What actually happens [at the hospital division he observed was that] the billing staff sit down each year; lay out the various payment plans on a spreadsheet, and decide on the division strategy--which surgeons will join which plans, and which carriers will be carried on a nonplan basis, trading higher payments for greater collection risk. Once that strategy is set, it is managed entirely by the collections staff. The surgeons simply join the plans they're assigned to.

It is an interesting collision, I think, between two quite rational, but alien, thought systems. Classical market economists tend to define rationality as maximizing economic outcomes. The division's equally rational strategy is to neutralize the plethora of payment incentives so the surgeons can practice their craft according to their lights, with minimum economic penalty.

This is a contest that the surgeons will almost always win. Health care pricing doesn't work like a grain auction. The terms of insurance company health plans are set bureaucratically and changed only infrequently with very little feedback on actual vendor behavior. And the plans are so complex, and the course of a difficult case so unpredictable, that it is often impossible to know in advance what a final price will be. For all those reasons, game theory would suggest that the surgeons' "neutralization" strategy is the sensible choice.

It is not that classical economics has no relevance to big-ticket health care--the proliferation of specialty hospitals suggests otherwise. But it is not the dominant paradigm within the Columbia-Presbyterian cardiothoracic division, or even a particularly important one. In other words, attempting to re-envision big-ticket medicine as a conventional problem in microeconomics may be what Alfred Whitehead called a "category error."

Leading mainstream health economists suggest that health care has special features that make it different from other domains of application, posing restrictions on the appropriateness of some neoclassical assumptions. . . . [T]he literature points to the presence in health care of externalities, information asymmetries, uncertainty, supplier-induced demand, and derived demand. But while all these features are important, they are neither universal in health care systems nor unique to them.

I try to identify the peculiarities of health care systems by building on the neglected but vital concept of need. By contrast, mainstream economics starts from the subjective satisfaction or utility of the individual. Modern mainstream economics rejects or ignores the concept of need, but many leading economists from Adam Smith to Alfred Marshall have acknowledged objective needs as well as subjective satisfactions.

While shifting the analysis from a utility-based to a needs-based approach, it is not naively assumed that health authorities or professionals always know best. Indeed, the problem is one of institutional design where knowledge is developed and distributed, and where mistakes become useful cues for learning and adaptation.