Conflicts of Interest in Healthcare

Atul Gawande’s piece The Cost Conundrum in the New Yorker has created quite a buzz. Apparently, President Obama has been recommending it as a must-read. Peter Orzag, the Director of the Office of Management and Budget for the administration, referred to Gawande’s article a couple of times in the last week.

The reason Gawande’s seminal piece has caught the attention of the blogosphere and the administration is because it uses data to point the finger where so far in the healthcare debate, it hasn’t – at doctors themselves. It’s easy to blame the insurance companies or the pharmaceutical companies. They are big, powerful corporations and it is natural to assume that must be twisting the system to their advantage thus raising costs for everyone. Doctors, whom we trust with our care, are much more difficult to confront. But confront them we must. It appears that the root of the problem in American healthcare is over-care.

Doctors are paid by insurance companies (or patients) by the amount of work they do (number of visits) not by the results. Insurance companies pay a standard rate per visit. They make no distinction between the rates they pay to a doctor that provides great care and one that provides poor care. The doctor therefore has all the incentive to increase the number visits and none to increase the quality of care (above a certain minimum, obviously, otherwise they won’t be left with any patients).

There are other perverse incentives in the system. The doctor might decide that they can do some minor procedures in the doctor’s office itself thus generating more profit for themselves. Which is all nice entrepreneurial stuff, but it leaves a huge conflict of interest on the table. The patient probably can see it when they are sent for a lab test that they don’t need, but when all they have to pay is the co-pay, they don’t much care.

The conflicts of interest can be deeper and uglier as Gawande reports – kickbacks from hospitals, favours from pharma companies. The bottomline is that much as we would like to put doctors as care givers on a pedestal, they are economic actors and respond to the incentives they are given. And those incentives lead to expensive, over care which leads to higher health insurance costs on businesses and workers, a large number of uninsured and a rapidly rising state and federal health budget. Unseen by us, this great transfer of wealth from the ordinary tax payer to health providers, has crept up on us.

Another industry that went through its own trials because of conflicts of interest was the broker research industry of the late 90s. CEOs of public companies, investment bankers and research analysts had this nudge-nudge-wink-wink thing going on – analysts would give their top ratings to every company that was a client of their banking colleagues. The bankers would then kick across a portion of their fat fees to the analysts. Everyone was happy but the research that investors were getting was not worth the paper. It was like Lake Woebegon – all the companies were above average.

Then the bubble burst and it was left to Eliot Spitzer to clean up the mess. He prosecuted a few analysts and extracted the Global Settlement from the big broker dealers which regulated the conflicts of interest. There were minor requirements like better disclosure of existing client relationships on research reports but also some big ones which threw up these Chinese walls between Research and Banking. No sharing of fees was the big one. Some of these things have worked, some haven’t, but Research has never been the same since.

Now Research, even in those days was a tiny industry (less than 5B) compared to the US Healthcare industry (over $2 trillion). To tackle conflicts of interest in the Provider industry will take enormous willpower, money and time. The lobbying might of the American Medical Association, the Pharmaceutical lobby and the Insurance industry may just be too much even for a popular President.

For instance, Gawande cites Mayo Clinic as a provider that gives some of the best care in the country and a very low cost. The doctors at Mayo Clinic are all on a salary. They basically have no profit motive and the only thing they care about is patient care.

Can all American doctors move to a salary only remuneration model? There is absolutely no chance of that happening. The only way that could happen if everyone worked for an NIH like setup that the UK has. Everyone agrees that that will not come to pass in the US.

But the option of doing nothing doesn’t exist anymore. The problem with a democracy is that things have to get very bad before corrective action can be taken. A significant percentage of voters need to feel the pain before the right thing can be done. Has that time come yet? I don’t know. I just don’t know.

1 Comment

  1. Siddharth says:

    Basab, valid views but "over-care" to an extent is also a result of regulation and safeguards againts potential lawsuits. Economy of scale does not favor US healthcare costs. Nor does a high calorie diet promote general well being. Simple thing – No "Hand wash" raises dental treatment costs by USD 10 billion.

    Medical diagnostic in US is highly investigative and less intuitive. The culture in the society also adds to rising cost – people don't want to discuss their medical cases with friends and relatives and hence rely only on hospitals as providers. In contrast to other countries, where the provider role is shared by dispensaries, hospitals, chemists, family, collegaues, neighbours. There is no money exchanged when I ask my chemist – what medicine should I take? or when patients treat each other! The choices for treatment makes services competitive.

    The only way out is less insurance, and less governance. Only Ingenuity is cost-effective. Obama may just transfer the problem from premiums to tax payments. I hope he does not.


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