If Health Care Providers Act Rationally Costs Will Infinitely Increase

TW: Kwak makes one of those somewhat obvious yet crucial points. If doctors behave like rational suppliers, medical costs will continue to escalate and at probably increasing rates. He references the now ubiquitous Awal Gawande New Yorker piece in which Gawande compared a high-cost locality- McAllen, TX to a lower cost TX locality. Kwak's points out that the McAllen doctors were merely behaving as rational suppliers, the exception were the lower cost suppliers in the other locale.

As we have mentioned before, health care providers make their living providing/selling health care. They are not saints, they are not irrational and they are at the end of the day suppliers. To expect hospitals, doctors, pharma companies etc. to optimize your health care costs is to expect irrational behavior.

To a certain degree as technology and systems improve, the health care folks not pushing higher, more expensive treatments may be the ones ferreted out and pushed out.



From Jim Kwak at Baseline Scenario:
"...our health care system has high-cost and low-cost areas; the high-cost areas have no better outcomes than the low-cost areas. So theoretically we can solve our health care cost problem by making the high-cost areas behave like the low-cost areas.

However, the market incentives go in the other direction; the economically rational thing for providers (doctors, hospitals, etc.) to do is to run up procedures and thereby costs. It would be better if providers focused more on patient outcomes or organized themselves into accountable care organizations, as Gawande prefers; but there is no economic reason for them to do so. People are not magically going to become more altruistic overnight.


...In some ways McAllen isn’t the aberration; according to the old Chicago economics department, everywhere should be like McAllen.

Remember all the people who said that you can’t blame mortgage brokers and investment bankers for being greedy, because that’s how a capitalist economy works? Well, you could make the same defense for the McAllen doctors. We long ago stopped expecting lawyers and accountants to behave contrary to their economic interests; now we simply expect them to conform to the law and to certain professional codes of conduct, and otherwise make as much money as possible. Why should we expect anything different from doctors?..."
http://baselinescenario.com/2009/06/21/the-health-care-problem/