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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Jun 30 2008 at 6:49pm

I used to work for a startup where we had a technology to pay docs based on a “case” not per procedure. We had a complex statistical model based on the diagnostic codes on the claim stream that predicted how much effort was required to treat an average patient with the condition. The doc got paid to treat the case and the amount of work they did was up to their judgment. Undertreatment was controlled by the threat of malpractice while there was no point in overtreatment as the doc was not getting paid for it. It was a fascinating exposure to the world of medicine.

We analyzed many claims streams of health plans and found lots of oddities.

People with the same condition will get vastly different treatments depending on geography or experience of the doc.

Many docs choose the “best” procedure based on reimbursement rate. For example one network did far more hysterectomies abdominally rather than vaginally than would be expected even though the abdominal procedure was much more dangerous and traumatic, simply because they were paid more.

A small percent of docs learn how to game the fee for service payment system. These are called “over-utilizers”. They drain the common pool of funds used to pay all docs in a network. They are the reason that all docs have to call for pre-authorization (called utilization management). This punishes the good with the bad and makes everyone mad.

Ultimately the company failed. The reasons were

1. The claims streams of insurance companies were hopelessly screwed up. Having worked in manufacturing, where errors are measured in parts per million, I was astounded at how the health care industry blandly accepted errors rates of parts per dozen as acceptable.
2. Doctor’s office billing systems were setup to bill per procedure and had no end of problems dealing with cases.
3. Docs that had learned to game the fee for service model, hated case based payment.

I only bring this up to demonstrate that there are other ways of paying for medicine that could radically change the current system and improve care.

One side note is that most of the people I worked with had been in health care for many, many years and ALL of them distrusted doctors. I have found this to be true in my own experience. You would think that with all their training docs would be extremely knowledgeably, but I have not found this to be true. My Dad had brain cancer and a doc prescribed a steroid to shrink the tumor. It worked – but the doc kept him on the drug way past the recommended limit of 30 days (from the PDR) and it caused his intestine to perforate. Official cause of death – brain cancer (astrocytoma) – real cause of death – drug induced peritonitis. Do you know more Americans die of a trivial to diagnose condition, aortic aneurism, than AIDS? Has your doc ever suggested that you should get a test? Lifeline screening offers this test and three others for $120 (no insurance). I was constantly amazed that I knew more about new vaccines than my kid’s pediatrician. I am not suggesting that you believe the wild stories on the Internet, but unfortunately you simply cannot trust that doctors are doing the correct thing. You need to do your own research.

Jul 1 2008 at 11:51pm

In other words, there certainly is some specialization in health-care, but what is missing is actual ‘division of labor’. In Arnold’s father example, each one of the eight units he visited started from scratch or was unaware of the other units’ knowledge or even existence. This lack of coordination is due to the very restricted ‘extent of the market’ in health-care.

Jul 2 2008 at 2:16am

Arnold I am sorry about your father. I have a couple of suggestions from the U.S. Federal Healthcare System.

My question is why should the U.S. continue to have the Federal Government pay for Medicare and Medicaid through government insurance?

1. What I noticed in the Federal Healthcare system is Midlevel providers have too much power. This was the case in the Walter Reed Wounded Warrior care incident.

3. Are we going to send doctors to four years of medical school and residency only to be undermined and undercut by a nurse practitioner or physician assistant?

4. Arnold you said a “project manager”. The Family Physician is the “project manager”. The Family Physician is busy competing against the Midlevel provider for existence. Organizations like Wal-Mart hire Midlevel Providers with less education and skills to serve in the place of physicians. Every Midlevel Provider should be treated like a physician resident, when dealing with certain patients. An overweight poor minority elderly person that is treated at Wal-Mart is misdiagnosed and undertreated.

5. The Family Physician and the Midlevel Provider cannot both be the “project manager”. Your father’s “project manager” should have been a family physician and assistant project manager could be a Midlevel Provider.

