Thursday, November 17, 2011

Bundling and the Importance of Standardization

I have done more than a few posts discussing how concentrated medical expenditure in the US is.  Ezekial J. Emmanuel does a good job discussing one way to focus on this problem, bundling payments.

What I want to bring up in particular, is this:

The last big barrier to switching from fee-for-service is to get Medicare as well as the other insurers to change how they pay in unison. It is extraordinarily difficult for doctors and hospitals to change how they practice if they are partially paid via fee-for-service and partially through bundling — especially if the bundles differ between insurers. The incentives pull in opposite directions — fee-for-service to deliver more services for sick patients, bundled payments to be efficient and keep patients healthy. But if Medicare and private insurance agreed to coordinate a switch to bundled payments, doctors and hospitals could follow suit. This will not be easy, but it is absolutely necessary if we want to save real money and improve care.

This brings up one of the big issues for people that like to argue health care should be more decentralized.  The lack of standardization in payment systems is one of the big inefficiencies in our health care system.  Bundled payments aren't the kind of reform that is likely to happen spontaneously across the US, it takes someone with coercive powers to make all of the actors move together.  A decentralized system is highly unlikely to be able to institute the kinds of reforms that we need on a broad scale.  While individual institutions can pursue this, it only takes one powerful actor, such as a hospital group, to prevent this kind of reform in an area.  The reality of the economic system is that in complex markets like health care, a number of actors serve as veto holders.  To get them in line requires a centralized coordinating body.

While this example is specific to health care, it can also be applied more generally.  Some systems require greater specialization and competition, others require greater coordination and standardization.  Areas requiring standardization virtually always require a degree of coercion to be able to reach an efficient equilibrium.  Properly identifying which is which is a critical challenge for every society.  Insisting that all situations are one or the other is just plain unhelpful, both kinds of problems exist and require an evolutionary case by case response.  Ideologues, either those that insist that everything requires competition and unique solution or those that insist everything is reducible to basic principles to be determined by centralized planning (rare today but a significant historical viewpoint) both threaten one of the fundamental tasks of society and social evolution.

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