Free Market Health Care: The Road Not Taken

My column is up at Forbes, and is the fourth in a series on Obamacare.  An excerpt:

Its amazing to me how many ways supporters of government health care can find to rationalize the bad incentives of third-party payers systems.  Take, for example, the prevelance today of numerous, costly tests that appear to be unnecessary.  Obamacare supporters would say that this is the profit motive of doctors trying to get extra income, and therefore a free market failure.   I would point the finger at other causes (e.g. defensive medicine), but the motivation does not matter.   Let’s suppose the volume of tests is truly due to doctors looking for extra revenue, like an expensive restaurant that always is pushing their desserts.  In a free economy, most of us just say no to the expensive dessert.  But the medical field is like a big prix fixe menu — the dessert is already paid for, so sure, we will got ahead and take it whether we are hungry or not.

It should be no surprise that while US consumer prices have risen 53% since 1992, health care prices have risen at nearly double that rate, by 98%.  Recognize that this is not inevitable.  This inflation is not something unique to medical care — it is something unique to how we pay for medical care.

Contrast this inflation rate for health care with price increases in cosmetic surgery, which unlike other care is typically paid out of pocket and is not covered by third party payer systems.  Over the same period, prices for cosmetic surgery rose just 21%, half the general rate of inflation and just over one fifth the overall health care rate of inflation.

This is why I call free market health care the road not traveled.  There are many ways we could have helped the poor secure basic health coverage (e.g. through vouchers) without destroying the entire industry with third-party payer systems.  Part of the problem in the public discourse is that few people alive today can even remember a free market in health care, so its impossible for some even to imagine.

Update: Coincidently, Mark Perry has a post that addresses just the issue I do in my article, that is the positive effects of high-deductible health insurance and out of pocket health expenditures on pricing transparency and reduced costs.  The high deductible health plans at GM seem to be having a positive effect on the health care market.  A shame they will probably be illegal under Obamacare.  Of course, since GM is owned by the government, it can get any special rules that it wants, unlike the rest of us.  But that his how things work in the corporate state.

  • http://dullgeek.blogspot.com dullgeek

    Just yesterday, I was complaining about a price of a procedure that I had done. I, like you, have a high deductible health plan with an HSA. I recently went to the doctor who made a recommendation for a procedure. I asked for how much the procedure would cost. But, of course, no one could tell me. Doctor's offices simply are not set up to answer that question.

    Yesterday, I got the bill. So apparently they can answer that question eventually.

    Had I known, in advance, that the cost of this procedure would be $650 there's no way I'd have agreed to it. At best, I'd have gone to find another doctor who either offered the procedure for less, or offered an alternative diagnostic method that wasn't so pricey. But, of course, even if *my* doctor could have somehow magically been able to produce a price, that doesn't mean all the rest would have.

    So, instead, I did the procedure guessing that the cost risk was about half of what it ended up being.

    I would like to go to the doctor's office and present an invoice for a visitation fee of $400, and see how much they like aribtrary fees given to them after the fact.

  • http://stopthebreathing.blogtownhall.com astonerii

    Exactly

  • http://dullgeek.blogspot.com dullgeek

    Reading your article, you seem to be able to get the doctors to provide you quotes. How do you do that? I have been trying for several years to get a healthcare provider - any healthcare provider - to provide me a price up front. I have not once succeeded.

    What is it that you do to get those prices?

  • http://dullgeek.blogspot.com dullgeek

    BTW, there are a number of procedures that are routinely done at dentists, for which most dental insurance covers at most 50%. Getting a price - in advance - for those procedures is incredibly easy. Almost all dentists offices that I've visited have someone who will go through the cost of the procedure, deduct how much insurance will pay, and present you with a quote for how much you'll be responsible for after that. This is just another example of a health related service where lack of coverage provides better price information to the consumer.

