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Some would say that doctors, once licensed, aren't subject to lots of traditional regulation. A review of the Federal Register1 would in fact show that doctors face few explicit regulations governing:

  • Patients they will and will not treat

  • Therapies and protocols they use

  • Where to administer treatment to their patients

  • Whether and how to measure the results of their work

In many ways, however, doctors' choices on each of these four dimensions of practice are microscopically regulated—through the way they are paid for their services. Reimbursement has become the primary mechanism through which the regulation of doctors occurs in the United States.2 To the extent that doctors cannot afford to do things they are not paid to do, and will gladly do more of those things they are paid handsomely to do, the decisions about whether, when, and how much to pay doctors for the various things they do has unwittingly become one of the most pervasive and powerful regulatory mechanisms ever devised.

Most discussions about reforming health care run into a dead end when the participants realize that the regulatory system that we call reimbursement will not allow it. The reimbursement system is structured to sustain the status quo. Caregivers who do things the way they've always been done, or who make improvements within the present architecture of care, can get paid for what they do. Those who wish to disrupt the system by changing the very architecture of care, however, often are stymied by the specter that there literally is no money to be made from doing it. This is because disruptive innovations, being new to the world, just don't fit within the existing categories of products for which prices have been set and approved for reimbursement.

Health-care reformers have made compelling cases that improving the value of health care can't happen unless those who receive health services know what they cost and bear at least a share of the cost burden.3 At the same time, however, the belief that employers or the government are morally obligated to cover health-care costs has become a tenet accepted with near-religious fervor by most people in modern societies. We therefore seem bound in the tautologically tight paradox that employers, Medicaid, or Medicare must cover most health-care costs in ways that insulate providers and patients from the very market pressures that would normally force efficiencies, greater accountability, and the delivery of increased value.

What makes the encumbrance of reimbursement even more distortive and binding is that most prices insurers pay are not set by market forces. Rather, they are administered prices that reek of the pricing algorithms and backroom negotiations used in communist systems. Those who set or approve prices for medical products and procedures are typically physicians, health economists, and actuaries who are impaneled by Medicare and private insurers to tell them what they ...

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