HEALTH CARE: The Hospital as Soviet Gosplan

Recently an article of mine on healthcare, “Healthcare and Radical Monopoly,” was published in The Freeman:  Ideas on Liberty.  Since I wrote the article several months ago, I chose healthcare as the topic for my forthcoming C4SS research paper.

One thing I barely touched on in the article for The Freeman, that I’ve been digging into heavily since, is the absolutely astonishing levels of overhead in hospitals, and the pathological organizational culture that contributes to it.

Of course Obama’s healthcare “reform” is focused almost entirely on the insurance industry, rather than on the costs of healthcare itself.  But while insurance company price-gouging and profit margins contribute to skyrocketing premiums, it’s very much a secondary effect–mostly icing on the cake.  The main factor behind rising insurance premiums is the rising prices hospitals charge for delivery of actual services.

And the organizational culture of hospitals is the main culprit.  Standard management accounting practices are at the heart of that culture.  Under GAAP accounting rules, which Donaldson Brown played a major role in developing at Du Pont and GM ninety years ago, only labor counts as a direct/variable cost.  Capital expenditures and administrative costs go to general overhead, and are treated as fixed.

So while the MBAs obsessively try to shave off every possible minute nursing staff are scheduled, they pour money down ratholes on the kinds of wasteful white elephant capital boondoggles you might have seen in the old USSR–not to mention having a level of administrative overhead rivaling the Ministry of Central Services in the movie “Brazil.”

At the hospital  where I work, I’ve seen entire floors remodeled at enormous expense, just to make them less functional than before.  I’ve seen a perfectly functional telephone system on my ward replaced at a cost of thousands of dollars, and a totally acceptable photocopier replaced at a cost of thousands more, just because they had the money in their capital budget and couldn’t think of anything else to spend it on.  I’ve seen the hospital add a DaVinci “surgical robot” and invest in extremely expensive specialty treatments for high-end niche markets, while patients shit the bed waiting for bedpans and go five days without a bath or linen change.  Most recently, the hospital announced an $8 million expansion of ER; the money spend on that alone would probably be enough to increase the staffing ratio to one orderly for each six patients, what it used to be fifteen years of downsizing ago, and fund it at that level for ten years.  But spending that money on labor for patient care would lower “productivity,” according to their pointy-haired MBA metrics–despite the fact that the money they’re ostensibly saving from staffing cuts now is more than offset by the resulting increases in med errors, falls, and hospital-acquired infections.

The objects of capital spending remind me of Friedrich Hayek’s predictions for a centrally planned economy:

“There is no reason to expect that production would stop, or that the authorities would find difficulty in using all the available resources somehow, or even that output would be permanently lower than it had been before planning started . . . . [We should expect] the excessive development of some lines of production at the expense of others and the use of methods which are inappropriate under the circumstances. We should expect to find overdevelopment of some industries at a cost which was not justified by the importance of their increased output and see unchecked the ambition of the engineer to apply the latest development elsewhere, without considering whether they were economically suited in the situation. In many cases the use of the latest methods of production, which could not have been applied without central planning, would then be a symptom of a misuse of resources rather than a proof of success.”

In particular, Hayek cited “the excellence, from a technological point of view,” of some Soviet industrial machinery.  It was excellent.  It’s just that nobody had any idea, given the grossly distorted incentives and price signals in the Soviet economy, whether it was worth the resources put into it.

But under GAAP rules, overhead doesn’t matter because, thanks to the miracle of “overhead absorption,” it just gets passed on to the customer as a markup.  Hence the $3 bag of saline solution that’s billed for $300–not to mention the infamous $10 aspirin.  It’s what Paul Goodman called “the great realm of cost-plus”–the very same culture that gave us the $600 toilet seat at Pentagon contractors.

The only solution is to let conventional bureaucratic hospitals rot, bypass them, and start over from scratch.  It means eliminating the organizational culture of prestige salaries, mission statements, Weberian “best practices,” work rules, and job descriptions.  It means, instead of interdepartmental “quality improvement committees,” empowering those actually providing the care to act on what’s right in front of them without interference from pointy-haired bosses.

It means, especially, decentralized delivery of service and cooperative finance: small, neighborhood cooperative hospitals that bypass the insurance system altogether and operate on the same flat-fee membership basis as John Muney’s clinics in New York, or Qliance in Seattle.  This would have two primary benefits:  first, because of the flat-rate fee, there’s no incentive to mutual logrolling between specialists, padding the bill with a $6000 CT scan, etc.; second, as Muney pointed out, it eliminates the 25% or so of costs that come from insurance paperwork.

The future of healthcare is not Obamacare, or any other statist legislative agenda created at a table where the seats are all occupied by the people who created the problem.  If there is any hope for affordable healthcare, it lies in small, bottom-up, patient-driven institutions that route around all the inefficiencies and irrationalities of state capitalist healthcare.

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