Does Your Doctor Answer to You — or to Third-Party Payers?

The ideal doctor is one who is our agent—not just in dealing with disease, but in dealing with the complicated, complex institution we call the health-care system. The problem, as I explain in my book Priceless: Curing the Healthcare Crisis, is that health insurance undermines the very agency relationship that would best serve our needs. Because the typical insurance contract reduces the out-of-pocket cost of care to patients, they have a perverse incentive to overconsume healthcare. Because the same contract pays doctors according to the number of visits, tests, and procedures they order, they have a perverse incentive to overtreat.

In order to control costs, therefore, insurers typically engage in all manner of techniques to control and limit the choices patients and doctors have. That includes controls over the drugs we can take, the tests we can have, and even the doctors and facilities we have access to. Third-party payers have enormous power to limit our choices because they have the power to pay or deny payment of medical bills. Even if their decisions are challenged and subsequently reversed, third-party payers can impose significant time and money costs on any doctor or patient who doesn’t follow their rules.

Physicians who practice medicine in this environment learned long ago that they are not free to be the unfettered agents of their patients. For example, if you are insured by BlueCross, your doctors will tend to view BlueCross as their customer, rather than you. They will look to BlueCross rules and procedures to determine what drugs to prescribe, what tests to order, and when and if surgery is to take place. On the other hand, if you are an Aetna patient, they will tend to view Aetna as their customer and they will tend to look at Aetna’s rules and procedures in making treatment decisions.

The danger is that instead of serving as your agent, doctors will become agents of third parties—insurance companies, employers, Medicare, Medicaid, and so on. To the degree that this occurs, the third party’s needs become more important than the patient’s needs. And remember, the primary need of the third party is to avoid spending too much money on you.

How far could this disturbing trend go? Further than you might think. In 2011, Medicare announced that it will start paying more to hospitals that follow a dozen procedures, including administering antibiotics prior to surgery and anticlotting medication to heart attack patients.[1] It will pay less to hospitals that don’t comply. The same thing is about to happen to doctors. Those who comply on up to 194 different metrics—including adopting electronic medical records—will get higher compensation.[2] Those who resist will get less. These are examples of a much larger trend: Washington telling the medical community how to practice medicine. This is happening even though a 2010 study[3] finds little relationship between the inputs Medicare wants to pay for and such outputs as patient survival, and even though the latest pilot programs show that paying doctors[4] for performance doesn’t improve quality.

Self-interest is a very powerful motivator. As Adam Smith explained over 200 years ago, it is not through altruism or charity that we get most of our needs met.[5] Our needs get met because producers and sellers find it in their financial self-interest to do so. But suppose you find yourself in an institutional environment where normal market forces have been systematically suppressed and where perverse incentives are the norm. Suppose other people find it in their self-interest not to meet your needs—or even to do things that turn out to be harmful to you.

That is the direction in which the healthcare sector has been headed for several decades.


1. Donald M. Berwick, “Medicare Program; Hospital Inpatient Value-Based Purchasing Program,” Final Rule 42 CFR Parts 422 and 480, Centers for Medicare & Medicaid Services, Department of Health and Human Services, May 6, 2011.

2. “2011 Physician Quality Reporting System (Physician Quality Reporting) Measures List,” Centers for Medicare & Medicaid Services, Department of Health and Human Services, March 31, 2011,

3. Lauren H. Nicholas, Nicholas H. Osborne, John D. Birkmeyer, and Justin B. Dimick, “Hospital Process Compliance and Surgical Outcomes in Medicare Beneficiaries,” Archives of Surgery 145(10) (2010): 999–1004.

4. Brian Serumaga et al., “Effect of Pay for Performance on the Management and Outcomes of Hypertension in the United Kingdom: Interrupted Time Series Study,” BMJ 342 (2011): 108. doi: 10.1136/bmj.d108.

5. Adam Smith, The­ Wealth­ of ­Nations, 5th edition (London: Methuen & Co., Ltd., 1904).

[Cross-posted at Psychology Today]

John C. Goodman is a Research Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the Independent books, Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America.
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