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How The Health Care System Is Like The Subprime Mess

Last night I finally had a chance to read Atul Gawande's terrific New Yorker piece about health care costs, which everyone is recommending. I'll leave most of the analysis to the healthcare wonks (though I don't want to sell it short--it's an engagingly written piece that any civilian will enjoy). But, from where I sit, Gawande's most interesting idea is an analogy he offers up:

About fifteen years ago, it seems, something began to change in McAllen. A few leaders of local institutions took profit growth to be a legitimate ethic in the practice of medicine. Not all the doctors accepted this. But they failed to discourage those who did. So here, along the banks of the Rio Grande, in the Square Dance Capital of the World, a medical community came to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers.

I'd go even further. It's not just that the medical profession increasingly resembles the mortgage industry in its values and outlook. It's that it resembles it at the level of basic microeconomics--namely, a set of highly skewed incentives. One big problem with subprime lending is that it rewarded volume rather than quality. Many lenders would sell off the mortgages they underwrote; they made money providing the service of mortgage origination. But because they weren't hanging on to the mortgages, they weren't concerned about getting paid back and didn't have much incentive to sort good credit risks from bad ones.

As Gawande describes it, most doctors are like subprime mortgage lenders in this way: They don't really make money by improving their patients' health; they make money providing a series of expensive services--tests, treatments, etc. So, like subprime lenders, it's no surprise they've taken to increasing the volume of those services whenever possible. Yes, various cultural norms in the medical profession restrained those impulses for a while, especially in certain communities. But the fraying of those norms in places like McAllen has led us to a healthcare finance disaster. It's kind of the original subprime mess.

--Noam Scheiber