6. Until the American Medical Association and the U.S. Government truly define the role of the Midlevel Provider resources are not going to be used correctly. Midlevel Providers are supposed to be assistances to Physicians and over the years this role has faded away. The Family Physician should be the team leader and the team members are paid based on the overall performance of the team.

7. The idea of U.S. Government medicine needs to be redefined. Also the U.S. Government Entitlement System needs to be redefined. Foreigners in the U.S. in particular illegal aliens should not qualify for any U.S. Government Entitlement Programs. A fee for service system needs to be established for U.S. Federal Physicians.

Cosman, Madeline P. Illegal Aliens and American Medicine, Journal of American Physicians and Surgeons Volume 10 Number 1 Spring 2005
Available at:

Huntoon, Lawrence J. The Medicaid Penny, Journal of American Physicians and Surgeons Volume 10 Number 1 Spring 2005

Jul 2 2008 at 2:28am

I think you did a good job of keeping the discussion focused, which is always difficult with the impossibly vast topic of health care. I am on the board of an investor-owned hospital company which owns several hospitals, so I was very interested in the podcast and particularly on the discussion of failed incentives for quality of care in the hospital setting.

The question that came up during the podcast was “why doesn’t the market drive hospitals to improve coordination of care?” As a board, we do discuss the business side of quality initiatives, but probably less than you would imagine and certainly less than you would hope. I hope I can offer a little insight into the perspective of hospital management.

Though I agree with much of the analysis, I would disagree with the assertion that hospitals view the payor as the customer. Most hospital management teams (for profit and not-for-profit) expend the vast majority of their time and energy on physician relations. The power of the physician to direct the patient’s care can’t be underestimated. Doctors have tremendous influence over the course of treatment, the timing, the cost, and the location where care is delivered.

I would agree that the main impediment to providing a patient advocate is the infringement on the autonomy of the doctor. Doctors frequently have alternative venues in which they can perform procedures themselves or can refer patients elsewhere if they feel their decisions will be second guessed at the hospital. There should have been a discussion of the growing use of hospitalists, doctors who partly play the role of a “shepherd” during the hospital stay.

Unquestionably, payors are critical variable in the success or failure of a hospital. We spend a lot of time attempting to negotiate favorable contracts with payors, and are constantly mindful of our processes around coding, billing and collecting. A very small swing in the payor mix (percent of net revenue from Medicare, Medicaid, Commercial, Self-Pay, etc. respectively) can impact the profitability of any hospital in a given month or quarter, but we don’t spend time trying to manage the payor mix because it is largely beyond our control and highly unpredictable.

I also see the relationship with payors as inherently adversarial. It is impossible to build up goodwill with payors and therefore any gains realized through interactions with payors (such as a favorable contract) are likely to be temporary. With physicians, on the other hand, it is possible to establish long-term symbiotic relationships based on trust – and in some cases alignment of economic interests. Doing so creates lasting value for shareholders and patients.

We recently made a substantial investment in a patient safety technology. We felt the investment was the right thing to do and would raise the profile of the hospital among local physicians. This particular investment in patient safety was not advertised to local residents. This is not to say that the patient as customer is ignored. But patients are more likely to be swayed by high profile physicians, state-of-the-art facilities, and the recommendation of their own PCP.

Jul 2 2008 at 10:11am

As far a family member needing to be the lead in medical treatment, some things just cannot be deligated. I would not trust my money to money manager nor my healthcare to a stranger.

Jul 2 2008 at 12:41pm
Jul 2 2008 at 10:26pm

Informative podcast. There are many things that seem backwards in the health care industry. There has been too much centralization, and this has removed the consumer (or the patient) from the picture. If we give more power and responsibility to the consumer, the consumer will demand changes to improve the quality and reduce the expense of health care.

Jul 5 2008 at 9:38pm

Having avidly listed to Econtalk as well having read many books on the topic including Arnolds, I believe the solution has to be a market based model, with patients paying significantly larger portion of their health care expenses. I suspect that most people miss the point that, at least theoretically, cut back in employee paid health care should show up as increased wages.

