One of the most interesting articles I have read on the health care cost issue was this one in the New Yorker that I read over the summer.
Overall, I thought it a pretty interesting insight into the issue. But that’s not what I’m concerned about here. What I thought was interesting about it was what an example it provides about the difficulty that people often have in understanding how markets work. The author, Atul Gawande, is a doctor, not an economist. At the end of the article he turns to proposals for reform. And he has this discussion with a doctor:
The third class of health-cost proposals, I explained, would push people to use medical savings accounts and hold high-deductible insurance policies: “They’d have more of their own money on the line, and that’d drive them to bargain with you and other surgeons, right?”
He gave me a quizzical look. We tried to imagine the scenario. A cardiologist tells an elderly woman that she needs bypass surgery and has Dr. Dyke see her. They discuss the blockages in her heart, the operation, the risks. And now they’re supposed to haggle over the price as if he were selling a rug in a souk? “I’ll do three vessels for thirty thousand, but if you take four I’ll throw in an extra night in the I.C.U.”—that sort of thing? Dyke shook his head. “Who comes up with this stuff?” he asked. “Any plan that relies on the sheep to negotiate with the wolves is doomed to failure.”
But that’s not actually how modern markets work. They work through an invisible hand process of supply and demand, not through a process of negotiation as “if he were selling a rug in a souk.” What one would expect would be that different doctors would post different prices for services and consumers would make different price-quality tradeoffs. Over time, in competing for business, doctors would adjust their prices to attract or reject consumers at the market. It is the process of millions of consumers making individual decisions that sets the prices, not consumers negotiating over prices (except in some cases). When I walk into Target I don’t expect to be able to bargain, but I do expect to get a good price.
One thing that is peculiar about the author’s inability to visualize this is that this is exactly how the market for comparable services works, such as for lawyers. Consumers every day choose a price-quality tradeoff in legal services. If I want a lawyer to help me prepare my will, I don’t call up Skadden and ask to negotiate my fee. I compare a couple of lawyers and then choose the price-quality package that is best for me.
In fact, it is my understanding that this is exactly how it works in the various areas of health care that are not covered by insurance–Lasik surgery, fertility treatments, and I’m sure there are others. Dentistry and veterinary care also have posted prices and consumers can shop among different suppliers of medical services. Perhaps there is some reason why consumers can’t shop for medical services (especially elective services) the same way they shop for lawyers and for, well, a bunch of other medical services already. But Mr. Gawande’s flawed imagination about how such a market might work is not one of them.
bob says:
That invisible hand just works wonders, doesn’t it?
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November 17, 2009, 5:32 pmEngineer says:
Gawande knows that his description is a just a cartoon.
But his editors at the New Yorker need to stay on good terms with the White House.
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November 17, 2009, 5:38 pmPatrick Bateman says:
Todd, your insight is 100% correct. That said, the invisible hand is less strong in the medical market vs. the lawyer market, because stricter limits on how many new doctors we can have each year gives doctors a stronger bargaining position against purchasers of their services.
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November 17, 2009, 5:44 pmmikeyes says:
Possibly because it is much more complex than that. This is not a free market in the classical sense.
If that elderly woman manages to make a deal with the surgeon, she still has to deal with the hospital, the other doctors involved, and the federal government since the rules for Medicare (in her case) don’t allow the doctors to make a special price just for her. If they do, then they may run into a problem with the rules that govern how doctors and hospitals can be reimbursed if they take federal money from any patient.
Physicians used to be able to do pro bono medicine or barter but that can’t be done any more. If a group of ill patients got together and threatened a boycott, perhaps the doctors could change their pricing structures, but they would have to do it individually or be cited for price fixing.
Also, the vast majority of physicians and other health workers are not self employed. They work for an entity either a group or a hospital, etc. Special pricing rules apply there too including lowest price guarantees to the many health insurance companies that they contract with. Any cut in price would have to be passed on to a large number of players. It isn’t worth making a deal in the case cited.
Besides, in a very cynical way, the patient is not in a very good position to bargain if they are going to die.
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November 17, 2009, 5:48 pmDeraj says:
Your analysis fails to take into account that many healthcare decisions are life and death decisions. Yes, when considering where to refill my allergy prescription an MSA allows for me to choose between pharmacies based on which is cheaper. But, what does the market do in an emergency situation when a patient is unconscious, or what about remote and rural areas where there isn’t a choice between providers. The truth is, the analogy is more apt than you realize.
For the record, I agree that hospitals, physicians and other healthcare providers should publish their fee structures and that the market will regulate those fee structures as they become known, but the market will not resolve the issue of high healthcare costs simply because the consumers will be better educated.
