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Fixing Health Care Requires Freeing the Patient and Freeing the Doctor: An Interview with John Goodman

TWO DECADES AGO, IN THEIR BOOK Patient Power: Solving America’s Health Care Crisis, John Goodman and Gerald Musgrave argued that the problem with American health care was that somebody other than the patient was making most of the decisions— because somebody other than the patient was picking up the bill. The authors introduced the world to the idea of medical savings accounts, which gave patients control of the money and allowed them to decide what health care was worth buying and what wasn’t. Today, medical savings accounts are called health savings accounts and they are the fastest growing type of health plan in the country. Now Goodman, President of the National Center for Policy Analysis, has written a new book called Priceless: Curing the Health Care Crisis, in which he takes the argument even further. The system of third-party payment not only constrains patients, he says, it also prevents doctors and hospitals from finding new and better ways of serving patients. We talked recently with Goodman about how a real free market in health care can deliver better medicine.

The Insider: In your book, you argue that the suppression of market forces creates problems in health care. Isn’t health care different, though, in a number of ways that make it hard for markets to operate?

John Goodman: Wherever we don’t have third-party payers paying most of the bills, health care markets work very well. We see that in cosmetic surgery, in Lasik surgery. We see it in the international market for medical tourism, which covers just about every type of elective surgery, and increasingly in the United States we’re developing a domestic market for medical tourism. So there’s lots of evidence that markets can work in health care. We’ve seen a growth of specialty products in areas where patients pay mainly with their own money. There are more than a thousand walk-in clinics now. They post prices. They provide high-quality inexpensive care. Rx.com was the first online mail-order pharmacy, which came into existence to compete with local pharmacies, mainly appealing to people who were spending their own money. You get price competition, and so you get lower prices and higher quality as well.

TI: So is ObamaCare just a continuation of the suppression of market forces?

JG: The philosophy behind ObamaCare is that health care really should be free at the point of delivery. They’ve certainly gone to great lengths to make preventive care free without deductible or copayment. There are a lot of people on the Left who would like to make all health care free at the point of delivery.

Right now, our third-party payment system gives both the patient and the doctor perverse incentives. The perverse incentive of the patient is to over-consume because he’s not paying the full price. And the perverse incentive on the doctor’s side is to over-produce because instead of trying to satisfy a patient, he is really maximizing against a payment formula.

TI: What about the argument that consumers can’t really make informed decisions on their own about health care; that information asymmetries force us to rely on doctors’ judgments, and so therefore we need something other than markets to keep crass profit maximization in check?

JG: There’s information asymmetry in the cell phone market. The guys repairing my cell phone know a lot more than I know, but cell phone repair is a market that works very well. There’s even a chain called iHospital, and their employees are called iDoctors. Some firms make house calls to repair your cell phone. So asymmetry of information doesn’t mean that markets can’t work, and work well.

TI: If patients had to pay for their care out of their own pockets, wouldn’t they forgo care that they really need?

JG: You want people to choose between health care and other uses of money. Certainly society as a whole has to do it, and, therefore, it’s appropriate for individuals to do it. If somebody wakes up in the middle of the night and they have something wrong with them, should they go to the emergency room, and spend the money for care? Or should they forgo that care and see if they get better on their own? Who is in a better position to make that choice than the patient? One of the reasons why we promote health savings accounts is we want the patient to actually have money. So, if he decides he needs the care and it’s worth the price, he can pay it first. We think that the patient is the ideal person to make a lot of those decisions.

TI: So because of third-party payment we over-consume health care in aggregate. But are there specific medical services that are under-consumed?

JG: I would say for the chronically ill we are way under-consuming drugs. If we treated most chronic illnesses optimally, we would, maybe, double or triple the drugs that chronic patients take. Let’s say the diabetics, the asthmatics, and so forth had a budget that they could manage. Then the providers would try to think of ways to meet the needs of the patients that would include prescribing the right drugs and encouraging the patient to be compliant with drug regimes as part of an overall care plan.

TI: So if we had real prices and consumers making decisions based on those prices, health care providers would behave differently too, right?

JG: Yes. For example, we would have competition to treat the diabetics. You would have clinics and facilities that are set up to meet their special needs.

TI: And the fee schedules that both government programs and insurance companies use are not real prices either, right?

JG: That’s right. That’s a crazy way to pay doctors. If you don’t have a task on your list, they’re not going to do it. They’ll only do what they get paid to do.

TI: Another theme of your book is that we have confused health care and health insurance. How did that happen and why does it matter?

