HEALTH CARE ECONOMICS 101.

HEALTH CARE ECONOMICS 101. Good morning, class. Today's reading material is a guest post at Kevin Drum's place by Shannon Brownlee. She makes a case for controlling health care costs partly by changing the way physicians are compensated. A snippet of her argument:

Last month Blue Cross put physician reimbursement cuts into effect in California and doctors were predictably outraged. "I don't know how anybody can afford to stay in practice and accept Blue Cross rates," Dr. Charles Fishman, a San Luis Obispo dermatologist told the Los Angeles Times. "Boo hoo" was undoubtedly the response from many readers. It's hard for the average American to feel much sympathy for a profession where the median income is $215,000 a year. Soon, Medicare will be making its own cuts, and we'll hear a new round of complaints from doctors.

The point of all this cutting, of course, is to reign in spiraling health care costs. But reducing reimbursements to doctors never works in the long run, and you'd think payers would have learned that lesson by now. Why doesn't it work? Because medicine, as Dr. Arnold Relman, the former editor of the New England Journal of Medicine, once observed, is the ultimate piece work industry. When you pay them less per "piece," physicians can and do increase the volume of services they provide in order to make up for lost income.

This quote has much food for thought and debate, but the part I want to stress is the one in that last sentence: "When you pay them less per "piece," physicians can and do increase the volume of services they provide in order to make up for lost income." What might look odd about it to you, especially in comparison to the textbook supply and demand curves which together determine the equilibrium price and quantities traded in a market?

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