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November 17, 2009, 5:51 pmDJ says:
Actually, if you look at the market for Lasik you’ll see exactly how a market system can work in health care. Doctors and insurance companies still negotiate deals, but since the patient/customer has to pay the majority of the cost, price information is readily available. The customer makes a determination on quality vs. price and the market drives down the cost while continuing to allow innovation.
Sure would be nice if our entire health care system worked like that.
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November 17, 2009, 5:52 pmrichard says:
Perhaps there is some reason why consumers can’t shop for medical services (especially elective services) the same way they shop for lawyers and for, well, a bunch of other medical services already.
Heres the reason and why the plastic surgery analogy is inapplicable: When I go to a plastic surgeon, its because I want a smoother face or bigger boobs or a smaller nose or whatever. I know what I want and I can pick and choose between rates and services. When I go to my doctor (other than yearly check ups), I don’t know what I want. I have a symptom and I want the doc to diagnose it, tell me what’s wrong and then cure me. I don’t want him to tell me I have a certain problem and then go to the doctor marketplace to see who will offer me the best rates and services for my condition (assuming of course that I have been properly diagnosed). I don’t know about you but I don’t ever go to the doctor for elective services where I know what I want-I go because I have a problem and want the problem cured and that type of situation is not amenable to the free market-consumer shopping scenario you set out.
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November 17, 2009, 6:02 pmOpher Banarie says:
DJs example of Lasik also applies for many procedures deemed ‘cosmetic’ and/or not covered by insurance (such as breast augmentation, face lifts, liposuction, etc.) where the fee structure is available in advance. While you might not shop around on a Saturday afternoon for someone to set your broken leg, you may already have researched local emergency options in anticipation of such a need.
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November 17, 2009, 6:05 pmTheBadness says:
If I want a lawyer to help me prepare my will, I don’t call up Skadden and ask to negotiate my fee. I compare a couple of lawyers and then choose the price-quality package that is best for me.
And if you set up an M&A deal or bond issue, you retain counsel from a firm on your panel with whom you have a prior arrangement regarding hourlies and miscellaneous expenses.
Which is why most folks would prefer let insurance companies do the heavy lifting for major, do-or-die transactions like a bypass. It’s hard to p/q a complex custom product, all the more so when there’s an ironclad no returns policy. Bear in mind that well-heeled people with complex estates often do call Skadden (and their ilk) to take care of a will, because the yellowpages folks don’t have the necessary experience or capabilities.
Moreover, emergency medicine is not a patient-initiated transaction: not all medical bills involve any patient choice at all. And, as a previous poster notes, the patient/doctor transaction is one of many involved in anything more involved than an office visit.
Now, for electives and most preventive care, I can see the merit of putting more ‘skin in the game,’ so to speak.
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November 17, 2009, 6:05 pmChrisIowa says:
The force of the market would be felt for those services that would be paid largely from the deductible. High cost services such as the bypass surgeries that would still be covered by insurance would not much be affected by the market. The fees for initial and followup consultations that would be under a high dollar deductible would be affected by the market. The initial consultation would be affected because many patients’ deductibles have not yet been met at the time of the consultation. The follow-ups would be affected since some of those would extend into another year’s deductible.
The market will not work in any area where the services are demanded by one party, provided by a second, and paid for by a third.
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November 17, 2009, 6:06 pmJay says:
But LASIK is also different for another reason–it’s an entirely elective, low-risk, surgery. No one is under any pressure to make a snap decision to undergo LASIK, and, while I haven’t had it done, it seems like it would also be fairly easy to measure a LASIK surgeon’s competence/skill–the surgery either works or it doesn’t; a lot of that doctor’s former patients either report suffering from side effects, or they don’t.
How does anyone make similar comparisons of, say, oncologists or cardiologists? People who need their services are by definition already sick, and it may actually be that the best doctors tend to get the very sickest patients referred to them, giving them higher mortality rates. There are, no doubt, ways in which market based reforms could wisely be incorporated into the health care system, but this kind of glib invisible hand-waving doesn’t do them much justice.
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November 17, 2009, 6:08 pmMichael Risch says:
While I generally agree that a market would work, I think there are way too many transactions costs:
1. Urgency limits choice
2. Asymmetric information limits choice — is there really going to be a price/quality consideration? I doubt it.
3. Bounded rationality limits choice
4. Complex contracting as noted above (hospital, surgeon, anesthesiologist) limits choice through high transactions costs
Limited choices means that health care providers are not price takers and have at least a limited natural monopoly due to the high investment it takes to set up shop. This is the whole reason for having insurance companies negotiate fixed prices for large groups — it overcomes many of the transactions costs listed above.
