Follow the money: money matters in health care, just like in everything else.

I suspect that our collective search for villains - for someone to blame - has distracted us and our political leaders from addressing the fundamental causes of our nation's health-care crisis. All of the actors in health care - from doctors to insurers to pharmaceutical companies - work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity and discourage transparent competition based on price or quality.1 I. INTRODUCTION In health care, as in everything else, money matters. Of course, money is not the only thing that matters - but it matters a lot - perhaps more than all the other factors combined. What we pay for and how we pay for it profoundly affects the care that is provided (and not provided), the settings in which care is provided (and not provided), and the lives and fortunes of those providing and receiving the care and those presented with the bill. If all were well with the health care system, the observations in the prior paragraph would be of no particular significance. Thus, no one would be much interested in the observation that auto mechanics, plumbers, actors, bicycle messengers, and newspaper reporters also respond to economic incentives - and that misaligned incentives can have adverse consequences. Yet, to say the least, all is not well with American health care. Whether the subject is the quality of care that insured and uninsured Americans receive, the cost of coverage and of receiving care, Medicare's fiscal projections, the burdens Medicaid imposes on the states, the cost of pharmaceuticals, the availability of primary care physicians, the wide variation in cost and treatment patterns, the continued viability of employment-based health insurance, or the dysfunctions of the medical malpractice system, it is clear there is no shortage of problems with the U.S. health care system. What all of these problems have in common is that some (and, more often than not, most) of the blame is properly attributable to misaligned economic incentives. Instead of trying to address that problem, past efforts have focused on a "collective search for villains," with the specific identities of the villains varying, depending on the political and philosophical commitments of the searchers. These efforts have been time-consuming, and have created steady work for lobbyists, lawyers, law professors, and policy wonks, but they have had about the same impact as the witch trials that swept Europe from 1400-1600 and Salem, Massachusetts from June-September, 1692: deeply satisfying for those who perceive they are doing "God's work," intensely unpleasant (and sometimes lethal) for the targets, but providing little actual improvement in the state of the world. Stated more positively, unless and until we alter the core incentives created by our existing payment system, we will get more of what we've already got - a dysfunctional non-system that delivers uncoordinated care of widely varying quality at a high cost.2 Part II provides a number of examples of how "money matters" in health care, and details the adverse consequences that have resulted from ignoring that basic insight. Part III details how the latest iteration of health reform has, in important ways, made things worse by "doubling down" on coverage without addressing these incentive problems. Part IV considers what we can learn from Massachusetts' 2006 health reform efforts. Part V concludes. II. MONEY MATTERS: A COMPENDIUM It is difficult to overstate the extent to which economic incentives explain the structure, performance, and pathologies of the American health care system. …