Tuesday, March 22, 2011

Why Economics 101 Incentives for Controlling Healthcare Costs Don't Work

Over at Baseline Scenario, James Kwak insightfully discusses Atul Guwande's findings in a recently published New Yorker article and explains why health care incentives don't work. Basically, the insight is that since only a few patients consume a hugely disproportionate amount of healthcare dollars for severe conditions, that providing incentives to cut down visit the doctor visits (to stop the so-called "over-consumption" of medical care) actually increased medical costs in a plan that implemented this strategy. As James Kwak explains:
One refrain you heard incessantly during the health care reform debate was that we have high health care costs because of overconsumption and we have overconsumption because people don’t bear a high enough share of their marginal health care costs, so the solution is to increase copays and deductibles. This is what Economics 101 would tell you: people respond to incentives. But Gawande discussed one large company that tried this year after year, but only saw their costs going up. The problem was that while most members responded to the higher copays and kept their costs more or less steady, the 5 percent of members who generated 60 percent of the costs behaved differently. Or, rather, they also reduced consumption (of doctor’s visits and prescription medications), but as a result they often had catastrophic outcomes. These were people with heart disease on cholesterol-lowering medications, and when they went off their medications they ended up in the hospital with heart attacks and then with congestive heart failure.
Read the whole thing.

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