I would be interested in understanding more on 1) impact of asymetric information, cherry picking and failure of firms in case of catastrophic insurance 2) and comparisons of different models of health care from other countries

Jul 6 2008 at 8:33am

Dr. Kling, I am deeply sorry for your loss. It takes great strength to talk about your life in difficult times and I learned from your discussion.

I will share with you my story. My family Dr. 5 years ago did not take any insurance. He simply provided records but it was my family’s responsibility to file claims and be reimbursed. It worked quite well and, to me, work much better than in recent years when he started accepting insurance.

When my wife had our child she came home from the hospital, 3 days later went to her Obgyn who found her to be moving forward, except for a sleeping difficulties.

That night my wife refused to take her sleeping pills for fear of not waking up. I am blessed for her strength of refusing. It turns out her heart was weakened by the long labor. A young Dr. was the first to work with her in the emergency room. She lost concisousness or conciousness was taken away so she could rest. She spent atleast 10 days in this state.

Our family Dr. came by and reviewed the charts, gave me liturature that I could read on the condition and gave some reassurrance that the proceedures were being followed were on the right track. The only part of family Doc showing up that I did was filling out the standard form stating our family Dr.

The Young ER Doc. Still came by when my wife was transfered to the ICU. He was the one that arranged for the transplant Dr. consult, who indicated that no transplant was needed now but he would know what to do if necessary.

I would also like to note that 3 or 4 times in my weeks sitting in the ICU waiting room I saw the mortitians quietly enter the ICU. It was not hard to imagine the pressure on the medical staff that worked in the ICU. After 10 days my wife was rested enough to regain conciousness.

In day 12 she was transferred out of the ICU. The young ER Dr. came by and my wife did not know who he was. He was indeed the one that released her from the hospital.

My wife asked me “Why does that Dr. smile so much?” She did not know that he was Doctor who had been her shepard. I replied to my wife with a great emotion “He smiles so much because he saved your life.”

My thanks to Southeast Baptist Hospital of San Antonio, Texas and their staff and Doctors.

Thomas A. Coss
Jul 6 2008 at 4:47pm

Dr. Kling, I am sorry for your loss and appreciate your sharing your thoughts from that experience. Given what I heard, your suspicions sound correct.

As a returning college student following a few years as a Navy Corpsman and Vietnam Veteran, I made a fateful decision; I studied Economics. Having taken to the discipline rather quickly, it taught me that I also had to make arrangements for income in the event that such studies might require more time than anticipated. I decided, in parallel, to become an RN to increase near term income and acquired my license and undergraduate degree in economics about the same time. I did some graduate studies, but ended up spending the following nine years as a practicing RN while building a family.

As an RN I was at the top of the game, able to work in the most demanding of clinical environments, I had considerable experience in Emergency Room and Critical Care nursing. Wherever I worked, I always had the sickest patients; I was the top among my peers.
Ask any physician, and he or she will acknowledge that over 80% of medicine is on the job training. I don’t for a minute dismiss the remaining 20% of advanced didactic work in science, and pharmacology and medicine as irrelevant, quite to the contrary, that is critical; still after nine years I learned a lot of medicine, and in the end, too much.

The problem with learning lots of medicine as an RN, it becomes exceptionally painful to work, and support, what is simply bad medicine. In critical care I discovered that the probability of a patients survival was inversely related to the number of physicians on the case. The combination of my time in task as an RN, my knowledge of Medicine along with the analytic tools of economics, my time as a practicing RN was numbered. In the end, it broke down to this, despite evidence to the contrary, the physician is never wrong.

A close friend of mine, Dr. Michael O’Toole, MD of Chicago helped me in understanding my quandary. What Michael was showing me is Medical School on a napkin (he literally used a cocktail napkin). There are basically two sets of conditions that a physician faces when treating patients. The first set is that the physician either knows what is going on, or does not. The second set of conditions is that the patient is either getting better or the patient is not.