The reason the market works better for elective procedures like Lasik is that: a) negotiations are less complex, b) services are provided by many providers in non-hospital settings, and c) there is no urgency, which allows the consumer the time to compare prices.
I am certain that there are areas where such health care provisions could be handled by the market. My sister, for example, is a podiatrist and told me today about how she lost a patient to another doctor who was charging $10 less for routine foot care (turns out the patient was wrong and is in for a surprise — bounded rationality and asymmetric information at work). So maybe the family doctor can work in a market, but heart transplants? I’m not so sure.
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November 17, 2009, 6:08 pmDavid Schwartz says:
Richard: The analogies are not that different. When you do to the doctor, you know exactly what you want — you want him to find out what’s wrong with you and treat it. It’s true, you don’t want to have to shop around once you know what’s wrong (except in unusual cases where treatment is very specialized or expensive) but when you pick the doctor in the first place, you already know that barring those unusual cases, he’s the person you want to treat you.
The situation is much the same with a lawyer. When you go to a lawyer, you know what your problem is roughly, but you have no idea what specific work is going to wind up being needed. You pick a lawyer because you know he does good work, whatever precisely turns out to be needed, and you know what rates he charges per hour or whatever, but not the price you will ultimately pay.
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November 17, 2009, 6:09 pmJust Me says:
I love the self-referential title of this post.
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November 17, 2009, 6:17 pmMicha Elyi says:
mikeyes made some good points. Try this field experiment folks: call the three hospitals that advertise most in your local urban area and ask for the total cash-paying patient’s price (surgeon, anesthesiologist, nurses, operating room — all of it) for correcting an inguinal hernia. This is non-cosmetic, postponable but not exactly elective surgery; wait too long and one could end up in the E.R. getting the surgery and suffer lifetime infirmity (or death).
If your experience is like mine, no one at the hospital will know. You’ll be referred to the office of an appropriate surgeon’s practice and no one there will be able to answer your question either.
I see a market opportunity here for health plan companies and even malpractice insurers to consider. (They have the cost data.)
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November 17, 2009, 6:17 pmPatHMV says:
Of course there are some procedures, emergencies and the like, where any price-shopping is not possible. Does that mean we must treat ALL medical procedures the same way, and foreclose ALL market forces, simply because in some instances there are some problems? That’s silly. If you want to argue that, bring some statistics to show how much of our health care expenses are actually spent on such immediate emergencies.
As ChrisIowa notes, high deductible plans would wind up with significant price competition below a certain threshold, with insurance companies taking greater responsibility to negotiate bulk prices for the more expensive (hence, more likely to be an emergency) procedures.
As for shopping around for bypass surgery, you know what? People do it all the time, and the federal government and private insurance companies have initiatives to promote that. They do it on the basis of quality, but the fact that it can be done indicates that it’s often not the immediate, do-or-die decision being described by some of the commenters. One can go to several websites which rank hospitals, and doctors, by success and complication rates, and other factors. The reason for providing this data is so that consumers can choose to go to a hospital or doctor which they believe, based on the data, to be better for that particular procedure. It’s no conceptual difficulty to provide cost data at the same time, and no reason to believe that consumers wouldn’t act in part on that information. Go to the $5,000 surgeon with the 95% success rate or the $10,000 surgeon with the 96% success rate? How much is that extra 1% chance of success worth to you?
What about routine doctor visits? The current system encourages extra procedures, both defensively (to avoid lawsuits) and proactively (because doctors get paid by the procedure, not the time they spend with you). With a market system, you can say: “doc, are you doing that test because you’re afraid I might sue, or because I really truly need it?”
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November 17, 2009, 6:22 pmSeaDrive says:
I just quoted this because I thought it was worth repeating.
Somewhere in some other thread, someone is saying the insurance companies don’t actually pay for anything, they are just a conduit for money supplied by the purchasers of policies. And in yet another thread, someone is saying that “employer-paid” policies are really paid for by the employees as an alternate form of wages.
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November 17, 2009, 6:24 pmrichard says:
Richard: The analogies are not that different. When you do to the doctor, you know exactly what you want — you want him to find out what’s wrong with you and treat it. It’s true, you don’t want to have to shop around once you know what’s wrong (except in unusual cases where treatment is very specialized or expensive) but when you pick the doctor in the first place, you already know that barring those unusual cases, he’s the person you want to treat you.
