A couple of suggested reads following a chat with Anthony Carpenter…
FROM: P132-134 in W.C. Hsiao/Health Policy (32) 1995 125-139.
While physicians can serve as agents for patients, advising them about needed medical treatments, physicians also provide those treatments and earn their livelihood from them. The dual role of agent and provider creates an imperfect agency relationship, allowing physicians to induce demand for their own services in the interests of profit or professional satisfaction.
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Studies have found that physicians possess the ultimate degree of market power as demonstrated by their ability to price-discriminate [17] and to induce demand for profitable services such as the use of expensive and profitable technology, surgery and drugs [18]. This market failure results in high income for physicians, performance of unnecessary services (which may harm patients), and overuse of expensive technology and drugs.
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Moreover, even in normal circumstances, physicians and hospitals cannot tell patients in advance the price of treatment because of the uncertainty of diagnosis and individual’s recovery rate. Thus, a basic prerequisite of market competition – advance price information-is largely absent in the clinical-service market.
Hospitals also tend to be local monopolies. Because of the large capital investment required to build and equip a hospital, and because of economies of scale, a community may have only one or two hospitals. In an unregulated environment, a hospital could use its monopolistic power to generate excess profit, offer poor-quality services, and acquire expensive and prestige-enhancing technology without regard to cost-effectiveness.
However, price controls are not sufficient to control health costs. International experience shows that providers can increase the volume of services by inducing demand, altering medical practice patterns, and shifting to high-priced drugs, which give higher mark-ups to compensate for falling revenues arising due to price regulations. Developed countries have thus had to regulate both price and quantity. Payment methods based on capitation, total hospital budget, and global budget for physician services have all proven effective in controlling costs and allocating resources. The United Kingdom has adopted the capitation payment method for GPs. Managed-care plans in the United States are also adopting capitation payment. Canada, Germany, and Japan all rely on one form or another of global budgeting to control cost inflation and allocate resources. Their experiences with
global-budget approaches show that these methods are effective in containing cost escalation [20].
Because providers can induce demand, developed nations have found that they have to control the aggregate supply (such as the number of hospital beds, the number of physicians, and distribution of physicians by specialty) in conjunction with other government actions. Otherwise, as Germany found, excess supply creates pressure to increase global budgets. Government has also had to regionalize expensive and complicated services (such as kidney and heart transplants, hip and knee replacements, coronary artery bypass grafts, and the like) because competition for prestige prompts medical centers to acquire the latest technology regardless of cost-benefit.
FROM: P132-134 in W.C. Hsiao/Health Policy (32) 1995 125-139.