When the Invisible Hand Meets an Immovable Object

In a coincidence worth noting, Adam Smith’s The Wealth of Nations was published in 1776, the year that our nation-to-be declared its independence from what was then the Kingdom of Great Britain. In that work, Smith argued that the colonies were not worth the cost of keeping them. Nonetheless, Smith’s ideas and US commerce, including the health-care marketplace, continue to travel in parallel universes. We got health-care reform, but we still have the same quasi–free-market system we had when we entered the fray, albeit with 31 million potential new customers. That makes us one of the only developed Western nations that can make that free-market claim. It is true that Medicare was on a collision course with fiscal disaster prior to reform, and apart from some vague hopes about the ability of accountable-care organizations (ACOs) to moderate costs, the reform bill did not address this cost conundrum. The free market has prevailed, though, and the free market continues to have the opportunity to find a solution. As the radiology market roils, splinters, and consolidates in response to reimbursement cuts; as hospitals gain clout; and as physician practices consider their options, I wonder what Smith would have thought. What would the champion of self-interest have said about our health-care future, and the likelihood of our health-care market producing a solution favorable to all members of the community? Reared by a widow in a small town in Scotland, Smith was educated at Oxford, where he acquired expertise in European literature and an extreme distaste for English universities. He returned to Scotland to take a chair in logic, and then moral philosophy, at Glasgow University. He earned financial independence and traveled widely as a result of leaving academia to tutor a duke. After that, Smith settled down to launch classical economic thought with the above-mentioned five-volume work. Though his renown is based on the theory that rational self-interest, in a free-market economy, leads to economic well-being, Smith had a great interest in ethics and charity (the subject of his first book), and he believed that mankind was innately interested in the fortunes of others, as well as in their happiness. Classical economic theory suggests that if the health-care market and its actors are left to their own devices, prices will reach their proper level, supply will meet demand, and innovation in care delivery will flourish to meet the needs of all. Throughout this issue of Radiology Business Journal, you will find examples of providers successfully adapting to new market forces, such as the two Ascension Health hospital administrators who are reengineering the delivery of hospital-based imaging services, producing greater efficiency with the same resources. This month, we also write about the dissolution of a hospital–practice relationship that can be traced back to the 1920s; in spite of losing its hospital contract, the practice still stands strong (with new models of health-care delivery currently in formation). In addition, we bring you the story of a consortium of 15 of the nation’s largest practices, representing some of radiology’s most visionary leaders, aligning to achieve best practices, additional resources, and further efficiencies. If competition is allowed to flourish, if all of these providers are left to pursue their own self-interest, and if there is enough supply to meet demand, Smith’s invisible hand of the market will allocate resources to the benefit of all. Uncertainties persist, however. Hospital–physician relations are strained in many markets. Teleradiology companies are testing the old definitions of what makes a radiology practice a radiology practice, and new delivery models threaten to commoditize the specialty. Further turbulence should be anticipated here. Smith used his theory of equality of returns (all uses of a resource must yield an equal rate of return) to explain why wages differed. The more difficult or unpleasant the trade, the higher the pay; hence enhanced wages are earned by radiologists (whose work is difficult to learn) and, in Smith’s day, by hangmen (whose work was odious to perform). Smith so strongly opposed techniques to prop up markets artificially that he went on record as approving of smuggling. Where would he have stood on the New Delhi ghost readers? A fascinating article¹ in the April issue of Health Affairs describes health-care market dynamics in the bellwether state of California that have arisen in response to this state’s delegated-capitation model of care. Its hallmarks, in some markets, are large multispecialty physician organizations and massive horizontally integrated hospital systems. In others, independent physician associations (IPAs) negotiate with insurers on behalf of independent physician practices, which overlap insurance networks by up to 97% in some markets. The authors argue that these characteristics have evolved to give providers unparalleled market clout in negotiating with payors in California. They also see relationships among California’s multispecialty physician organizations, large hospital systems, and IPAs and the ACOs that the Senate bill proposes introducing into the Medicare program (for the purpose of providing physicians with incentives to deliver high-quality, efficient care). The authors warn that instead of producing the intended efficient, high-quality care, the ACOs could raise the cost of care instead. Writing that antitrust regulations have been unsuccessful in challenging hospital mergers, the authors suggest that policymakers might, instead, need to turn to price caps on private-sector rates, unless market mechanics can be found to moderate price increases. Price caps would result in lower prices for insurance companies, which would (theoretically) pass these cost savings on to employers and consumers in the form of lower premiums—or would they? Let’s hope that the administration uses policy as Smith suggests: to enforce contracts and encourage innovation. Prices have to come down, but there might be enough elasticity in our health-care system for market mechanics to produce this result, rather than leading government to resort to price setting. That is a measure of which Smith definitely would not have approved.