JG: The surprising thing is that otherwise sophisticated people make this mistake. They talk about how Massachusetts health reform, cut the number of uninsured in half. To a lot of even sophisticated people, that means that somehow people are getting more health care, but there really isn’t any evidence that more health care is being delivered in Massachusetts. So there is a very definite confusion over something very important. If the people who were going to community health centers and emergency rooms before are still going to those places for the same care, then we really haven’t changed anything. We’re just moving money around.

The number of people who say they can’t find a doctor or are not getting care is about the same as it was before the reform. Remember, in Massachusetts they didn’t create any more doctors; they didn’t create new doctors, new nurses, or new clinics. They just expanded demand and left supply where it was before. So now in Boston, a new patient has to wait two months to see a doctor. The average for the country as a whole is one week.

TI: And the time we spend waiting for care can be a bigger barrier to access than money. That’s what you refer to in your book as the time-price of health care. Is that right?

JG: Just as people do in Canada, in Britain, and in most European countries, we pay for care in the United States primarily with time and not with money. What does that mean? How long does it take you to get the doctor’s office on a telephone to make an appointment? How many days do you have to wait before you can see the doctor? How long does it take you to get from your home to the doctor’s office? How long do you have to wait in the doctor’s office once you get there? Those are all non-price barriers to care. And those barriers to care, by the way, are more important than the fee the doctor charges.

TI: So is it correct to say that as a society we’re paying twice for health care? Patients pay with time, and then society as a whole still pays the doctor his fee.

Nothing in the Affordable Care Act increases access. I believe that access to care for our most vulnerable populations is going to go down, not up. We’re going to have a huge rationing problem. We’re going to expand the demand, but there’s no change in supply.

JG: Yes, that’s right. But some of that time is just delay. So I use “time” in several different senses in those examples I gave you. Having to wait so many days to see the doctor is just delay. But waiting in a doctor’s office, waiting in an emergency room is a real waste of resources. That’s another sense of time. If the emergency room is basically giving away care for free then the time-price is the market-clearing price. People who get care will be the people willing to wait in the emergency room the longest. One out of every five patients who goes to an emergency room leaves without ever seeing a doctor because they get tired of waiting.

TI: But even if the time-price goes up, won’t lowering the money-price of care increase access for low-income and vulnerable populations?

JG: Nothing in the Affordable Care Act increases access. I believe that access to care for our most vulnerable populations is going to go down, not up. We’re going to have a huge rationing problem. We’re going to expand the demand, but there’s no change in supply. So if you’re in a plan that pays providers less than what Blue Cross pays or what the other private payers are paying, you’ll be less preferred than other patients. And who are those people? They’re the elderly and the disabled on Medicare, low-income people on Medicaid, and if we follow the Massachusetts precedent, they will be low-income people in the newly subsidized plans sold in the health insurance exchanges. Those are the most vulnerable people and they will have the greatest difficulty finding doctors who will see them.

TI: What are the main things that we need to do in order to get a real free market in health care?

JG: Most fundamentally, we need to free the patient and free the doctor. You free the patient by giving him control over the marginal dollars. You free the doctor by allowing him to compete on price and on quality.

TI: Does that mean more health savings accounts, changing the tax code?

JG: It means having more flexible heath savings accounts, so that the market can decide what activities we will self-insure for and what activities will be insured by third parties. Right now, HSA’s have across-the-board deductibles because Congress has designed your health plan. Congress is basically telling you what you’re going to self-insure for and what you’re going to use a third party for, instead of letting individuals and markets make that choice.

TI: You devote a chapter of your book to describing the intellectual state of mind that makes people resist the economic way of thinking about public policy problems. How do you change people’s thinking about that? How do you get them to see that ideas like “There’s no such thing as a free lunch” really matter— even in health care?

JG: It’s very hard. If you’re used to the economic way of thinking, which is the way my book approaches health care, it’s hard to talk to people who resist that way of thinking. There’s a recent report by a liberal group on how to contain costs. Well, none of it has anything to do with giving anybody the right incentives, because they don’t believe in incentives.

TI: But you’ve had some success in getting people to rethink health care issues, right?

JG: When I started out with the idea of a health savings account in the early 1990s, everybody was against the idea. And by everybody, I mean the Chamber of Commerce, the business groups, the health insurance companies, the American Medical Association. They were all against it. And in 10 years we’ve turned just about everybody around. So now, all those organizations are very supportive. All the health insurance companies offer the product. That was a dramatic example of changing minds.