Formalizing corruption: US medical system edition

Oh, corruption. It interferes with so many aspects of daily life, adding time to the simplest daily tasks, costing more money, and — often the most frustrating aspect — adding huge doses of uncertainty. That describes life in many low-income, high-corruption countries, leading to many a conversation with friends about comparisons with the United States and other wealthy countries. How did the US “solve” corruption?

I’ve heard (and personally made) the argument that the US reduced corruption at least in part by formalizing it; by channeling the root of corruption, a sort of rent-seeking on a personal level, to rent-seeking on an institutional level. The US political and economic system has evolved such that some share of any wealth created is channeled into the pockets of a political and economic elite who benefit from the system and in turn reinforce it. That unproductively-channeled share of wealth is simultaneously a) probably smaller than the share of wealth lost to corruption in most developing countries, b) still large enough to head off — along with the threat of more effective prosecution — at least some more overt corruption, and c) still a major drain on society.

An example: Elisabeth Rosenthal profiles medical tourism in an impressive series in the New York Times. In part three of the series, an American named Michael Shopenn travels to Belgium to get a hip replacement. Why would he need to? Because health economics in the US is less a story of free markets and  more a story of political capture by medical interests, including technology and pharmaceutical companies, physicians’ groups, and hospitals:

Generic or foreign-made joint implants have been kept out of the United States by trade policy, patents and an expensive Food and Drug Administration approval process that deters start-ups from entering the market. The “companies defend this turf ferociously,” said Dr. Peter M. Cram, a physician at the University of Iowa medical school who studies the costs of health care.

Though the five companies make similar models, each cultivates intense brand loyalty through financial ties to surgeons and the use of a different tool kit and operating system for the installation of its products; orthopedists typically stay with the system they learned on. The thousands of hospitals and clinics that purchase implants try to bargain for deep discounts from manufacturers, but they have limited leverage since each buys a relatively small quantity from any one company.

In addition, device makers typically require doctors’ groups and hospitals to sign nondisclosure agreements about prices, which means institutions do not know what their competitors are paying. This secrecy erodes bargaining power and has allowed a small industry of profit-taking middlemen to flourish: joint implant purchasing consultants, implant billing companies, joint brokers. There are as many as 13 layers of vendors between the physician and the patient for a hip replacement, according to Kate Willhite, a former executive director of the Manitowoc Surgery Center in Wisconsin.

If this system existed in another country we wouldn’t hesitate to call it corrupt, and to note that it actively hurts consumers. It should be broken up by legislation for the public good, but instead it’s protected by legislators who are lobbied by the industry and by doctors who receive kickbacks, implicit and explicit. Contrast that with the Belgian system:

His joint implant and surgery in Belgium were priced according to a different logic. Like many other countries, Belgium oversees major medical purchases, approving dozens of different types of implants from a selection of manufacturers, and determining the allowed wholesale price for each of them, for example. That price, which is published, currently averages about $3,000, depending on the model, and can be marked up by about $180 per implant. (The Belgian hospital paid about $4,000 for Mr. Shopenn’s high-end Zimmer implant at a time when American hospitals were paying an average of over $8,000 for the same model.)

“The manufacturers do not have the right to sell an implant at a higher rate,” said Philip Boussauw, director of human resources and administration at St. Rembert’s, the hospital where Mr. Shopenn had his surgery. Nonetheless, he said, there was “a lot of competition” among American joint manufacturers to work with Belgian hospitals. “I’m sure they are making money,” he added.

It’s become a cliche to compare the US medical system to European ones, but those comparisons are made because it’s hard to realize just how systematically corrupt — and expensive, as a result — the US system is without comparing it to ones that do a better job of channeling the natural profit-seeking goals of individuals and companies towards the public good. (For the history of how we got here, Paul Starr is a good place to start.)

The usual counterargument for protecting such large profit margins in the US is that they drive innovation, which is true but only to an extent. And for the implants industry that argument is much less compelling since many of the newer, “innovative” products have proved somewhere between no better and much worse in objective tests.

The Times piece is definitely worth a read. While I generally prefer the formalized corruption to the unformalized version, I’ll probably share this article with friends — in Nigeria, or Ethiopia, or wherever else the subject comes up next.


08 2013

3 Comments Add Yours ↓

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  1. Bill Savedoff #

    Excellent post – both on the point about formalized process for elites to extract rents and the way this works in the U.S. health system.

    There’s no clearer demonstration of systemic corruption in the US than the Supreme Court’s Citizens United decision and the public and transparent flow of funds into political campaigns. The U.S. is quick to criticize the influence of oil companies and large construction firms in Russia, China, India … but thinks that campaign contributions by such firms inside the U.S. is just fine because it is legal.

    On a smaller scale, in addition to your health comparison, you could compare US and European cell phone regulations. All European cell phones have SIM cards which make it relatively easy to switch from one carrier to another and therefore make pricing more transparent and encourage competition. Another case where corporate involvement in shaping regulations supported concentration of market power at the expense of market competition in the US.

  2. 2

    Thanks Bill, I appreciate the comment and the cell phone example, which I’ve used with friends as well. I understand that prices for similar services are also much higher (I’ve heard double?) in the US than in Europe.

    One of the most interesting public policy contrasts I’ve ever experienced was the contrast between public and private services in Ethiopia and Somaliland. In Ethiopia the state monopoly on telecom leads to poor quality and very expensive phone and internet service, whereas the super-free-market Somaliland has multiple carriers competing for customers, and offering very competitive rates. On the other hand, some services clearly benefit from central provision (roads, power) as Somaliland was atrocious on those fronts: for instance, all electricity in Somaliland is created by diesel generators, and anyone who wants to can set up their own and sell to their few hundred closest neighbors. The result is massively inflated energy costs, not to mention dangerous and highly redundant homemade wiring systems. Just one more example of public policy lessons coming out of international comparisons!

  3. Lee #

    Doesn’t this just raise the question – how did Belgium *solve* corruption?

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