  • marco73

    Where I live in Florida, it is almost impossible to find out a price for a medical procedure. Since so many folks here are on Medicare, the entire price structure is based on how much the doctor has to charge the non-Medicare patients in order to keep the lights on.
    I've had to make several recuring visits to my doctor, and have paid just my deductible each time. Lo and behold, about 3 weeks later I have a small credit on my account, because the visit was less than the deductible, so my doctor sends me a small check. Then I write a check for the full deductible next time I am in. I've asked the receptionist if I can just write a check for the amount of the visit, then they don't have to send me a refund check later. Nope, not going to happen, they are just not set up to provide a price before service is rendered. Even though the procedure is exactly the same as the last time, and I can tell them to the penny what it cost last time.
    I'd love to walk into the doctor's office one day, and be treated like the dentist: here's how much it costs, here's what your insurance will cover, here's your part.

  • James H

    I've encountered this as well, my wife was looking into some procedure, and the hospital or doctor seemed to have no way to figure out the cost. Then if they do, you have to argue with them about everything because they are so used to gaming the bill to get the biggest payout.

  • Steven

    Worse than all this is the "penalty" pricing in affect in the healthcare industry. If you need a CAT scan, Eatna has a deal to pay $250 for it. If it isn't covered by your insurance or you go to the imaging center that doesn't have a deal with your insurance, they will bill you $5,000 for the same CAT scan and you are screwed.

  • Dr. T

    My profession is clinical pathology (laboratory medicine), and I have studied test utilization for over twenty years. There are three main reasons for ordering tests that aren't essential for making diagnoses or monitoring patients. I rank the reasons in order of frequency:

    1. Lack of time. Physicians are among the smartest people in the world. Medical education and training times are the longest of any profession: 12 years post-high school for internists and family practice; 14-17 years for specialists. (I was 29 when I finished training.) Physicians expect high pay per hour of work. However, except for certain surgeries and procedures, reimbursement rates per patient visit are not high. The only way to get reimbursed at an appropriate hourly rate is to see more patients per hour. The typical physician needs to conduct six to eight routine visits per hour. When a patient's problem is not readily identifiable, the physician has two choices: spend another 5-20 minutes asking more questions and conducting a more thorough physical exam or spend 2 minutes ordering lab tests. A physician's time is more valuable than the costs of common lab tests, there are no disincentives to ordering tests, and there is a waiting room filling up with more patients. Thus, almost all physicians order the lab tests. This type of overutilization is understandable and economically sound.

    2. Desire for diagnostic certainty. Physicians use the excuse of malpractice suits to cover up their craving for diagnostic certainty. A physician may be 85% certain about a diagnosis for a noncritical condition, and instead of assuming the diagnosis is correct and giving a trial of therapy, he orders expensive "esoteric" lab tests, magnetic resonance imaging scans, PET scans, and/or endoscopic studies. Physicians need 99.9% certainty for cancer and a few other conditions, but not for most medical problems. The extra testing adds huge costs, delays diagnoses, and leaves patients untreated for longer times. This type of overutilization is bad medicine and economically unsound.

    3. Profit. Some physicians own laboratories (individually or jointly with other physicians). Lab testing can be very profitable, especially when you cut corners as most physician-owned laboratories do. Physicians who own labs order more lab tests than is normal for a given problem. They also order tests that are done in their own labs even when different tests (available from non-owned labs) are more appropriate. This type of overutilization is bad medicine, economically unsound, and unethical. Fortunately, the prevalence of this type of overutilization is much lower today than it was 15 years ago. (That was the only good effect of the increased federal regulation and oversight of clinical labs that began in 1992. Naturally, physician groups [except for pathologists] lobbied for exemptions. They didn't get them.)

    If we want to decrease overutilization of lab tests and imaging studies, we need to change the ways that physicians are compensated. Physicians who spend more time with their patients and order fewer diagnostic procedures sacrifice earnings. Physicians who research a patient's problem, use computer diagnostic aids, or informally discuss a patient with a colleague get no reimbursement for their time. In contrast, looking at a stomach wall with an endoscope for 10-15 minutes puts $600 into a gastroenterologist's wallet.

