Joe Flower Explains Healthcare Economics In 5 Minutes

Joe Flower Explains Healthcare Economics In 5 Minutes

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Healthcare Econ 101: Why it costs so much, yet we still don’t get what we want and need—better healthcare that is cheaper.

Joe: First rule of economics: people do what you pay them to do.
Second rule of economics: people do exactly what you pay them to do. They really notice what it is. I’m sure that all of you know exactly what can get you fired, in some detail. And you know exactly what you can do in your jobs to really advance in your jobs, get better at it, make sure of a promotion, make sure they keep you on. You’re very, very clear on that.

Well, so is everyone in the healthcare system. So are the doctors, the nurses, the hospitals, the device manufacturers, the pharmacy manufacturers—they’re very clear on what we’re paying them to do. If we’re not getting them the results that we want, it’s because we’re not clear on what we’re paying them to do.

So, let’s look at Healthcare Econ 101.

Traditional economics, we start with a buyer and a seller. I want to buy a rug, I go to the marketplace, there’s all these guys selling rugs. I haggle with them. If his price is too high, his quality is too low, I go to this guy over here and we come to some kind of agreement. Right? No problem. So, the market is—it’s what people talk about [as] a free market, where it’s kind of self-leveling. We arrive at what the actual value of that rug is in this market, at this time.

Now what happens if you have an insurance supported, fee-for-service system?

See, that actually names what we’re paying them for.
If I go to a restaurant, am I paying someone to fry things or to put ice in them? No, I’m paying for a meal. I don’t care what they do back there to prepare it—a lot about it I [probably] don’t know how to do—but I’m paying for a meal.

This is not what we’re doing. We’re paying fee-for-service.

Now what happens in that fee-for-service system?

Well, the first thing is the buyer gets split in two. The entity that’s paying for it becomes different from whoever that’s choosing it. What we’re saying—yes, we need an MRI here, we need a new hip, we—is not the person who is actually paying for that. Insurance supported, fee-for-service system.

But there’s something—there’s a little complication.
Who’s doing the choosing?

It’s the patient and the provider, together. My doctor and I are doing the choosing, and someone else is paying for it. Or at least paying for most of it.

But there’s another complication to this. What’s this?

The seller is also the provider. So, the doctor’s also a salesman, in the sense that they’re selling their time—they’re doing fee-for-service—and they’re helping me make the choices.

So, the usual feedback loops of a free market system, are not there. A lot of these changes that we’re seeing in the insurance system are attempts to put at least some of that feedback loop back in, so that the person making the decision have at least some of the payment. They have to do some of the payment themselves so we begin to do rational economic decisions, instead of just making them up out of thin air with the advice of the people who are actually going to do the service for us.

So, it’s a very complicated problem.

We try to control cost the entire time—and I’ve been in healthcare for 30 years—and I started around the time that they began trying to do various cost controls and basically, these cost controls have not worked. There is no evidence that we have controlled cost at all over all these years.

So, what cost controls looked like over those many years—there’s been various, lots of different ways of controlling unit cost. We will only pay you so much to see a patient. We will only pay you so much for this drug.

What happens—suppose you’re selling TVs. What happens if the market dictates in some way that the amount that you can charge on this TV is depressed? You can’t charge as much. What are you going to do?

Woman: Sell more.

Joe: Sell more. You’re going to make it up on volume. What’s the other thing that you’re going to do? You’re going to upsell. “You ma’am do not look like the type of person who could use a mere TV. You need a whole entertainment system! Five-sided sound! We got bass cabinets the size of a mini-bus for you.” You know? And you pay like $5800 for this huge thing.

Does that sound like something that we’re doing in healthcare?
Now, many of the new things that we can do that we couldn’t do twenty, thirty years ago, are very helpful. But not all of them. Some of them are not. And we don’t really have a mechanism in place for saying what is helpful and what’s not.

The executives of the companies that you work in. the healthcare executives are being asked to do something they have no experience in doing. They have no training in it. They barely know what it means. They have difficulty seeing their way from where they sit, that they can do this: controlling system cost.


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