This three part blog series examines the underlying economic principles that shed light on current problems in healthcare.
Part I: Economic principles drive the best healthcare delivery systems
Part 2: The Socialist Incentive Problem in Healthcare
“To assume all the knowledge to be given to a single mind…is to disregard everything that is important and significant in the real world.” ~Friedrich Hayek, The Use of Knowledge in Society (pamphlet, 1945; currently out of print)
One of the great contributions of Friedrich Hayek to the study of economics is his examination of how dispersed knowledge is utilized for the betterment of everyone. Everyone has an understanding of how things work unique to their world. Although the scope of that understanding is limited relative to the aggregate of all the knowledge of the world, each person is valuable in that he/she possesses knowledge that only he/she has. Additionally, this knowledge can be implicit, in that it is often out of the realm of being consciously understood. This was apparent during the tour of the surgery center also. Dr. Smith often spoke of how he decided on whom he should make a partner of the center. Much of this decision-making process seemed to rest upon just “knowing” who was the best candidate. Also, there are points where Dr. Smith, by virtue of not having to work in a hospital, is able to go against many of the rigid top-down guidelines often set by them. This allows him to improve outcomes—or prevent bad outcomes—by applying implicit knowledge in each new situation. Each medical situation is different, and thus requires using available information to treat each person as an individual rather than as a set of symptoms.
Many aspects of the medical system assume that if there are enough guidelines and planning from above, the perfect outcome can be reached. Yet, in reality, the optimal outcome in any area of an economy must derive from valuing the capabilities, yet respecting the limits of human knowledge. Since we cannot have the platonic form of the perfect outcome, we must settle for an earthly solution. The common occurrence of mistakes in the standard medical system can be likened to Icarus flying too close to the sun. In trying to guide and plan for every situation from the top, the planners assume knowledge of each situation that they cannot possess. In decision-making, all we really have are the memories of our past that can be used to engender positive outcomes in the future. There will never be omniscience, which is the precise reason that the entrepreneur is the ideal decision maker, rather than a bureaucrat. Acceptance of human limits is more feasible than a utopian hope for bureaucratic omniscience. Much of what you can see in the Surgery Center of Oklahoma is an honest and imperfect journey in the pursuit of perfection.
The Socialist Calculation Problem
“Economic calculation makes it possible for business to adjust production to the demands of the consumers.” ~Ludwig von Mises, Bureaucracy
Even if people were not driven by the incentives around them and the bureaucrat was able to possess all relevant knowledge of an economy, there still remains the calculation problem of socialism. As the entrepreneur, Dr. Smith does have the option to make the entire surgery center gold plated to potentially increase the price of care. But he doesn’t. Why? Because he believes that no one would be willing to pay a price for it, and it’s not necessary. Although that is an exaggerated example, it shows that the doctor is faced with infinite decisions he must make, but must constantly try to do so in a way that maximizes value. The calculation of profit and loss is the greatest method available to make these decisions when faced with scarce resources, but the risk of loss is often not considered when a bureaucrat is attempting to allocate these resources.
This was evident when Dr. Smith explained that there are certain machines he only rents when he needs them rather than buying them. Also, there is a new addition to the center that he has been putting off for a while since the Center’s ever-growing efficiency keeps making the cost of the extra room superfluous. If those running a hospital thought they would like to buy a certain machine for the hospital, or that extra space could be even moderately advantageous, it is very likely that the decision would be made to acquire them. Yet, in the case of the Surgery Center of Oklahoma, the decision must be made in relation to how it will directly benefit the bottom line and indirectly benefit the price and quality afforded to the patient.
Yet, despite the monumental successes Dr. Smith and other cash-based physicians have had, there still remains a strong reluctance (and often resistance) in the government to admit that market solutions have been better than the attempts from government in the last 60 years to control the practice of medicine. This can be better understood with the following quote:
“Everything which might cause doubt about the wisdom of the government or create discontent will be kept from the people. The basis of unfavorable comparisons with elsewhere, the knowledge of possible alternatives to the course actually taken, information which might suggest failure on the part of the government to live up to its promises or to take advantage of opportunities to improve conditions—all will be suppressed. There is consequently no field where the systematic control of information will not be practiced and uniformity of views not enforced.” ~Friedrich Hayek, The Road to Serfdom