The situation is much the same with a lawyer. When you go to a lawyer, you know what your problem is roughly, but you have no idea what specific work is going to wind up being needed. You pick a lawyer because you know he does good work, whatever precisely turns out to be needed, and you know what rates he charges per hour or whatever, but not the price you will ultimately pay
David,I see the difference between the two as vast. With a lawyer, most people have much greater knowledge of what they want than with a doctor and know that if they want a divorce, they will need a different lawyer than if they want a will or someone to represent them in a business dispute. With a doctor, I want to go to my GP and find out what the diagnosis is and whether he can take care of it or whether he needs to refer me to a specialist. At the initial stage of a consultation, I (a fairly bright, knowledgeable guy) usually have no idea of what my symptoms portend.
Moreover, I, like almost everybody else, has medical insurance so my choice of a doctor is circumscribed to docs on the approved list. Also, I’m not paying full fare, only the deductible so if the differnce between doctors is, because of the deductible,between a $30 charge and a $40 charge, its not going to be worth my time and effort to comparison shop. The comparison to Lasix shopping is just not very persuasive nor, IMHO, is the one to shopping for a lawyer.
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November 17, 2009, 6:37 pmgab says:
“What I thought was interesting about it was what an example it provides about the difficulty that people often have in understanding how markets work.”
And you do Todd?
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November 17, 2009, 6:37 pmSteve says:
Actually, the market for legal services is ridiculously dysfunctional, so the analogy is pretty apt.
People aren’t able to effectively shop around for medical or legal services because the information available is highly imperfect, there is little or no transparency, they have no ability to weigh risk versus cost, and the hiring decision is often made under exigent circumstances.
All of this is virtually indisputable in the vast majority of cases. Okay, says Prof. Zywicki, maybe all those points are valid, but the invisible hand will compensate for all of them just the same! So even though patients have no rational way of concluding that doctor A performs successful heart surgeries 10% more often than doctor B and should therefore be able to command a 20% higher price, the market will make it happen! In the long run, the price of their services will magically gravitate to exactly the level where it would be in an ideal market with perfect information.
To me, this is nothing more than free-market ideology masquerading as an argument. It’s utterly faith-based. But the thing is, people who think this way don’t realize they’re subscribing to an ideology, they think they’re privy to rock-solid economic Truth. So there’s not likely to be much persuasion going on.
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November 17, 2009, 6:42 pmB.D. says:
It’s pretty simple, really.
If A is a buyer and B is a seller . . . and C is the one who pays for A’s purchases . . . then A and B will each have an incentive to fleece C.
In the healthcare context, our tax code encourages something approaching the development of this kind of perverse economic relationship. Comprehensive, third party insurance—the kind employers provide as a tax-free perk in addition to salary—basically divorces the insured from the direct costs of their healthcare expenses and frees doctors from the pesky demands of a cost-conscious consumer. If someone else is paying for most of it, why NOT order unnecessary and expensive tests? Heck, the doctor even has the added incentive of ordering unnecessary and expensive tests so as to protect himself in the event of a malpractice lawsuit.
In a properly functioning healthcare market, where consumers directly pay for their own insurance and are thus more responsible parties to the transaction, doctors will have to be more sensitive to competitive market forces. And that does not mean the doctor and the patient have to haggle over costs like pikeys at a flea market.
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November 17, 2009, 6:42 pmDavid Schwartz says:
I don’t think that’s really all that true. You know he’s going to listen to your heart, maybe take some blood, recommend further procedures. You know within a reasonable boundary what he’s going to do. And you know there’s going to be an opportunity for discussion before he goes beyond those bounds. Perhaps car repair is a better analogy.
You pick a doctor much like you pick a car repair shop. You have to trust both that he’s going to use good judgment to decide what needs to be done, do it well, and charge you a reasonable fee. But you generally don’t have full knowledge of what you’ll need when you shop for the service, generally only because it’s inconvenient to do things that way, though nothing stops you.
Doctors know you have this problem, so the doctors that solve it best will have the best shot at your business.
Right, but these two problems cancel each other out. Your insurance company is not going to allow you to pick the doctor that overcharges them. They will do the cost-based filtering and you will do the service-based filtering. This makes your job easier, not harder, and markets more efficient, not less.
Perhaps. However, if you look at Lasix shopping, food shopping, car repair shopping, lawyer shopping, shopping for home repair services after an event covered by inusrance, and all the other kinds of shopping, it should be clear that while doctor shopping is not precisely analogous to anything else, it’s surrounded on all sides by services with functioning markets.
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November 17, 2009, 6:47 pmBill Harshaw says:
I don’t think your example works well, at least not for non-lawyers. I need my will revised (my former lawyer died 10 years ago) but I’ve no real idea of how to shop for a lawyer, how to judge a lawyer’s quality, or even to find out what a lawyer might charge for my legal work. Given that lawyers have their own cartel, the ignorance of consumers like me means, I think, the market doesn’t work well for legal services for individuals.
