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Our Two Economies; Lack of Competition in Healthcare as a Barrier to Innovation

Posted Apr 17 2012 12:00am

David Brooks, a columnist for the New York Times, recently discussed our two interrelated economies and the lack of real competition in one major sector -- healthcare. Below is an excerpt from his column about these two economies (see:  The Two Economies )

[Tyler Cowen's] work leaves the impression that there are two interrelated American economies. On the one hand, there is the globalized tradable sector — companies that have to compete with everybody everywhere. These companies, with the sword of foreign competition hanging over them, have become relentlessly dynamic and very (sometimes brutally) efficient. On the other hand, there is a large sector of the economy that does not face this global competition — health care, education and government. Leaders in this economy try to improve productivity and use new technologies, but they are not compelled by do-or-die pressure, and their pace of change is slower. 

A rift is opening up. The first, globalized sector is producing a lot of the productivity gains, but it is not producing a lot of the jobs. The second more protected sector is producing more jobs, but not as many productivity gains. The hypercompetitive globalized economy generates enormous profits, while the second, less tradable economy is where more Americans actually live. In politics, we are beginning to see conflicts between those who live in Economy I and those who live in Economy II.

Republicans often live in and love the efficient globalized sector and believe it should be a model for the entire society. They want to use private health care markets and choice-oriented education reforms to make society as dynamic, creative and efficient as Economy I. Democrats are more likely to live in and respect the values of the second sector. They emphasize the destructive side of Economy I streamlining — the huge profits at the top and the stagnant wages at the middle. They want to tamp down some of the streamlining in the global economy sector and protect health care, education and government from its remorseless logic.

What worries me about the healthcare sector is that hospital executives, and many physicians, seem to spend a considerable amount of time worrying about how to manage reimbursement and maximize their income (see: Beyond Fee for Service: Reimbursement for Episodes-of-CareHealth Systems Use Their Regional Dominance to Muscle Insurance CompaniesWhy the Prices Charged by Hospital for Inpatient Care Are IrrelevantComparing the Details of Hospital Charges in the State of Oregon ). When was the last time you were urged by the leadership of your hospital to lower costs through innovation and the development of new products? Probably a rare event if ever. And yet, lowering costs through innovation is the standard business model for high-tech firms. Although healthcare has the feeling of a high-tech industry such as the dramatic breakthroughs in personalized medicine and constantly improved lab tests and imaging procedures, it does not feel this way inside. In clinical pathology, for example, most of the innovation seems to be delivered by the companies in the industry.

The obvious question is whether there is some way to make healthcare more competitive and innovative. I am inclined to answer no to this question. It's possible that healthcare reform may provide a stimulus for innovation but I suspect that the industry's answer will be to cajole physicians and nurses to manage more patients per day and work harder. Another possible way to stimulate significant competition is for the health insurance companies to start providing incentives, financial and otherwise, to send patients abroad for surgical and medical procedures (i.e., medical tourism). Such a movement, however, would probably get quickly snuffed out by our politicians. For them, hospitals are the largest source of employments in many of our cities and towns. The same rules apply to the education and government sectors of the economy mentioned by Brooks above.

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