," but I think this is a fine starting point.

As of this moment, I think there are several obstacles that are preventing these preconditions from being met. These are:

1) Lack of standardization

Healthcare provision is not a standardized commodity. In fact, it's highly variable and can be judged along any number of highly subjective criteria. Even if you were to say that procedure X costs Y dollars, there's no guarantee that the procedure will be exactly the same, as differences between the doctor and the facility can be hugely significant. How can you quantify the trust that you have in a doctor? Things like this can make comparison of healthcare offerings extremely difficult.

2) Lack of information

Let's assume that there was, in fact, a well-designed framework that would allow you to easily compare all of the relevant metrics. There's still a problem with transparency. As of now, there is no 'one-stop-shop' that will show you all of the different providers in your area, that will publish these relevant metrics, and that will allow you to do deeper research about the few providers that you're interested in. The best I've seen is from my insurer, which just shows me a list of doctors in a particular specialty, what schools they went to, and where they're currently located. In choosing a healthcare provider, this is not the information that I need.

3) Lack of pricing information

I haven't really heard of a lot of doctors that tell you up front how much their procedures are going to cost. You can't make a price-based decision if you only get the price after you make the purchase. I could be wrong about this though, having only anecdotal knowledge.

4) Indifference to pricing

This is a generally weaker point, but all the same, I thought it might be interesting to think about. Let's assume that all of the other points have been taken care of, to the full extent that it's realistically possible. We have a sense of standardization, we can access some sort of customer satisfaction metrics for all of the doctors that we're considering, and we know what it's going to cost us up front. I still think that, except for standardized checkups, the bulk of customers will be largely indifferent to price. This is because when people go to the doctor, their inclination isn't to get a bargain. Their inclination is to find the person that will cure whatever it is that ails them, regardless of the price (within reason and affordability). There are a lot of stories out there about people bankrupting themselves paying for the healthcare of themselves or the people they love. That wouldn't happen if they didn't think they had to.

Moreover, given that any metrics that come out will probably be incapable of truly capturing the 'intangibles' of the healthcare experience, it's possible that people may even go in the opposite direction, and start choosing providers that are more expensive, simply because they'll think that the price is somehow correlated with the quality of care.

I'm not saying that a consumer-driven healthcare market isn't going to work. I definitely think that consumers should be at the table when the "four armies" battle it out for control. But all the same, as with any free market, you have to make sure that the requisite preconditions are in place before you can start counting on the invisible hand to do its thing.