Thursday, May 6, 2010

Entrepreneurship in Health Care

One of the themes in the health care economics course that I teach is that in order to reduce health care costs, the health care market needs to be more competitive. We see that at the local level, many of the prime players - hospitals, private insurance, pharmaceuticals markets are not very competitive in that one or a few firms dominate the market, resulting in a great deal of market power - which is good for the firm since they are more likely to make higher profits - but not so good for the health care consumer or third party payer. So how does the health care market become more competitive?

In a previous post, I linked to one professor from Harvard who thinks that health care should be run more like the retail industry, where the consumer is king. I think that is a little naive, given the amount of imperfect information in the decision-making process and the cost of making a significantly wrong decision due to the asymmetric information in the health care market. If I choose the "wrong" restaurant meal, in that I really don't like it as much as the meal my wife choose, that just means that next time I will make a different decision. In health care, the wrong decision can have serious repercussions for both the individual and their family. So, what to do, given this asymmetric market?

In a fascinating article on optical care, we see that if health care organizations are allowed to act more entrepreneurial, then we can end up with better care and in some cases lower costs. This is one of those situations, where the lack of competition, or more specifically, the lack of incentives for health care organizations to think and make decisions more like an entrepreneur really hurt both the health care providers and the health care consumers.

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