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Wyden and Kitzhaber Should Innovate Health Care Together

May 7th, 2012 by dk

I hope Oregon Governor John Kitzhaber has a successful visit to Washington, D.C this week. He’ll spend most of his time lobbying for rule changes that will allow Oregon to experiment with new ways to optimize Medicare and Medicaid funds. Again.

Kitzhaber midwifed the Oregon Health Plan in the 1990s and it’s still one of his proudest accomplishments. As a former emergency room doctor, Kitzhaber’s path to public service cut through the conventional health care model. Indeed, some would say Kitzhaber reclaimed the governor’s office just so he could have the meetings he’s having this week.

Oregon — and Dr. Kitzhaber — has a great track record innovating for health care. Oregon Health Plan might still be the envy of an underinsured nation, if only dynamic cost controls had been built into the system.

I hope the governor discusses cost control strategies over dinner with Oregon’s senior Senator Ron Wyden. He should let Sen. Wyden order the wine.

Kitzhaber would argue that this country has no health care model at all. What we have is a sickness treatment model. As such, he’s been tightly focused on education, prevention, and early treatment strategies. Nobody can make the literal case for “an ounce of prevention is worth a pound of cure” better than Dr. Kitzhaber.

Paying for an ounce now instead of a pound later is good governance, but setting the price isn’t what government does best. We all know horror stories about government paying too much for bolts for aircraft repairs or shatterproof ashtrays or a platter of breakfast pastries at a government conference.

(It doesn’t help that the first time we read a story about government employees negotiating hard for the best possible price, the vendor happens to be a Columbian prostitute.)

Government can deliver services with great efficiency, but market forces excel at setting prices. Can we devise a single payer health care system without government also being the single negotiator? Dr. Kitzhaber knows best what patients will need, but Sen. Wyden has listened to economists about how the prices should be set.

Nobel Prize winning economist William Vickrey pioneered a free market system for setting the lowest sustainable price for any item whose inherent value is not well defined. A Vickrey auction resembles any other sealed bid auction, but with one minor — yet profound — adjustment. The lowest bid is automatically rejected.

You win a Vickrey auction by submitting the second lowest bid. “Loss-leaders” need not apply.

The Medicare reform package put together by Sen. Wyden, along with U.S. Congressman Paul Ryan, uses a Vickrey auction to set local prices for privately run health care plans. Government-run Medicare coverage would then be required to at least match that benefit package. Those on the political left expect the “single-payer” option (a.k.a. traditional Medicare) to offer more benefits at the same price.

Wyden has shrewdly devised a system where the private sector sets the price and defines the package of benefits. Government sets the minimum coverage required by all, but then only has to match or exceed what the Vickrey auction winner will provide.

Setting limits or recognizing synergies will be done by companies competing for access to the senior health care market. Wyden’s plan has outsourced any “death panels” to private companies. Sometimes we do want a government that “leads from behind.”

What does all this have to do with wine? Restaurateurs long ago noticed that diners instinctively emulate a Vickrey auction. Most choose the second cheapest wine on the menu.

Restaurant owners take advantage of this tendency and often make their second least expensive wine also their most profitable. In other words, you may be getting less quality at a higher price when you choose the wine that looks “safest” to your eye (and your social pride.)

Wine lists are in this way no different than medical procedures. Whether it’s a Rogue Valley Cabernet or a silver nitrate ulcer cauterization, consumers lack information about what it should cost, and they’re in no place or mood to do the necessary research.

But Wyden does his homework. His plan combines the efficiency of capitalism with the effectiveness of government. I’d trust him to fill the glasses before these two leaders toast Oregon’s inventive medical solutions.


Don Kahle ( writes a column each Friday for The Register-Guard and blogs.

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