If you arrange those in a four square “window” you end up with four conditions. One in which the physician knows what’s going on and the patient is improving (this is Good),one in which the physician knows what is going on and the patient is not improving (this is not good but understandable, some patients do not improve. Still there is another set of conditions in which the physician does not know what is going on and yet the patient is improving (not ideal, but good) and finally there is the set of conditions in which the physician does not know what is going on and the patient is not improving (here is where the physician calls for a “consult” from a colleague). I think Dr. O’Toole captured things very well.

The problem, as you know, is asymmetric information, and residual claimancy. Physicians may have the knowledge and expertise, but they can’t do the healing or the dying.

In your experienced with your father you rightfully identified a central issue in healthcare. We have people with exceptional expertise treating people we call patients, still in the end it is the patients who bear the burden of consequences. In the financial world we have escrow agents that keep everything tidy between seller and buyer, but there is no such role in healthcare aside of the ad hoc version provided by nurses, and perhaps that is where we need to begin.

When anyone gets sick, say with cancer or heart disease, they are forced to gain knowledge and participate in detailed decisions around which approach to pursue. Unfortunately, they stop there assuming that all practitioners of a given treatment approach are the same. They are not. Perhaps the most important decision following agreement on a treatment approach (the what, or what to do) is the next decision: who or who best to do it? This is the decision that has the greatest impact on outcomes; unfortunately there is plenty of information and discussion around treatment choices and nearly nothing around those who do the work.

Nurses represent the largest number of healthcare providers in the world. Any time a friend and or acquaintance of mine is due for a medical procedure, I seek out a nurse at that facility and get candid insight and often obtain information available nowhere else. The challenge is that the culture within healthcare does not favor candor. If I were not an RN, I would not likely get the candor I seek. Nurses trust one another as do Physicians, and neither is likely to expose their career by offering their specific advice and or criticism.

Many hospitals have instituted “Patient Advocates” but these positions are often under risk management. These roles are aimed and mitigating risk to the hospital and not realistically at promoting or monitoring the performance of care provided the patient.

Until a better solution presents itself, I believe developing a relationship with nurses in care of patients is the best possible way of improving their likeliness of going home.

Thank you for an outstanding podcast, and for sharing our experience.

Thomas A. Coss

Jul 7 2008 at 4:11pm

This was one podcast that made a very astute analysis and recommendation for improvement in an system that many people have had occasion to encounter. Like Mr. Kling I saw may mother through her last days trying to get straight answers from the medical staff that was treating her.

I find most of these podcasts irritatingly dogmatic with the guest and Mr. Roberts reinforcing each other’s free market biases. This podcast, however, provided real valuable insight into a serious problem.

Jul 7 2008 at 5:12pm

How about more emphasis on personal responsibility? People show up at the hospital with all sorts of ailments, many of them self-induced through poor lifestyle habits.

I pay for car insurance and I know that driving dangerously or while intoxicated may result in an accident or a ticket and a subsequent increase in my insurance premium and my ability to function normally. Why don’t people view their lifestyle choices and ultimately their health care consequences in the same manner?

The healthcare system was designed to treat sick and injured people. A lot of people that show up at hospitals have no idea what’s going on. They assume it is somebody else’s responsibility to take care of them and that they bear no accountability whatsoever.

Jul 9 2008 at 4:48pm

Anyone’s death is a tragedy. If it could be avoided, it is even more of a tragedy. But an anecdote is an anecdote, and while it may point to problem areas, it’s no more than a story.

I found this a disappointing podcast, mainly because it pointed out problems, suggested theoretical solutions, but didn’t engage people who actually work in the health care fields. I realize that economists “follow the money,” but there a many other powerful incentives besides money for those who work in the health care. No matter how bright policy wonks are, they lack the experience of those who actually work in the field. To suggest that by changing financial incentives to pay people for a different kind of health care, one can dramatically change the landscape, is I believe, simplistic.

