Critics of consumer based health care argue that this type of product is fundamentally different than other goods and services. Consumers are not capable of making decisions regarding their care (but government bureaucrats and HR employees are), the cost of care will have little influence over their behavior, and competition will cause cost increasing redundancy and must be limited by such rules as CON and bans on advertising and posted prices. The delivery of health care simply can’t be left to the marketplace (the fact that there never really has been a real market place in health care seems to escape them).

One way economists try to examine economic behavior are event studies. Here, we look at a significant change in policy, news or whatever and (controlling for other factors) we examine how behavior changes based on this event. A major one occurred in health care almost 17 years ago. Prior to that, Medicare had paid hospitals for their capital costs. Hmm, one might question the wisdom of paying anyone to have costs but that’s a future blog. Anyway, Medicare compensated hospitals for depreciation, interest and lease costs related to Medicare discharges. The powers that be decided that this might be encouraging hospitals to have lots of capital costs.

As a result, they switched to a “prospective capital system” where hospitals received a payment for capital for each Medicare discharge (it was phased in over a 10 year period). The basic idea was that hospitals would make more money now by providing services with less, not more, capital costs. An amazing thing happened. Hospitals such as the Cleveland Clinic created capital budgeting systems. Doctors and other hospital employees now had to justify the capital they wanted to buy though the same type of Net Present Value analysis that private companies use to try and add value. The initial response was “This is outrageous! What do you mean can’t buy everything we want?” Welcome to the real world folks.