Markets Beat Government on Medical Errors

These errors occur all too frequently. The Institute of Medicine, a non-partisan research organization chartered by Congress, estimates that 50,000 to 100,000 hospital patients die in the United States each year as a result of preventable errors. That’s almost three to six times the 18,000 Americans the IOM estimates die each year because they lack health insurance.

Medical errors are pervasive in part because the way we pay doctors and hospitals leaves them with too little direct incentive to improve patient safety. For the most part, insurers pay providers on a “fee-for-service” basis: for each service a doctor performs, he collects a fee. That creates an obvious incentive to recommend more tests and treatments, even if those services offer little or no benefit to the patient.

The problem goes beyond wasteful spending, however. If, through negligence, a healthcare provider causes a patient to require more services, he can often collect additional fees.

Medicare, the federal health care program for the elderly, provides an example. When Congress created Medicare in 1965, it assuaged doctors’ fears about government-run medicine by agreeing to pay providers on a fee-for-service basis.

When a hospital discharges a patient, Medicare cuts the hospital a check based on the patient’s diagnosis, and cuts checks to the doctors who treated him. If, however, someone made a mistake that injured the patient and caused him to receive more services — if, say, he acquired a preventable infection, or received the wrong medication, or was injured in a fall, or developed bedsores, or underwent surgery on the wrong body part — then Medicare will send the doctors more checks, and might also increase the amount it pays the hospital.

Imagine remodeling your kitchen and paying the contractor extra to fix your garage door because he backed his truck into it. When Medicare and private insurers reward medical errors this way, Americans pay higher taxes and insurance premiums to cover the costs of other people’s mistakes.

After forty years, Medicare has finally wised up to this perverse financial incentive. Medicare officials have announced that starting this October, they will no longer pay the added costs associated with a list of obvious medical errors. Private fee-for-service plans such as WellPoint and BlueCross/​BlueShield are following Medicare’s lead, as they usually do in matters of provider reimbursement.

Yet this is hardly a case of government beating the market. Markets developed an antidote to this perverse incentive decades ago by creating arrangements that force hospitals and insurers to bear the financial costs of their own errors.

In prepaid group practices like Kaiser Permanente, providers receive a fixed amount of money per patient. If an error leads to additional services, the added expense comes right out of Kaiser’s bottom line. As Donald Berwick and Sachin Jain of Harvard Medical School write, “The prepaid group practice model is particularly conducive to improving safety…because the practice itself (and not the insurers or patients) must pay the costs of poor quality.”

If anything, government prevents markets from improving patient safety. A raft of government interventions favor fee-for-service medicine and inhibit competition by plans with greater incentives to reduce errors. Medicare, the nation’s largest purchaser of medical services, is almost entirely fee-for-service. Federal and state tax laws give larger tax breaks to people or groups that choose more costly care, and favor employer-based coverage, which usually denies workers the ability to choose their health plan.

To be sure, prepayment creates a troubling incentive of its own: providers who receive a fixed amount per patient can potentially increase their profits by skimping on care. Nevertheless, most research suggests that prepaid plans produce similar health outcomes at a lower cost.

We may disagree about how to achieve better medical results, but as we all know, you get what you pay for. The government pays for unnecessary and harmful medical care, and that means more money, more mistakes, and more casualties.