Fragmented Medical Care: America’s Health Care Scam

Healthcare Economist

Fragmented Medical Care I: America’s Problem

The U.S. healthcare system is one of the more fragmented systems in the world. Traditionally, economists believe that a splash of decentralized planning with a heap of free markets is a recipe for efficient outcomes. In the case of health care coordination, however, information sharing, and collaborative work are needed if quality is to improve and decentralization may not be the best option. Cebul et al. (2008) describe some of the problems with America’s fragmented system. For instance:

• Health insurance is a high turnover product. About one-fifth of health insurance policyholders cancel their plans in any given year. Most of these changes are due to i) employees switching jobs and ii) employers cancelling their group plans in favor of other plans. When insurers have short term relationships with their customers, it likely does not pay for them to invest in preventive care or chronic disease management programs.
• Having a fragmented insurance market can give insurers an incentive to lower quality. When adverse selection is present, offering high quality medical care will attract sicker individuals which will drive up insurance premiums. Thus, insurers often do not have an incentive to provide high quality care.
• The fragmented insurance system means that hospitals must spend more money paying administrators to collect claims. Woolhander et al. (2003) finds that hospitals in the U.S. spend $315 per capita on administration compared with $103 in Canada.
• The fact that physicians are rarely employed by the hospitals has lead to some perverse behavior by nurses. For instance at Stanford Hospital, “Nurses were harshly blamed by surgeons for instrumentation failures, but nurses who delivered clean instruments on time achieved ‘star status’ among surgeons. In this setting, some operating room staff shared instruments between surgical suites. Some nurses kept critical instruments in their personal lockers. Some surgeons also took instruments with them when they left the hospital.”
• Further, physician heterogeneity hurts efficiency by making standard operating procedures nearly impossible to implement. Generally, hospitals allow doctor to gets what they want in order to attract physicians with large patient bases to their hospital. However, this creates an incredible amount of complexity and possibility for error in the health care system.
• When providers do consolidate, it is often not done in the best interest of the patient. While vertical integration could improve quality, consolidation is often done with the purpose of locking-in profitable referrals or increasing bargaining power.
• “[Medicare] patients with diabetes see a median of eight physicians in five distinct medical practices.”

In future posts, I will give some examples of organizations that have been able to overcome these problems, as well as policy prescriptions to improve the health of America’s medical system.

See also: Fragmented Medical Care II (The Models) and III (Policy Options).

Cebul RD, Reibitzer JB, Taylor LJ, Votruba M (2008) “Organizational Fragmentation and Care Quality in the U.S. Health Care System” NBER WP 14212.