Trust the Customer!
Health-care costs doubled over the decade ending in 2004, in fact reaching an all-time high measured as the share -- 16% -- of GDP; and they continue to greatly outpace inflation. Similarly, education costs from primary levels up through college continue to grow faster than other categories of national spending. Why?
Here is a bare-bones way to think about this situation: A is the customer, B is the service provider. B informs A what A should buy from B, and a third entity, C, pays for it from a common pool of funds. Stated this way, the problem has no known economic solution because there is no equilibrium. There is no automatic balance between willingness to pay by the consumer and willingness to accept by the producer that constrains and limits the choices of each.
In the U.S., you go to see your physician, who says you need to buy X from her. You pay a part of the price, and, if you are employed, your health-insurance company reimburses the physician for the remainder. Next year all rates in the insured pool have to be increased to pay for the rising cost. In most foreign countries you wait in line for the provision of the service (surgery, an MRI scanner, etc., if they are even available), and after the service is delivered, the government reimburses the provider. Next year the government increases taxes on the pool of taxpayers.
Another example. You want to get a college degree in field X. The college says: Here is the tuition price and this is the program of study in X. If it's a public university the price you pay is perhaps 20% of the cost to the college, and the college collects the difference from the state budget levy on the taxpayers. If it's a private university, the tuition you pay is closer to the cost of service, but most private universities still rely heavily on donors and public sources for the support of education costs.
In these examples, if third-party deep pockets pay whatever is the price B charges A this year, the effect is to reinforce the incentive to raise the price next year. Spending escalates, which leads to a demand for cost control. In health care there is increasing control over access to medical services. Insurance companies disallow patient free choice of physicians, clinics and hospitals outside their approved network. Physicians and medical organizations face escalating administrative costs of complying with ever more detailed regulations. The system is overwhelmed by the administrative cost of attempting to control the cost of medical service delivery. In education, university budget requests are denied by the states who also limit the freedom of universities to raise tuition.
If there is a solution to this problem, it will take the form of changing the incentive structure: empowering the consumer by channeling third-party payment allowances through the patients or students who are choosing and consuming the service. Each pays the difference between the price of the service and the insurance or subsidy allowance. Since he who pays the physician or college calls the tune, we have a better chance of disciplining cost and tailoring services to the customer's willingness to pay.
Many will say that neither the patients nor the students are competent to make choices. If that is true today, it is mostly due to the fact that they cannot choose and have no reason to become competent! Service providers are oriented to whoever pays: physicians to the insurance companies and the government; universities to their legislatures. Both should pay more heed to their customers -- which they will if that is where they collect their fees.
Significantly, in Lancaster County, Pa., an Amish and Mennonite delegation, whose people pay cash for medical services, negotiated discounts up to 40% with their hospital for services. If they can make it work, surely we can as well.
Would some one please just trust the customer?
Mr. Smith, a 2002 Nobel Laureate in Economics, is a professor at George Mason University.
| URL for this article: http://online.wsj.com/article/SB114179336901692343.html | |
No comments:
Post a Comment