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Getting Health Care Incentives Right

David Goldhill’s father, 83 but still working, walked into a non-profit Manhattan hospital with pneumonia. Five weeks later he was dead from hospital-borne infections. Appalled by the negligence and primitive record-keeping of a top-rated hospital, Goldhill spent two years researching the US health system. The September Atlantic features Goldhill’s report on how misdirected incentives seriously distort the system. Goldhill, a business executive, proposes an alternative system to give consumers more choice, and allow competition to improve quality and lower costs. (See “How American Health Care Killed My Father“.)

Key to Goldhill’s reform is to split health care into two components: he would require us to contribute regularly to a health savings account to cover basic care and to purchase catastrophic insurance-with appropriate subsidies for lower income citizens. (Note that requiring subsidized purchase of health insurance, as Obama also proposes, is a political smokescreen to hide the reality that universal health insurance will reduce benefits and raise costs for those relatively well off Americans who have benefited most from the current system.)

I agree with Goldhill on splitting the system between basic and catastrophic, but I don’t think his health savings account will provide the best incentives. Here’s the problem:

As a society we want all citizens to receive basic health care. That means immunizations, treatment for minor illnesses or injuries, dental care, hearing aids, eyeglasses, pregnancy monitoring, routine counseling for chronic diseases like diabetes, or high blood pressure or heart disease-care that heads off serious conditions and keeps people productive and out of hospitals. Such care should be more than free: it should be accessible to those who can’t afford a taxi or much time off from work. (Great Britain not only provides free health care, but reimburses transportation.)

As a society, we also don’t want over-treatment, let alone the incompetent treatment that killed Goldhill’s father. But as long as doctors are paid by fee-for-service, there will be over-treatment and little incentive to make doctors wash their hands. That’s true whether or not a hospital is non-profit. Moreover, fee-for-service encourages doctors to become specialists, who are better paid, instead of primary care practitioners.

The problem with the health savings account part of Goldhill’s proposal is that it would not only discourage over-treatment but encourage people to skimp on basic health care. Moreover, people would still lack the information to make good healthcare decisions.

How do we promote basic health care while discouraging over-treatment?

Some thirty years ago, we thought HMOs like Kaiser had come up with the solution: capitation, that is, charging a fixed amount per client. Supposedly, the patients who stayed healthy would balance out those who got sick, and the HMOs would profit by cutting waste. It didn’t work that way. HMOs started denying care to sympathetic patients, provoking public outrage. The HMOs backed off–and raised premiums.

What went wrong with capitation? As someone wrote at the time, if you charge a fixed price for a buffet at a cafeteria, watch the quality of the food decline. In other words, capitation gave HMOs an incentive to cut service.

So are we stuck between over-treatment with-fee-for service and under-treatment with capitation? No. In the real world all-you-can-eat buffets thrive without cutting quality–because they face competition. Most HMO patients are there by choice of their employers, not their own. In some states, there is only one HMO. Capitation has failed in HMOs due to lack of competition.

Here’s my alternative to Goldhill’s health savings accounts. Provide every citizen with a fixed, age-adjusted federal voucher to cover the services of a primary care physician/ medical service advisor. This primary-advisor would provide all basic health care services. And the advisor would offer counseling on serious health problems, recommendations for specialists as needed, and guidance on choices of catastrophic insurance providers.

Why would this primary-advisor approach work where HMO capitation failed? The answer is competition and informed clients. First, the primary-advisors would compete with one another to offer the best service for the voucher. Second, they would enable clients to make well-informed health care choices–creating competition among service providers, such as MRI facilities or catastrophic insurers.

A primary-advisor and catastrophic insurance system would of course require regulatory constraints. For starters, neither primary advisors nor catastrophic insurers could refuse or drop clients. While the system would be de facto single payer with private provision, it could potentially provide better service and more effective cost control than our current full single-payer system: Medicare.


  1. I believe that you raise two primary legitimate concerns of Mr. Goldhill’s proposal, which he acknowledges: that some might skimp on important care, and some would not know how best to choose their care. However, these are manageable concerns. If funds are available that cannot be spent today on anything but important preventive care (including transportation, etc.), then I believe most people will utilize those funds. And a personal relationship with a primary care physician who does not stand to gain financially from most health care decisions is a perfect model for helping with those difficult decisions.

    Fee-for-service is not what is over-valuing procedural care vs. primary care. It is the fact that the AMA runs the committee that Medicare listens to in setting which services are valued more highly. There is no reason to believe that individual consumers would value these services in the same way.

    I would vote that, in such a system, you could choose whether to pay for primary care services from your HSA through an annual capitation system OR through fee-for-service. You could negotiate that with your doctor. Requiring that a capitation arrangement could not be ended would NOT work. Sometimes human relationships fail, and you need to be able to find a new doctor.

    Mr. Goldhills’ proposal deserves more of this debate, and NOW!

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