People hope that socialized medicine will deal with some of these issues, but every country I know of that has taken that route has a 2-tiered system. And the countries with better mortality statistics than the US don’t necessarily have better health care, they have different populations, report their statistics in different fashions, don’t report preterm deaths as we do, etc.

Maybe at some time Russ, you could have a wider ranging discussion including some health care workers. There is no question that we could do better, but what are the best ways to in fact do better?

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Podcast Episode Highlights
0:36Intro. Father's medical care at the end of his life. One thing to see statistics that suggest things are wrong with the American health care system, Hanson podcast, but quite another thing to see that up front. Father diagnosed with cancer of the esophagus late last year; political scientist, wouldn't live to the next election. But he probably died from an infection contracted in the hospital. Pain in ankle in early January, goes for x-ray; fell and broke hip. Emergency room; pin put in. Advised to walk around. History of cardiac problems, so put there, kept flat on his back and developed bed sores; died three months later. Sent to many different units in the interim. Incredible equipment, well-trained and caring people; but system failure and break-down.
5:13Specialization; nature of health care system is that is not designed but it is tampered with. In the modern hospital, well-informed specialists, but lack of a generalist--someone in charge of the whole patient. Family members end up playing the role of general advocate. The specialization we observe is not particularly healthy and is not perhaps what we would observe in a less-interventionist system. Hammergren and Harkins' book quote: Doctors trained as individuals, rewarded for outcompeting classmates and colleagues, taught to be skeptical of others. Doesn't lend itself to team-oriented behaviors. Don't need team for broken leg or strep throat. Complex patients such as those with diabetes or late stage cancers do. Spontaneous order, corporate order, breakdown of order. Gas station example: lots of people, still no wait, got gas. Not a breakdown of order as in the late 1970s. Find order on Public Choice Theory, could go to Concise Encyclopedia of Economics, David Henderson, ed. planned that (corporate order). Wikipedia, Google, unplanned (spontaneous order). In health care, the complexities are overwhelming the spontaneous order. Body is a complex system. Hayek observation: by spontaneous order we don't mean a world with no planning--planning often takes place within corporate structure--the question is who does the planning. In the U.S. we've put up barriers that make it hard for the corporate order to work. Feedback mechanisms make it so that you don't get lemonade from the pump at the gas station--could sue them, they could go out of business. In hospital, no feedback if as a result of one specialist curing a heart attack he gives the patient an infection.
15:33Simple business process level: people who have been in a business world. Freddie Mac--buys mortgages from lenders and issues securities. Regional staff would sign contracts. Years later it would turn out that Freddie Mac was supposed to receive a lot of money, but only the regional staff knew. Ordinary business fixes this or the company goes out of business. Felt by company though not the customers; if customers feel it, they go somewhere else. In health care, a business consultant would suggest all kinds of reorganizations, process changes, etc. that would produce better outcomes. Why doesn't this happen? This problem is relatively new. Patients are older and there are more often multiple causes. [Podcast taped June 18, Tim Russert passed away from a heart attack a few days ago.] Diabetes; chronic illness; more things people expect to be treated for--child doesn't sit still at school. Lone wolf or specialized doctor, though, hasn't changed. Need for more team-oriented approach with patient at center. Skyscraper has architect and project manager. That role is missing in health care. Could just be it's really hard. Making a car is a complex process; it's become a more team experience with a goal of preventing defects. Washington U., St. Louis, excellent, research hospital, Chuck Knight, head of Emerson, emergent not top-down corporate culture. Why is it that when you walk into a hospital today as an elderly person you don't get an advocate--a shepherd? Family member plays that role but is emotional and doesn't know the hospital structure. Maybe it's not productive or too expensive, patients won't pay for it. Tradition is that a doctor should be in charge. Would be very resource costly. Who pays for it? Hospital administration consists of people making sure the hospital gets paid: Medicare or private insurance. Customer is Medicare or the customer. Medicare, Washington, DC, has other goals, doesn't think. Pay for performance: define what's a good outcome and good procedures and reward hospitals and doctors for doing that. Reporting problem. Father's death certificate lists esophageal cancer. But he probably died of infections. Hospital didn't want to get dinged. Reports get manipulated when you try to manage from a long distance.