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November 17, 2009, 6:48 pmDavid Welker says:
Todd Zywicki:
You do know that the “invisible hand” is a metaphor, right? Stop referring to it as if it were reality.
On a related note, Adam Smith was not a libertarian. He also knew their were limitations to his own metaphor.
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November 17, 2009, 6:49 pmOff Kilter says:
“People who need their services are by definition already sick, and it may actually be that the best doctors tend to get the very sickest patients referred to them, giving them higher mortality rates.”
People who need the services of a criminal defense lawyer are by definition already arrested, and it may actually be that the best lawyers tend to get the hardest to defend clients referred to them, giving them a higher loss rate in court.
And yet no one says that criminal defense attorneys are not in a competitive environment, cannot bill the client directly, need to have the government pay for the services of all their clients, cannot develop an understandable and relatively transparent billing system.
Granted, both doctors and lawyers are cartel members, so all the benefits of free market competition are not present, but these alleged rationales for why doctors can’t have a more market-oriented relationship with their patients are silly.
As a doctor myself, let me say that the large majority of patient complaints when they see a doctor are NOT life and death matters. A large percentage of complaints resolve over time on their own, and would do so without seeing the doctor first. Meanwhile, people that have been arrested on felony charges are rather desperate and cannot easily shop around. So it would seem easy to have a more market-oriented medical system since we have one for lawyers.
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November 17, 2009, 6:52 pmBama 1L says:
In my experience it is simply impossible to learn even the most basic price information before the service is performed and the bill is received. In the past year my family has had an interval (that is, non-emergent) appendectomy and has planned for the birth of a child. We had options for where to receive each service. Insurance would pay a percentage but we would pay some ourselves. Since we’d rather, say, 20% of $10,000 than 20% of $15,000, we tried to make price part of the calculations and asked at the hospitals. They were happy to talk about their facilities, show us around, etc. but they referred questions about money to billing, which flatly refused to make any predictions.
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November 17, 2009, 6:54 pmShelbyC says:
You do know that Todd was using it as a metaphor, right?
And maybe you were gonna point out some of those limitations and explain how they apply here?
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November 17, 2009, 7:03 pmLN says:
Have you guys figured out yet why libertarians don’t get elected to high office?
I mean, the invisible hand guides us all to optimal outcomes. If politicians make decisions we don’t like, popular sentiment turns against them and they lose elections to political entrepreneurs who emerge out of the woodwork to make life better for the people. If politicians make decisions that we do like, then they are properly rewarded with re-election.
Eventually, we get a government that really works for the people. Anyone who disagrees is an ignoramous who doesn’t understand the metaphor of the invisible hand.
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November 17, 2009, 7:21 pmOff Kilter says:
Bama1L: You realize, of course, that your difficulty in finding transparent pricing is not evidence the market can’t work, but evidence the market doesn’t yet exist. That kind of pricing would be quickly made available if more people paid out of pocket and hospitals felt compelled to compete on a price/quality mix.
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November 17, 2009, 7:29 pmOff Kilter says:
What you don’t understand, LN, is that the metaphor for the political process is not the invisible hand, but the mailed fist.
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November 17, 2009, 7:31 pmLN says:
Why don’t elections create a “market” in politics, Off Kilter? As far as I know the barriers to entry are not that high. Complaining about the two-party system is like complaining about giant health insurance companies. Work harder to compete.
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November 17, 2009, 7:38 pmDerHahn says:
I think the bigger failure of understanding (for everyone, not just doctors) is confusing our current system of ‘pre-paid medical expenses’ with ‘insurance’.
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November 17, 2009, 7:41 pmTom says:
OK, lemme get this straight. According to the libertarian view, there’s a huge difference between (a) haggling with the rug merchant in a souk over price and (b) instead going to every rug merchant in the souk and and first trying to find out if they have comparable rugs, then determining what their prices are, and finally trying to determine whether the differences in comparability and price make another rug the better choice. Super. And if the shopper happens to be sick and it’s incredibly difficult to “shop around,” then you would tell them, “Talk to the invisible hand.” Great.
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November 17, 2009, 7:41 pmbyomtov says:
maybe you were gonna point out some of those limitations and explain how they apply here?
I see lots of limitations. There are huge information problems, for one thing. And negotiating and getting prices is not at all easy.
Suppose you need some non-emergency surgery. It has to be done, but you have time to shop around. You have to pick a surgeon, a hospital, an anesthesiologist, at a minimum. And what do they charge? Gee, maybe you have to go see each candidate before he can give you an estimate. Surely surgeons, at least, would want to know more than “I need operation X” before quoting a price. It’s not a quart of milk, and it’s not a will either. Those visits will take some time, and cost something, won’t they?