  • http://stopthebreathing.blogtownhall.com astonerii

    dullgeek:

    I call up the provider, tell him what I want, what I expect and that I am going to call several other places to get quotes. They usually respond within 48 hours. This is obviously for non emergency care.

    Important points:
    call them, do not go to office unless it is a complicated issue.
    Be specific about what you want and expect.
    Your paying in cash.
    You are going to shop around for the best price.

  • Dr. T

    @Steven: The penalties we uninsured folks face are due to Medicare. When Medicare first began in the late 1960s, the bureaucrats decided that physician, hospital, radiology, and lab reimbursements would be 75-80% of the "usual and customary" charges. This was amazingly stupid even for government bureaucrats. Naturally, all health care entities cranked up their "usual and customary" charges. Some private insurance companies also used percentage-of-usual-charges reimbursement schemes, so health care entities had even more reason to increase charges. Now, because of federal laws, health care providers** cannot offer discounts to individuals paying for their own care. So if you are uninsured or if you only have a catastrophic coverage policy, you pay 50-150% more for office visits and hospitalizations and 100-800% more for lab tests and imaging studies.

    **The few health care providers who do not see any Medicare or Medicaid patients can charge the uninsured whatever they wish.]

  • http://evilredscandi.blogspot.com Evil Red Scandi

    Another tip to people who pay cash - if you're spending a lot of money on something and you live in a liberal state, check the prices in a more "red" state. Often times you can save 30% - 40%. We recently had some dental work done for about $10,000 by a top-notch dentist in Utah that would have cost us about $16,000 to have done by a decent but mediocre dentist in California (yes, there was a lot of it). Well worth the trip and extra hassle.

  • Gil

    The problem with the issue of "free" health care is the "what if a poor person requires very expensive treatment to live?" If health care is not a right then the poor person may at least see if a hospice will at least keep him as pain-free as possible until death (but even that's not a right). It's not the same argument as "there's a free(-ish) market in food and no one starves" because no one will ever need expensive food to live. A couple cans of stew a day will keep a person alive. Maybe a lot of Libertarians feel too squeamish to say so it's because leads to them being branded as "heartless jerks" or something.

  • http://howmuchcaniborrowforamortgage.org.uk How Much Can I Borrow for a Mortgage

    The problem with issue of free health care is the what if a poor person requires very expensive treatment to live.
    ...........
    Nic

  • Uncle Bill

    Well... I have mixed feelings about this. I recently had a medical problem, for which my doctor could not find a cause. Finally, he said, "This is a real long-shot, but there is one more test I would like to run. It will probably be nothing, but I think it is worth a try." In the test, they found multiple blood clots in both lungs. They literally would not let me stand up in the imaging center after they got the results, called an ambulance, and had me taken straight to the emergency room. The emergency room doctor said, "Gee,you're really lucky. A lot of folks who have this just drop over dead." (Great bedside manner, huh?)

    So, if the doc had said to me: "This is a real long shot, and it will cost you several hundred dollars," I don't know if I would have had it done. But in retrospect, it probably saved my life.

  • DaveK

    Yes, the differences in cost can be pretty amazing...

    A few months ago I suffered a partially blocked central retinal vein... definitely not a good thing to happen, and a condition for which there have been no recognized treatments until fairly recently (and the recognized treatments -for the most part- control complications of the condition while it runs its course). Lots of running around and quick referrals, ending up at a specialist ophthalmologist and start of treatment. That treatment is ongoing, and seems to have been successful.

    But in the process I had a big lesson in treatment costs... First, that I could get a discount of 50% (no, I didn't leave out a decimal) by paying at the time of treatment, instead of having them bill my insurance company and me paying the rest (with a high-deductible it was the entire bill) later. Second, the drug of choice was really expensive, at over $2,000 per injection. After doing internet research, then having a talk with another good ophthalmologist in the same field, I found that there was another very similar drug that had resulted in nearly identical outcomes for treatment, but which costs something like 1/40 the cost of the initially recommended drug. We switched to that less expensive drug and things seem to be working out.