27:24Political and economic interface: moral quandary. Want people to be taken care of but the political process, either via the electorate or by special interests, we've moved into an imperfect system. How do you get from there to, say, a second-best, more effective solution? Basic moral quandary of health care: we instinctively want it to be free but we understand that the providers need to be paid. Moral repugnance to charging someone money if he is in distress. Usury laws developed from this. Set up a layer of insulation. In industrialized world, health care spending paid for by other parties. Here about 40% government. Patient is not the customer for that portion. Goal: remove some of that insulation. Lasik surgery, typically not covered by insurance or welfare programs; Lasik has gotten cheaper and better, profit motive, self-paid, advertising. Doesn't seem to be a powerful model that people have noticed has worked. Also: doctors are kings in the current system; main focus politically is to make sure they get paid. One excuse people give for health care being different is that it is complex. Computers are also complex; there are devices that work--competition, brand names, review articles. Could work in health care but we don't use them, not paying for it. Neat to see how resistant people are to the notion of paying for health care. A lot of the health care services we buy, such as Lasik or colonoscopy screening, are not in moments of distress. Elective. Even in distress you have more choices about how it can be dealt with. Temptation to say health care demand curve is vertical. People put off colonoscopy screenings because they are unpleasant; turned out for Russ to not be so horrible, took pills not liquid. Is it imaginable to get to a different world? Bootlegger and Baptist problem. A lot of general propaganda saying that good health insurance covers more. Economist would say it should cover less, just catastrophic insurance.
39:54The uninsured. You hear that they are at risk. Employer-provided health insurance is unraveling, huge wage differentials, people who are healthy leave to become consultants and have more take-home pay. Medicare, bankrupt. Enormous structural deficits forecast as population ages. Not much of a crisis in the sense that we'll do something different--lower benefits, raise tax rates. The problem that looms is the political fight. Stein's Law: something can't go on forever. Health care spending rising relative to GDP has to stop eventually if only on arithmetical impossibility. Longevity is going up. Most tempting way to resolve it is to keep clamping down on reimbursements to doctors under Medicare. Net result is doctors are leaving the system. Headed toward a two-tier system. Question of how we get there. People who use the government funds get poorer choices, fewer doctors; others pay more and more and have more choices. Medicare is government program deals with the elderly; Medicaid deals with the non-poor elderly.
46:02Most doctors don't feel like kings. Disillusioned, angry, bitter. Medicare bureaucrat or lawyer suing them is the king. Hammergren and Harkins' book quote: Average physician statistics, burdensome system for doctors. Why is it that we don't have this shepherd or project manager in charge? Doctor doesn't want to give up control. Have to reconcile their desire to have a more sensible workload with the need to be in control, allow others to be in charge of, say, prescriptions. Could have a doctor who is more of a generalist. Everyone is within his own silo, his own unit. Atul Gawande, a doctor, article: patient goes to doctor, has tumor, but instead gerontologist's first question is for patient to take off her shoes and look at her toenails. Can't clip her toenails, so at risk of falling down and being unable to get up. Need more gerontologists. In fact the number is decreasing. Shannon Brownlee's book, Overtreated. Take off your socks is not a procedure, so doctor's can't bill for it as a procedure. We are treating doctors based on what they do rather than the outcomes. We pay them by the code, by filling out the forms properly. We've created a breakdown.
54:29Arnold's father as political scientist. Believed in interest-group politics, viewed it as the rational core. Baseball fans in St. Louis: 8th inning, close game, less than two out: squeeze bunt here? That's the way the game's supposed to be played. Viewed interest groups as the way the political game's supposed to be played. Saw it as the natural order of things. Don't expect that if your favorite white knight or African American knight is elected that things will change. People on the insider of politics scratch each others' backs; on the outside. Libertarians like those who throw brick through the window; but maybe you can affect the system more by joining them.

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