And what if there are complications and you have to stay in the hospital longer, or have unexpected followup care? The idea that you can just get a price and decide is foolish. All the more so as it’s really hard to judge quality.
In other words, there are a tremendous number of ways in which a market for medical services differs from the simple model that guides the market-worshippers.
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November 17, 2009, 7:55 pmtrotsky says:
Just as we rely on Target (and Walmart and Costco and cetera) to do our haggling with thousands of manufacturers on our behalf, we rely on Blue Shield, Humana, etc., to haggle with doctors and hospitals to get the best price for us.
Ask any M.D. They drive a very hard bargain.
So maybe the market is working
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November 17, 2009, 7:56 pmShelbyC says:
There’s been some great writing on this site about the payoffs of aquiring politcal information that explain why the invisible hand metaphor doesn’t apply to the political system.
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November 17, 2009, 7:59 pmShelbyC says:
OK, so why is the politician-worshiper’s model better?
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November 17, 2009, 8:02 pmDan Weber says:
I must say that it’s great to see a thread where so many commenters have rejected the extreme on both sides.
Americans have a devil of a time comparing medical providers. They can ask their friends “hey, is X a good doctor?” and they’ll hear “well, he did a lot of procedures on me.” Which isn’t a good basis for medical coverage.
Doctors don’t necessarily have the incentive to treat me efficiently, either. They have an incentive to make me happy, which might involve doing more stuff to me but that’s very different from improving my health.
See also the tax incentives for employer-provided benefits.
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November 17, 2009, 8:06 pmLN says:
And there’s been some great writing elsewhere about the limitations of the invisible hand model when it comes to health care. This “oh it’s so complicated” caveat when it comes to the political system is especially unconvincing coming from people who are eager to believe that markets work fine everywhere else, even if they know nothing about the details.
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November 17, 2009, 8:11 pmreadery says:
How many doctors do you expect to be able to price-compare between the time your heart attack starts and the time you arrive at your selected optimum value ICU?
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November 17, 2009, 8:18 pmMichael Risch says:
On a side note, law firms negotiate hourly rates all the time.
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November 17, 2009, 8:25 pmShelbyC says:
Well, I’m not sure which model has more limitations. It’s sure a lot more worthwhile to research which doctors give the most cost-effective care, when I get the ability to choose my doctor than to research which politicians support which system that may or may not provide me with doctors that give the most cost effective care when I have only one gazillionth of a say in which politicians get chosen. It seems that all the limitations of the invisible hand model that people have pointed out are way worse with a government controlled model.
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November 17, 2009, 8:30 pmCJColucci says:
If I want a lawyer to help me prepare my will, I don’t call up Skadden and ask to negotiate my fee. I compare a couple of lawyers and then choose the price-quality package that is best for me.
That is almost certainly not true. I’m a lawyer without a will, but with a modest estate and, aside from my wife and dogs, no natural objects of my bounty. All the T&E lawyers I know are high-end, high-price sorts who wouldn’t (and shouldn’t) take me on as a client, though one of them has given me some names. Unable myself to judge the quality of T&E work, I have no illusion that I’ll be able to pick “the price-quality package that is best for me.” The best I can hope for is that my high-end acquaintance can judge the quality of lower-end practitioners. Given my relatively simple testamentary needs, probably any reasonably competent person can do the job and, with any luck, I won’t get ripped off if I’m referred by Big Shot T&E Lawyer. That’s probably good enough, and will satisfy me, but it’s hardly market magic at work optimizing outcomes.
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November 17, 2009, 8:31 pmShelbyC says:
But isn’t the OP making the point that you don’t have to do such comparison, because of the cumulative effects of many other people sharing information?
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November 17, 2009, 8:31 pmMark Field says:
Let’s get real about legal fees too. When a client comes to me, whether as a plaintiff or as a defendant, I can tell him/her what my hourly rate is, but I have no way to know what the eventual total will be — too many factors are outside my control. In no sense is this a “market” and neither are many medical services (some are, just as some legal services are).
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November 17, 2009, 8:41 pmBama 1L says:
I agree that the market doesn’t exist; I disagree that the information “would be quickly made available” if more people paid out of pocket. That is not an inevitable result. Hospitals may in fact be both very poor at guessing what their bills will look like and unwilling to give estimates.
Now do you think more people paying out of pocket would actually increase the incentive to provide information? How? If no one will tell your their prices, or if those who do turn out to be wrong (“We thought your appendectomy would cost $5,000, but actually it’s $25,000 because of some complication we warned you might occur. Sorry, and please set up a payment plan immediately.”), then what is the incentive?
