Arnold Kling

American Health Care as Viewed by an Entrepreneur

Arnold Kling*
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"Like many entrepreneurs, Bush began by trying to solve one problem and ended up having to solve another."

The industries we care about least innovate at the highest speeds, while those we hold dearest to our heart innovate hardly at all. Education, for example, is perhaps our most precious industry... yet it's locked in an archaic system... Health care, the body to education's mind, innovates at the same glacial pace.1

Jonathan Bush is the nephew of the first President Bush and the cousin of the second. He co-founded AthenaHealth, a software services firm that supports health care providers. His book, Where Does It Hurt?: An Entrepreneur's Guide to Fixing Health Care, co-authored with Stephen Baker, offers the perspective of a restless innovator on ways to improve the U.S. health care system. The book provides fascinating insights and a bracing alternative to those who view health care as requiring extensive government intervention.

Like many entrepreneurs, Bush began by trying to solve one problem and ended up having to solve another. The problem that he and his partner tried to solve was reducing the cost of childbirth, in part by making more effective use of midwives. However, the business foundered because of weaknesses in its management information systems, particularly those that tracked the byzantine process of collecting payments.

As Bush's company invested more resources in developing better systems for payment tracking and other functions to support the obstetrics business, solving the problem of health care information systems emerged as a greater profit opportunity than solving the problem of the high costs of medical services for childbirth. Thus, the company pivoted toward software services.

The obstetrics opportunity had presented itself because of the role that occupational licensure plays in health care costs. Ostensibly necessary for protecting consumers, the process of licensing tends to be captured by incumbent suppliers, who use licensing regulations to enforce cartels and restrict supply, a problem described by Milton Friedman over fifty years ago in his "Occupational Licensure" chapter in Capitalism and Freedom.2 Bush's perspective on this issue was formed when he trained in the military in 1991.

The army had effective programs in place for teaching sophisticated procedures to all of us, no matter what education we came in with...

Later, when I graduated to medic training... the same model prevailed. Ordinary people were trained to carry out sophisticated work, but now in medicine. Those who tested well were mastering work that in hospitals is only entrusted to surgeons.. If we got this training into the private sector (and loosened up regulations), you'd be getting primary care for $18 an hour. (Bush and Baker, page 22)

One weakness of the book is that Bush does not propose specific policies that would enable the sort of innovation that he favors. For example, I can imagine a rather drastic change in medical practice regulation. Instead of requiring particular credentials of those who carry out medical procedures, a regulatory body could set quality standards for such procedures. A clinic would warrant that it performs strep tests properly, for example, whereas today it instead must warrant that such tests are performed by properly licensed personnel. However, Bush does not make such an explicit proposal.

Bush describes laws and regulations that are rife with unintended consequences and rent-seeking. One example is the anti-kickback law, which forbids doctors and hospitals from exchanging products and services, such as billing software, with one another. Although Congress amended the law in 2004 to permit hospitals to provide computers and software to doctors, Internet services were initially not included in the draft legislation. Bush describes his barely-successful attempt to find a Congressman (in this case, a Congresswoman) willing to listen to his pleas to include Internet services, and then he writes:

But let's consider this process for a moment. It has nothing to do with innovation or satisfying customers or delivering results. It has everything to do with cultivating influence among politicians and regulators. (page 60)

Then, noting the usefulness of his name and connections, he continues:

I was an outsider with insider status. I'd guess that 90 percent of businesses that get blown up by government missteps, or even prevented from being born, are run by outsiders with outsider status. That is why it's so hard for activist government to be effective. It works with known players—while the future should be in the hands of unknown players working to make the household names obsolete. (page 60)

Another example is the legislation designed to encourage accountable care organizations.

It turns out that each ACO has to be 75 percent owned by the providers participating in it, which means mostly doctors. This amendment, of course, came from the doctors' lobby. (page 72)

Bush argues that our system of insulating consumers from having to pay anything for health care results in a bias toward expensive procedures. One example he offers is the proton beam accelerator, often used in treating prostate cancer, even though studies show negligible benefits.

Our taxes and insurance premiums underwrite this extremely expensive therapy, which costs nearly twice as much as another that is equally effective. (page 65)

Bush suggests offering consumers rebates for choosing cheaper treatments. This is an interesting idea. However, I worry about the potential for gaming a system that rewards consumers for the procedures that they don't undergo. I could imagine that consumers, in order to obtain rebates, might make dubious claims that they could have opted for an expensive treatment. I would prefer the more straightforward approach of having consumers share in the cost of the procedures that they do undergo.

Bush points out that hospitals, including non-profits, seek to manipulate the market in order to maintain high prices. Their strategies include mergers and acquisitions of medical practices. He points out that once Massachusetts General absorbed other hospitals in the Boston area to become Partners HealthCare, it enjoyed considerable leverage with health plans, whose consumers did not want to be denied access to the hospitals and doctors in the Partners system.

There were 551 mergers between 2007 and 2012, and the number is rising. While 50 hospital mergers took place in 2009, the figure more than doubled, to 105, in 2012... Booz Allen, my old employer, predicts that one out of five hospitals will seek out mergers by 2020....

In the first decade of this century, the number of doctors employed by hospitals rose by nearly 75 percent (page 87)

Bush argues that in less-regulated industries, businesses grow large because they are efficient and hold down costs. However, in health care, growth is a strategy for eliminating competition. "It's the victory of the inefficient," Bush writes (page 89).

 

For more on these topics, see the EconTalk podcast episodes Kling on The Crisis of Abundance and Kling on Hospitals and Health Care. See also "Who Attends You When You Are Ill? Attendant Services Under Consumer-directed Health Care", by Linda Gorman, Library of Economics and Liberty, 2011; and Occupational Licensing by David S. Young and Rent Seeking by David R. Henderson in the Concise Encyclopedia of Economics.

Bush argues that for most medical services, flagship research hospitals are high-cost providers. He believes that in a rational marketplace, the leading hospitals would have to specialize in particular areas of expertise. A hospital with unique skills at treating a certain type of cancer might attract patients from all over the United States with that cancer. However, it would not treat local patients for ailments that are more common and more easily treated. Instead, those cases would be handled by smaller community hospitals or clinics. He offers this forecast:

... big hospitals will increasingly struggle to draw business from the 99 percent of us that aren't terribly ill. This is why, I predict, many hospitals will fail in the coming years. (page 94)

In summary, Bush sees our health care system as rife with inefficiencies that could be eliminated using organizational innovation. Thus, it is a business filled with potential for entrepreneurs to rationalize the system and squeeze out unnecessary costs. However, only if market forces are allowed to operate will this potential be realized.


Footnotes
1.

Jonathan Bush and Stephen Baker, Where Does It Hurt?: An Entrepreneur's Guide to Fixing Health Care. Portfolio Hardcover, May 2014, page 61.

2.

Milton Friedman, Capitalism and Freedom. University of Chicago, 1962.


*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of five books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; and Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy. He contributed to EconLog from January 2003 through August 2012.

For more articles by Arnold Kling, see the Archive.

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