LDI Senior Fellow and Wharton School Professor Emeritus of Health Care Management Mark V. Pauly’s new book — the 30th he has written in his long career — is a compendium of wisdom and insights for health care managers. It is a plain-spoken work about how they often do the wrong thing with the best of intentions because they don’t actually understand what health economics tells them.

Titled “Applied Health Care Economics: Unexpected Insights for Management and Policy,” from Cambridge University Press, the book has 16 chapters debunking myths, highlighting counterintuitive truths, and applying economic reasoning to the day-to-day challenges hospital, insurance, and public health managers and policymakers face.

Pauly explains in the book’s preface:

“My approach here differs from the usual books that explain health economics, mostly to economists or economics students. They do not try to tell managers things they did not already know or might have been mistaken about — while my hope is to do just that. Both theory and evidence from health economics tell you things beyond common sense. Some points I will make are counterintuitive — cost shifting cannot happen in a world of profit-maximizing firms, better health insurance is not always good for you, nonprofit hospitals are no different from investor-owned ones. And Malcolm Gladwell is wrong about why people use hospitals. Often the message is counsel of caution when what people need to know to make the best decisions does not exist, so you need to hedge your bets. As well, sometimes economics does agree with common sense, even when it is uncomfortable to do so (i.e., physicians need financial incentives to be more thoughtful). My hope is to supply punchlines that not only are clear but also pay off for managers in terms of insights they would not otherwise have, assumptions they would not otherwise make, and conclusions that might otherwise follow the crowd. I do hope to surprise a little, reassure some, and warn a lot.”

One of the country’s most renowned health economists, Pauly’s work is informed by his experiences and findings over a 60-year career studying how U.S. health care is organized, managed, financed, and quality controlled.

He earned his PhD at the University of Virginia in 1967, just as the nation’s health care system was grappling with the monumental changes brought by the newly launched Medicare and Medicaid programs, which created the world’s largest government health care financing system. That transformation accelerated the growth of the emerging academic discipline of health economics, and Pauly became one of its key pioneers. His dissertation, “Medical Care at Public Expense: A Study in Applied Welfare Economics,” was later published as “Medical Care at Public Expense,” a work widely regarded as foundational in the field. Decades later, the book’s central ideas — on mandates, subsidies, moral hazard, competitive structures, and cost containment — echoed through the design of the 2010 Affordable Care Act.

Throughout his career, Pauly, a former Executive Director of the Leonard Davis Institute of Health Economics, has served on or led numerous public and advisory positions, including at the Physician Payment Review Commission, the Congressional Budget Office, the U.S. Department of Health and Human Services, the Medicare Economic Index Technical Advisory Panel, and advisory committees for the Agency for Health Care Research and Quality. He has also served as President of the American Society of Health Economists.

Here are six of the many dozens of insights and health economics points of wisdom his book offers:

COST SHIFTING
Cost shifting is a myth. Pauly argues that if hospitals or drug companies are already charging the profit-maximizing price to commercial insurers, they cannot raise those prices further just because Medicaid or Medicare pays less. The logic: if higher private prices were possible, providers would already be charging them. He warns policymakers and hospital leaders not to use cost-shifting arguments as excuses for opposing reimbursement cuts: the economics don’t support it.

VALUE-BASED CARE IS A DUD
He says “value-based care” and “value-based payment” have become slogans, widely praised but often empty of clear meaning. Managers are urged to deliver more value for less cost, but the metrics of value are imprecise and disputed. Pauly stresses that value-based payment is not delivering the transformation promised, and leaders must look for smaller, evidence-based gains rather than rely on sweeping slogans.

OUT-OF-POCKET PAYMENTS AND CONTROL OF INSURANCE PREMIUMS
Managers should design cost sharing that is targeted — discouraging overuse of low-value services while protecting access to high-value care. Policymakers should be wary of using uniform out-of-pocket payments as the primary tool to control premiums and use, since they could cut the use of high-value but price-sensitive services.

ADVERSE SELECTION
Pauly sees adverse selection as a genuine problem, especially under community rating, because insurers must charge the same price to healthy and sick people. That tends to push healthier people out of the market. But it isn’t fatal — markets can still work if subsidies, mandates, or careful benefit design are used to balance the risk pool.

WHY U.S. SPENDING (BUT NOT NECESSARILY COST) IS HIGHEST
Americans don’t use dramatically more care than people in other rich countries. Instead, the U.S. pays higher prices for comparable services — doctors, hospitals, drugs, and devices all cost more here. He emphasizes that high spending isn’t necessarily a “burden” on the U.S. economy. Much of it represents higher payments to American health care workers rather than waste. The real question is whether the health benefits are worth their true resource costs.

SOCIAL DETERMINANTS OF HEALTH
Pauly underscores that factors like housing, environment, income, and racism are critical drivers of health but warns they lie largely outside the control of the health care system. He characterizes adverse social determinants as “local public bads,” where any benefits from intervention often spill over to people or payers beyond those footing the bill. Because of this, health systems should avoid overpromising what they can achieve on their own, but managers can still pursue targeted collaborations and partnerships that help address these broader influences on health.

“Overall, economic problems require economic solutions rather than slogans or rage,” Pauly said. “And sometimes economic theory or data can help managers avoid dead ends as well as open new doors to a greater extent than if they relied on their best judgment alone. Not all challenges that arise from the current environment can be addressed, but many can — and knowledge of which others are still open cases can help managers avoid jumping too soon or seeming too defensive.”

“It is sometimes said that the U.S. health care system is a non-system,” Pauly continued. “But it is also sometimes said it is a system perfectly crafted by someone to produce the outcomes it does. The second observation is closer to the truth but fails to recognize that systemic relationships can and do develop organically. There always is an invisible hand — though sometimes it can be all thumbs. But tracing these relationships to their consequences and then back to their causes is what economists are supposed to be good at doing, so I offer up what we have so far, in the hope that it can both explain and guide.”

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