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November 17, 2009, 8:42 pmShelbyC says:
Of course it’s a market. That’s why you don’t tell him that your hourly rate is a gazillion dollars an hour.
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November 17, 2009, 8:45 pmLN says:
And of course there’s a market in politics. That’s why successful national politicians tend to be fairly “moderate.”
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November 17, 2009, 8:53 pmPriest says:
I would be hesitant to point to the car repair industry as a model for medical care, seeing as that business has the largest amount of fraud perpetrated on its customers.
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November 17, 2009, 9:09 pmShelbyC says:
Certainly, or something similar. You could quibble over whether or not its truely a market because it doesn’t exchange resources, etc. But I would question whether or not it processes information and allows people to achieve their desired outcome anywhere near as well as an actual market.
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November 17, 2009, 9:16 pmMike S. says:
There are lots of markets where it is hard to know exactly what services may be required in a given situation. And many where it is hard for the nonexpert to judge quality. But I know of no market where it is as hard to find prices as most medical procedures. This is not inherent to medicine. Before insurance became ubiquitous and when copays were typically 20% (say, in the early 1960’s) you could get pries from hospitals and physicians. And the hospital bill included the staff physicians like the anesthesia department. Nor were there separate charges for tissues at $50.00 per box. When patients routinely saw hospital bills, no one would have dared. The pricing opacity is a side effect of the move toward more comprehensive and widespread insurance (particularly Medicare.) The whole system is designed to exploit insurance companies.
Some years ago one of my very young children needed to be home on NG tube feedings. The Hospital set us up with a company that supposedly had a contract with our insurance carrier; they didn’t, and we were being billed at $2000/month (1987 dollars.) An hour of phoning medical supply firms showed that the unbundled retail price for these services was about $400/mo. (A friend recently tried pricing similar services and couldn’t; it has gotten far more opaque since then.) I called the company and canceled. They asked why, and I told them; they said if they had known we were paying out of pocket, they would have charged us the same $400.
I tried interesting the AG in an insurance fraud claim, but they weren’t biting; it is legal to rip off insurance companies as long as you are up front about it. That is, as long as you tell them the price, it is their business to check the reasonableness. In an employer dominated market, it doesn’t see worth their while.
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November 17, 2009, 9:17 pmMark Field says:
I agree that there’s a market for hourly rate. But that’s not what a client wants to know. S/he wants to know the total cost, and that’s exactly what no firm can promise (see Bama1L’s 8:42 post). No price, no market.
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November 17, 2009, 9:21 pmShelbyC says:
I’m not sure why you think knowing the price up front is so important. Purchasers almost never have perfect, or sometimes even very good, information about the nature and quality of the services they purchase. What makes a market is that the consumer has some idea of the expected cost to benefit ratio and is able to make trade-offs.
For example, I don’t know how much rice I’m going to eat next week. But I still would prefer ot buy rice at $.90 a pound than $1.
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November 17, 2009, 9:33 pmroguestage says:
I think the argument between ‘it’s a market’ and ‘it’s not a market’ misses the point. Of course health care in the U.S. is a market, as is health insurance. The main problem is that it’s an extremely inefficient market.
As many have noted above, demand varies from entirely elastic (‘I think I’ll treat myself to Lasik for my 30th birthday’) to entirely inelastic (“Code Blue!”), with just about every variable in between. The most expensive products — things like cancer treatment or emergency care — are necessary at times that are difficult or impossible to anticipate. Usually the demand for them is inelastic: you get treated, or you die. The extent of care needed is likewise difficult or impossible to anticipate, since even the simplest surgery can lead to dire complications.
Moreover, care for serious illnesses or injuries is often a long and painful process. For those who are not independently wealthy or who don’t have a large stash of emergency cash — including, I’d wager, the majority of Americans — any treatment that forces you to take time off from your job is that much more difficult to pay for, regardless of how necessary it is. And half-assed medical care isn’t like buying the cheap OJ at a bodega; it can have lasting, even permanent consequences for your health.
Couple this with the almost total lack of information on prices and costs and you have a recipe for a market that functions terribly, if at all.
Here’s the thing. I’m betting that the average American doesn’t know all that much about how markets work. I exhausted my extremely limited knowledge of economics by being able to recognize that scarce information and variable demand make a market inefficient, and I probably know more about economics than most, having taken a couple of college courses in it. But it’s easy for people to tell that the current market for health care isn’t giving them the system they want. The only thing that’s doing really well in this situation is the insurance industry’s bottom line. If having a robust insurance industry is the goal, that’s fine. If having a healthy populace with access to medical care is the goal, not so much.
