Plain Sense Economics

Perhaps as a fitting sequel to our discussion on rationing healthcare, comes an op-ed piece in the Washington Post by Alain Enthoven and Denis Cortese. The authors point to the need for reform on the supply side of healthcare, as well as improving access on the demand side.

[...T]hese programs [technology, preventive care, and effectiveness research] will not yield the significant cost savings we need. Rather, this trio of planks must be placed firmly upon the foundation of organized health-care delivery and aligned incentives.

I had the pleasure of talking with Enthoven earlier this spring, at a memorial service for a long time friend of my father. Enthoven has been on the faculty of the Stanford Business School and continues as a consultant to Kaiser Permanente. He has been talking consistently about realigning organizations and incentives in healthcare for the 25+ years that I’ve known him.

Here’s the challenge. We know that bringing all Americans under some kind of healthcare insurance plan will increase demand for services, which in turn will put upward pressure on prices. The result – significantly higher healthcare costs. Some of those new services will improve the lives and quality of life for the currently uninsured, and will reduce some future expenses. However, much of the additional care delivered and much of the care delivered today will be wasteful – not improving health outcomes and often making them worse.

Healthcare reform will need reform on the supply side, as well as the demand side. It is a continuation of our discussion on scarce resources and rationing. In a market where demand is increasing, quantity and prices go up. If resources are scarce and the opportunity costs of those resources too high, then it helps to change the supply/production part of the equation.

Enthoven’s long association with Kaiser Permanente is consistent with his position. He has seen the benefits of reorganizing care – better outcomes using fewer resources. He also believes in incentives as a way to change both patient and provider behavior. As he and Cortese point out, the three cost saving initiatives proposed by the Obama Administration are necessary, but not sufficient.