    Bottom line is that there really are savings to be had in medical treatment, and you don't necessarily have to sacrifice the quality of care for that savings. If I'd had a low-deductible policy, I doubt that I would have questioned the initial treatment recommendations.

  • Gil

    Why not HMCIBfaM?

  • LoneSnark

    To continue the story, dentists operate in a free market, doctors do not. At my dentists office, x-rays and other tests are free, it is the procedures that have a clear price (I was shocked how much work my dentist does for free). If doctors worked like dentists, I suspect they too would find a way to do tests for as close to nothing as they can.

    Although, it is the case that dentists are more likely to capture the paid work from free tests which find underlying problems, not so when your doctor calls an ambulance for you.

  • http://stopthebreathing.blogtownhall.com astonerii

    "So, if the doc had said to me: “This is a real long shot, and it will cost you several hundred dollars,” I don’t know if I would have had it done. But in retrospect, it probably saved my life.
    March 5, 2011, 9:10 am"

    Exactly, it is a long shot. How much of your own money is it worth for you to live? That is exactly what your life is worth. Now, if you think your life is worth more than what you have in your bank account, then you buy insurance, which is risk based, and you pay according to your risk to the insurer of loss. Along with this risk based assessment that determines how much you pay for health care they will review your past medical decisions as well as the coverages you ask for. If you have always decided to have every test imaginable every chance you could, and ask that they are covered in your policy, your rate will go up, likely significantly, again, how much of your own personal money are you willing to pay to insure your health to the degree you want?

    What Anthony is talking about here is who should be paying? Should your health care premiums be hidden in the non disclosed part of your benefits package from work, while being subsidized through tax free status? Should it be hidden from you in the general funding of government across all levels? Should it be coming from your own pocket, in the form of savings, health savings accounts or personally purchased insurance?

  • Uncle Bill

    Should your health care premiums be hidden in the non disclosed part of your benefits package from work, while being subsidized through tax free status?

    Good question. In my case, though, it was not hidden... my company sent me a "total compensation" report every year, showing exactly how much they had paid for my health insurance (and all my other benefits). That is, they made sure that I knew exactly what the dollar value was of the benefits I was receiving.

    For 30+ years, they paid out much, much more than I ever consumed in the form of health care. Still, I highly valued it, and I worked hard to remain the kind of valued employee they would deign to keep on the rolls. I never expected to ever use up all the premiums we paid, but I wanted to the security of knowing the care was there if I ever needed it, and it would not put me in the poor house. Suddenly, in the last couple of years, my health care costs have ballooned, and the opposite has happened - my benefits have greatly exceeded my premiums. I worked hard to get to the point that I did not have to worry how much a test like this would cost, in the unlikely event that I ever needed it.

  • http://stopthebreathing.blogtownhall.com astonerii

    I worked hard to get to the point that I did not have to worry how much a test like this would cost, in the unlikely event that I ever needed it.
    March 6, 2011, 8:42 pm

    Sounds great. At least you know what your missing in your paycheck. Most people do not, I certainly never get updates.

  • CT_Yankee

    Lets see how fast Obama is to claim ownership of this CHANGE to the cost of medical care:

    Preemie birth preventive spikes from $10 to $1,500

    That's because the drug, a form of progesterone given as a weekly shot, has been made cheaply for years, mixed in special pharmacies that custom-compound treatments that are not federally approved.

    But recently, KV Pharmaceutical of suburban St.Louis won government approval to exclusively sell the drug, known as Makena (Mah-KEE'-Nah). The March of Dimes and many obstetricians supported that because it means quality will be more consistent and it will be easier to get.

    None of them anticipated the dramatic price hike, though — especially since most of the cost for development and research was shouldered by others in the past.

    "That's a huge increase for something that can't be costing them that much to make".

    http://news.yahoo.com/s/ap/20110310/ap_on_he_me/us_med_premature_birth_drug