Doctors & Mechanics

The Incentives Behind our Massive Healthcare Costs

Published on March 18, 2013by Abdul El-Sayed

My grandfather taught me to find a mechanic I could trust as soon as I moved to a new place.

That’s because it can be so hard to do—you never quite know if the mechanic is trying to cheat you out of a few bucks. After all, the reason you go to a mechanic in the first place is because you don’t know what’s going on with your car. Sure, you know that it’s making weird noises or not quite driving like it used to, but you don’t know why its not working properly, whether or not its something serious or just the usual wear and tear, or what its going to take to fix it. So when a mechanic tells you that repairs will cost $2,500 for something that seemed so insignificant, you don’t know whether to trust him or to go somewhere else.

For all of the same reasons it’s hard to find a trusty mechanic, we should be just as wary of our medical system. As Steven Brill beautifully demonstrates in his recent feature article in Time Magazine, profit incentives are driving the cost of healthcare in dangerous ways.

The parallels are obvious. We seek medical care for the same reasons we go to mechanics: Something’s wrong in there and we don’t know how to fix it. We don’t know the extent of the problem, the cause of the problem, or the seriousness of the problem—we only know that there is a problem. And if we could fix it on our own, we would. But we can’t.

Economists call this difference in knowledge between service providers and their customers an “information asymmetry”, which means that customers and providers don’t approach one another with the same understanding of the product they are attempting trade. While a patient might just want to make that ache or pain go away, it’s largely up to the medical system as to whether or not that pain deserves a full workup, complete with thousands of dollars worth in imaging and procedures, or just a couple of aspirins and a “call me in the morning.”

Just like mechanics, who can exploit the difference in their knowledge of cars to earn a few more bucks, the medical system can do the same.

And the data suggests that it does. One hallmark study looked at differences in the likelihood of ordering imaging tests, like chest X-rays, if doctors owned their own imaging machines as compared to if they did not. The findings are telling: doctors who owned their own machines were more than four times as likely to order imaging tests than their counterparts.

Why would doctors who owned their own machines be so much more likely to recommend imaging tests to their patients? It’s simple: the profits of those tests come right back to them, whereas doctors who had to refer imaging tests elsewhere earned no more for referrals, and were therefore were less likely to order them. Multiply these same incentives millions of times, extending up the chain from individual doctors to behemoth hospital systems, and you’ve got a good explanation for why we spend nearly 20 cents on the dollar for healthcare in this country.

This information asymmetry in medical care has two important long-term consequences.

Most importantly, it means that people are being subjected to invasive tests and treatments they don’t always need. For example, many imaging studies, like chest X-rays and CT scans, expose people to harmful radiation, which can cause cancer. One study estimated that unnecessary CT scans, for example, were responsible for up to 29,000 new cases of cancer each year.

And the risks extend well beyond imaging tests. For example, surgeons make substantially more money if they operate than if they advise patients for more conservative treatments. In his article “A Knife in the Back” in the New Yorker, Jerome Groopman demonstrates how a substantial proportion of surgeries to alleviate back pain are performed despite inconclusive evidence about the benefits of surgery to begin with.

The other serious implication is the rising cost of healthcare. Nearly 18 percent of America’s GDP is spent on healthcare—more than any other country in the world. What’s worse, is that growth in healthcare spending is also higher than in any other high-income country. It should be clear that incentives that drive doctors to order more tests and procedures only contribute to those rising costs.

Those incentives are part and parcel of our current healthcare reimbursement system, where providers are paid by the volume of services they provide rather than the quality of the outcomes they shepherd. Like mechanics who are also paid by the volume of their work, our “fee-for-service” system incentivizes providers—be they individuals or mega-complexes—to do more to earn more, even when more may not be better. While the Affordable Care Act does establish some programs to pilot other models, like the “Affordable Care Organization” model, which incentivizes doctors to work in teams and rewards them for their performance, fee-for-service remains the most dominant reimbursement model for healthcare in the US.

And for that reason, finding a trusty doctor can be just as hard as finding a trusty mechanic.

Edited by Karestan Koenen.