Common Sense Economics: Aligning Incentives with Evidence-based Care | Robert Nelson, MD

Standard economic theory in healthcare assumes that demand for medical services is inelastic. Simply stated, inelasticity means that demand for certain medical services remains fairly high and constant despite rising prices; whereas with a commodity that is elastic, higher prices will cause demand to fall and vice versa.

While inelastic demand applies to high acuity and critical illness, a large portion of the medical care consumed in this country is habitual and learned based on flawed assumptions about treatments and effectiveness of intervention. Over-utilization is further exacerbated because of our perverse payment and billing model which drives artificially high demand with minimal price considerations beyond a small co-pay.

A peculiarity of our healthcare system that contributes to lumping the vast majority of medical services into the inelastic category is the fact that PPO health plans require virtually all encounters with providers to be billed under the health plan, regardless of how minor or regardless of necessity. This forces analysts and economists to look at aggregate utilization and spend; or average per capita costs and utilization rates based on claims and generally irrespective of medical necessity.

In reality, a significant portion of our medical care consumption in this country is elective, non-emergent and in many cases unnecessary – or at the very least forced into unnecessarily expensive venues such as urgent care or ER. This spans the gamut from colds to constipation and backaches to boo-boos and a whole lot of unnecessary visits in between (like work excuses for mental health days).

Indeed, this same segment of medical care consumption has the potential for much more price elasticity of demand than we have been led to believe. The problem is, our current method of buying and billing for healthcare services has resulted in neutralizing the market forces that would normally allow prices to be affected by demand in these areas.

Nowhere is this more evident than with the millions of annual visits to doctor’s offices, Urgent Care centers and Retail clinics for colds and other upper respiratory illnesses.