Obama Advisor Addresses the “Market Failure” of Health Care

Published on September 21, 2009

Everyone in the health care reform debate believes the system wastes enough money to cover the uninsured and cut taxes, said David Cutler, professor of applied economics at Harvard University. “The best guess is that we waste about $700 billion a year on medical care that is not doing very much,” Cutler said during a Myron Scholes Global Markets Forum, presented by the Initiative on Global Markets and the Chicago Council on Global Affairs, at the Chicago Mercantile Exchange on September 21.

Among the symptoms of waste are a glut of middle managers eliminated from other industries and an average of $70,000 a year in time doctors lose talking to insurance companies, he said. “There are more clerks in health care than there are nurses,” said Cutler, who served as health care advisor to Barack Obama’s presidential campaign. “There are five times more clerks than there are doctors.”

Cutler, author of Your Money or Your Life: Strong Medicine for America’s Health Care System, listed the four primary hallmarks of “normal” industries but said health care practices fail to follow them:

• Effectively using information technology. When it comes to the vast differences in mortality rates (at least five times for bypass surgery patients in New York state) – for the lowest- and highest-rated doctors and hospitals, patients remain unaware.

• Compensation is tied to productivity, or doing a good job. “But doctors get paid now for doing too much – that is, for doing volume and not value – or for doing too little, cutting back,” he said. “We have to yet to figure out how to pay doctors to help make us healthy.”

• CEO or top managers stress quality and producing value. “But in health care, most CEOs and doctors worry about survival,” Cutler said. “They have to because that is the way the system is driven.”

• Workers are empowered to make changes. “This happens in health care but not completely,” he said. “For example, typical nurses waste 35 percent of their time documenting things on paper that they must re-enter electronically somewhere else.”

Cutler termed it a “market failure” that doctors, insurance companies, and employers have not created electronic medical records. “There’s this collective action problem—it would be great if everybody did it, but nobody wants to put forward the money,” he said. As part of its economic stimulus package, the Obama administration directed $30 billion for health information technology expected to put the entire industry online within 10 years, Cutler said.

He pointed to a recent analysis of health care spending in The New Yorker that showed doctors in McAllen, Texas, spend twice as much per capita as doctors in El Paso, Texas, where demographics, health care needs, and care are similar, he said. “The article concluded that doctors didn’t really know how much they were spending and that costs were so high because that’s the way the incentives work,” Cutler said. “The incentives are just to do everything, and so that’s what they did.”

Medicare spending varies by a two-to-one margin between areas of the United States with no significant differences in patients before or after treatment, he said. “If you brought the rest of the country to the level of costs that are good today, you’d save 30 percent,” Cutler said. “If you brought them to the level they ought to be at, you’d save even more.”

                                                                                                                        — Phil Rockrohr