What Can Be Done to Make Health Care More Efficient?

Excellent medical care is common in the U.S., but it is provided amid all too evident dysfunction. Quality and access to needed services are high for some patients and low for others. Waste is rampant, and costs have escalated more rapidly than incomes for years. Patients and their insurers often pay widely divergent prices for services provided just miles apart. And the patient and insurance billing system is bureaucratic, opaque, and maddening for all concerned.

The fundamental problem is the absence of discipline and accountability. There is very little incentive for those providing care to patients, or for insurers, to become more efficient over time, or to lower their prices, because doing so provides uncertain returns at best. More often than not, cost-cutting does not translate into expanded market share and stronger financial performance.

In this way, health care stands out. In most sectors, consumers gravitate naturally to the businesses that can eliminate unnecessary costs or find better ways of delivering products and services, which translate into lower prices. But  the health care market misfires because of inherent and external factors that protect expensive incumbents even when they underperform and overcharge.

To provide high-quality care with the least possible use of resources, institutions and clinicians need strong financial incentives to become more productive over time, which can be a painful process. For the market to work, firms need to be able to attract consumers by sharing the financial benefits tied to efficiency gains with them. That is not a realistic possibility in many health care settings today because of numerous impediments. As just one example, consumers are price insensitive to expensive care because their costs don’t change once they’ve hit the deductibles in their health insurance plan, so there is no reason to seek lower-priced providers.