Goldilocks and Health Care Quality

A recent paper in the Journal of Health Politics, Policy and Law (Vol. 34, No. 4, 2009) by Roger Feldman (Quality of Care in Single-Payer and Multipayer Health Systems) explores the economics of the relationship between health care quality and the type of payment system.* A multipayer structure, as the private U.S. health care system currently has, includes incentives for under-provision of quality. A single-payer system, such as that found in other nations and in the U.S. Veterans Health Administration, includes incentives for over-provision of quality. Like Goldilocks, one wonders what type of system would provide quality that is “just right.”

Feldman argues that health care quality can be meaningfully, if not exclusively, thought of as a public good. A public good differs from an ordinary good in that it must be shared (it is “non-rivaled”) and it is hard to exclude individuals from its use (it is “non-excludable”). National defense is the quintessential example of a public good: my use of national defense does not preclude yours and we cannot easily exclude anyone from its benefits.

A public good is under-provided by a market (i.e., multipayer) system because the benefits of an expenditure by one party (payer) to provide it are not enjoyed fully by that party.  Everybody would enjoy more of the public good but nobody has an incentive to provide it or pay for it. Everyone rationally thinks, “Let someone else do it.” This is the free rider problem. Therefore, health care quality, being a public good (at least in part) is under-provided by the market.

On the other hand, a single-payer system in which a global health care budget is set may over-provide quality, at the expense of quantity. If a facility or set of providers has a global budget it/they may choose how to allocate that fixed budget between quality and quantity. Feldman argues that hospitals would use market power to pursue quality objectives; that there is a controlling group within the hospital (doctors or administrators) with authority to order production of more quality; and there is asymmetric information between that group and consumers which allows the hospital to produce more quality than an informed consumer facing a budget might buy. (He made some of these points more explicitly in a private e-mail exchange.) He notes in the article that increasing the length of hospital stays is an easier and cheaper way to fill hospital beds than by increasing the number of procedures provided.

Over-provision of quality under a global-budget type single-payer system leads to rationing of quantity. Rationing could, in principal, be alleviated if quality were reduced, leaving resources available to expand capacity. On the other hand, as described, a multi-payer system under-provides quality. What to do?

Feldman makes several suggestions to improve quality  in a multi-payer system, one of which is similar in spirit to what the Obama Administration has begun to do: compulsory taxation (or borrowing that is to be serviced by taxation) to subsidize investment in goods intended to increase health care quality. The compulsory nature avoids the free rider problem. The stimulus package signed into law earlier this year included $17 billion for incentives to providers to use electronic health records (EHRs). One can debate whether or not this will improve care, but the intention is to bring about increases in quality through increased EHR use payed for by everyone within a multi-payer system.

If the government subsidizes quality improvements, via EHRs or otherwise, within a multi-payer system then perhaps the U.S. can achieve a balance of quality and quantity that Goldilocks would find “just right.”

* By way of full disclosure, I have worked with Roger Feldman for years and we have co-authored several papers.

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