Perverse Incentives in the U.S. Health Care System

Economists believe that people respond to incentives. Unfortunately, they pay much too little thought to the incentives that the U.S. health care system gives to providers. The NYT has two very good pieces showing the practical effect of the current incentive structure in today's paper. The first reports on the frequency of angioplasties in Elyria, Ohio. Doctors in Elyria use the procedure among Medicare beneficiaries at more than three times the average rate across the country. Why the high rate of angioplasties? They have a number of cardiologists that specialize in the procedure. This means that they are more likely to opt for angioplasties rather than trying drugs or open heart surgery, because they get paid to do angioplasties. The second article reports on a secret deal between Bristol-Meyers Squibb and a generic drug manufacturer to keep a generic version of Plavix (an anticlotting drug) off the market until 2011. This sort of bargain is exactly the sort of corruption that economists should expect from patents. Bristol-Meyers Squibb gets to earn monopoly profits as long as it can keep generic competitors out of the market. Generic companies that enter the market stand to earn a normal rate of profit, the same rate of profit that firms earns from selling paper or pens. This means that both companies can benefit if Bristol-Meyers Squibb kicks back some of its monopoly profits to keep a generic competitor out of the market. And, that is what we see, again and again.