The reader should be warned that Economists commonly make a distinction between ethics - fairness - and efficiency - how to get the most done with the minimum of resources. This post is about efficiency. If it is ethics that you want, see the post Fairness.

Really health is like farming. You inherit land, that would be your body, from your parents and you try to make the best of it. For some people this requires nothing, some need to exercise care and common sense, some cannot make it without the help of others.

Life is not fair, some people can go clubbing on Friday night while Wonks Anonymous is trashed if he has too many chocolate chips. The point is that you make the best of what you have and you have the vast resources of modern medicine to help you. In this fine nation of ours you can buy almost any medication or treatment or medical test, not to mention alternative medical practices.  And all of these technologies, combined in the proper way, have the potential to bring you to a state that resembles good health even if the physical endowment that you inherited from your parents is somewhat lacking.

Now how you go about doing this is a matter of some interest to economists and policy wonks in general. The incentives that you and others face, and the choices that you make will help to determine how well or badly the system functions. This is the essence of the debate on medical costs.

Let's start with the simplest model, the model preferred by 9 out of 10 economists. You play the role of Robinson Crusoe or some sturdy frontiersman. You make all the choices, evaluate treatment plans and pay the bills for everything. You have a fast internet connection so all of medical science and pseudoscience is at your fingertips. Doctors and hospitals advertise their rates and the government publishes thick books of statistics on outcomes.

You choose and your choices and those of others drive the competitive marketplace for medical care. On average everybody's choices are rational so we get a set of market prices that reflect the social value of all treatments. These prices signal providers about where to invest and so on. Sure poor people might be dying in the streets but we can fix that if we want to. We are talking about efficiency here.

Which would be the Libertarian take on the issue. You take your money - possibly supplemented by a government funded Health Savings Account - and you go out and buy medical care. Maybe we even fund emergency medical care so fine healthy citizens don't have to see dying beggars.

So maybe you don't like that one so much because you don't know who John Galt is or you are certain that you do not approach the universal genius of that shining example of humanity. You, like Wonks Anonymous and most other mere mortals, do not posses an encyclopedic knowledge of everything. Illness is a mysterious, scary country and you just do not know your way around. When it comes to setting up a plan for medical care you need an agent who will help you make choices and also supervise the treatments that you receive.

Ideally this agent will know your own situation intimately and have years of medical training and experience. The agent will be someone like your personal physician, if you are lucky enough to have such a person.

Unfortunately, in the fee for service world, your personal physician and the other doctors with whom you deal have mixed incentives. Morality and professionalism move them to act as disinterested agents. Money pushes them to recommend more treatments than are needed and perhaps endanger your life and comfort. Some fall and others are more subtly corrupted. This is made more difficult by the fact that our system has no provisions to pay doctors for their primary role. That would be their services as our medical agents.

So why not pay a doctor, or in the modern world a sufficiently large group of doctors, a fixed annual fee to provide us with medical services. Nobody makes money by providing useless services and the group has every incentive to make sure that any small, treatable conditions that we might have do not go untended. They nag us about our bad habits because they see these bad habits as the source of future expenses. They have every reason to apply low cost treatments that prevent high cost treatments later.

That would be the Accountable Care Organization. You, or the government on your behalf, would pay a large medical group/hospital chain a fixed fee and they would take care of you.  Which, Wonks Anonymous is sure, is a form of socialism that fosters dependency and will leave us defenseless before the barbarian hordes.

Actually the only thing wrong with the Accountable Care Organization is that there are not enough of them. Because everyone needs competition to keep them in shape and the best way that you can discipline your ACO is by threatening to leave them for another ACO.

So here is a moderate question:

Why can't we compromise and have the best of both worlds? We can make the consumer responsible for most initial medical care through a high deductible - say $5,000 a year - and then, when the deductible is met, we enter the world of accountable care.

Why not Accountable Care with a high deductible?

Which would certainly cut down on those pesky patients demanding antibiotics for viruses or MRIs for sprained knees. But what does it do to patient and doctor incentives?

While the patient is in deductible land he has every incentive to second guess the doctor. Do I really need this expensive medication for my diabetes? Can't I just promise to eat better and work out more? $5,000 for a one month drug treatment program!? I think I will just pray more and drink a little less! Which leaves the Accountable Care Organization on the hook when the chronic condition that needed pre deductible treatment blossoms into a full scale medical emergency.

And this happens every year because at the end of the year the patient has a new $5,000 deductible to meet.

And doctors will also be susceptible to the temptations of fee for service. Because $5,000 per year is a lot of money waiting to be collected. An extra test here or there, a few unneeded treatments and behold, you have just paid for a new surgery center or some such.

And here is the final issue. Most of the money on the table in the High Deductible Accountable Care Organization will be the deductible. About 80% of the people have average medical spending below a $5,000 deductible. Most of the decisions about medical care will be made by skeptical, cost conscious consumers who are not using their doctor's resources fully because of problems of trust and doctors who are being paid by the treatment.