Tax Loopholes and Health Care Incentives

Deficit fixers are stumbling into the realization that our current problems are caused by too little economic growth, coupled with tax policy that is riddled with loopholes. These loopholes lead to counter-productive incentives, as taxpayers and businesses game the system to save money, often in ways that harm economic growth.

Now let’s look at health care reform. It, too, needs economic growth, not only to generate the revenues that pays for health care but to create jobs, which result in healthier workers and families. But like tax policy, health care reform is riddled with reimbursement incentives that drive counterproductive behavior. So the answer for both is the same. Grow the economy and simplify the flow of dollars through taxation and reimbursement.

The reason that tax loopholes are counterproductive is obvious, or usually so. But why might reimbursement incentives be counterproductive? The answer is that they are linked to lowering costs and higher quality. How could goals as desirable as these be counterproductive? The answer is that there are two separate reasons for higher costs and lower quality. One, which the incentives are directed toward, relates to the way we practice. The other relates to our patients’ socioeconomic status and family circumstances. From everything I know, the way we practice accounts for 20% and the sociodemographics of our patients account for 80%, which is the same as the relative contributions of schools and teachers vs. students and their families to the outcomes of education. And therein lays the problem of unintended consequences. A hospital or practice could improve its cost/quality profile and achieve higher reimbursement by changing what it does. But it could do even better by changing who it treats.

So, what happens? Hospitals down-size in the inner city and move to the suburbs. Patients who break the rules, for example by going to an emergency room at night, are dropped from plans. Office hours are limited to daytime when the working-poor can’t bring family members. Hospital emergency rooms close to police emergencies by keeping their ICUs filled. Patients are prematurely discharged to home situations that can’t properly care for them. And the list goes on. The best way to improve a bushel of apples is to throw out the bad ones.

But that’s only half the problem. By not recognizing the large impact of poverty on costs and quality, the special needs of the poor are not addressed and income inequality is allowed to grow. And by attributing poor outcomes to poor practices alone, the “Quality-Industrial Complex” flourishes and, in its zeal, denies the reality of poverty. And the cycle of failed policy goes on. That need not happen.


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