Incentives in health care

The American health care system relies on a “fee for service” model, in which physicians are reimbursed for the procedures they perform.  I think this is a perfect example of how organizational structure and in particular incentives can affect outcomes.  Free market proponents argue that the only system that can optimally distribute goods and services is a free market.  I tangentially posted on efficient markets a short time ago.  However, even with a free market, the rules of the game determine what it means to win.  For example, when physicians are reimbursed for procedures then it makes sense for them to perform as many procedures as possible.  If it is the choice between an inexpensive therapy and an expensive one and there is no clear cut evidence for the benefit of either then why choose the inexpensive option.  A provocative article in the New Yorker by Atul Gawande  shows what can happen when this line of thought is taken to the extreme.  Another unintended consequence of the fee for service model may be that there is no incentive to recruit individuals for clinical studies as detailed in this article by Gina Kolata  in the New York Times.  The interesting thing about both of these examples is that they are independent of whether health insurance is private,  public or single payer.  Gawande’s article was mostly about Medicare, which is government run. An alternative to fee for service is  “fee for outcome”, where physicians are rewarded for having healthier patients.  Gawande favours the Mayo Clinic model where the physicians have a fixed salary and focus on maximizing patient care.  There must be a host of different possible compensation models that are possible, which I’m sure economists have explored. However, perhaps this is also a (critically important) problem where ideas from physics and applied math might be useful.