Hence, the demand for reforms at the political level. Which is probably why a recent poll showed that
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November 17, 2009, 9:35 pmjhubme_24 says:
What in the world are any of you talking about?? By what standard are you judging the “market-based” approach (or any other approach)??
For example: is the standard population average life expectancy? If so, you should can your health care reform nonsense (on either side of the issue) and just spend money making and enforcing laws banning alcohol, tobacco, trans fats, any foods containing Advanced Glycation End products and limit caloric intake to either 1300 or 2000 kilo-calories per day (depending on whether you think caloric reduction is effective in humans).
Maybe that’s not the standard that you have (and I doubt it is the standard anyone here is discussing), but the point is: state the standard and argue from there. Not this random drivel about the downsides of each system. There is a downside to every human action (at the minimum, you forgo the benefits from other actions that could have been taken instead). I promise you that people will die no matter what policies are enacted. So, again, name the standard; and name it first.
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November 17, 2009, 9:47 pmShelbyC says:
Of course, markets never give people everything that they want, the whole point is to enable them to manage trade-offs. And a public option (or at least a publicly funded option) is the most inelastic market there is, and with more limited information.
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November 17, 2009, 9:47 pmbyomtov says:
ShelbyC,
OK, so why is the politician-worshiper’s model better?
False dichotomy. Neither model is perfect, or even close. We need to work out the best (or a much better) system using a combination of market and government. To proclaim that the market will solve it all is just as foolish as proclaiming that the government can solve it all. Ideology interferes with problem-solving.
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November 17, 2009, 10:03 pmDove says:
The objection that one cannot price-shop when ordering a time-critical procedure is naive. We have emergencies in other markets and are able to price-shop. Plumbers, tow trucks, overnight couriers. The combination of posted prices, established reputations, and a robust review and rating system makes relatively well-informed snap decisions possible, even in emergencies.
The objection that the opacity of the market puts customers at a disadvantage is naive, too. In markets that are complex and opaque, we hire advocates to represent us: general contractors, real estate agents. And in a lot of markets, you can find an army of auditors and reviewers and appraisers and consumer advocates. There’s no reason one couldn’t hire a paid personal advocate, researcher, adviser and auditor when dealing with the medical system. I think in sufficiently weighty medical decisions, seeking such advocacy would be routine, much like it is when buying or building a house. To some extent, a good family doctor already does this.
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November 17, 2009, 10:12 pmzuch says:
Prof. Zywicki:
As in “I need that bypass [or those statins], but it’s beyond my means.” So some people go without ... and the doctors/clinics see their business falling off (or falling over), and decide out of venal motives to relent....
You can tell a libertarian ... but you can’t tell them much, sad to say.
Cheers,
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November 17, 2009, 10:16 pmModa says:
No, actually the reason you don’t tell him that your hourly rate is “a gazillion dollars an hour” is because the state bar association requires to you charge a “reasonable fee”. So much for your market.
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November 17, 2009, 10:20 pmroguestage says:
Unless you’re using “inelastic” in a way I’m not familiar with — something entirely possible given my limited knowledge of economics, in which case, I’d love an explanation — I’m not clear on your meaning. A public option would actually give people an additional trade-off. They can choose it instead of private insurance. I’m not sure how an additional choice makes a market more inelastic, or how people would have any more or less limited information about it than about current health insurance plans and health care choices.
I never said that it, or any market, was intended to give people everything that they want. But it’s clear that the current health-care market isn’t giving people enough of what they want, so they’re demanding that the market change.
My original response was to the post generally: thinking that the market should change doesn’t require a sophisticated understanding of markets, it only requires an understanding that the market is not functioning efficiently. Adding competition, here in the form of a public option, is generally understood to increase efficiency, all else equal.
I’m sure there are some that believe the current health care market functions efficiently, and therefore that no reform is needed. But it seems clear that they are in the minority.
As for the particular type of reform, there are libertarian reasons to think it is undesirable to have the government add competition to a market, but that’s a different argument. The post was themed ‘failing to understand how markets work’; my point was that that understanding isn’t necessary to understanding when a market isn’t working.
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November 17, 2009, 10:25 pmroguestage says:
Dove, in all of those examples, the person doing the price shopping is conscious. In many medical emergencies, the person who would ordinarily do the price shopping is unconscious. It’s pretty hard to price shop from cardiac arrest.
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November 17, 2009, 10:28 pmBrian K says:
You pick a doctor much like you pick a car repair shop.
given the average person’s experience with a car repair shop, i don’t know if you want to make this analogy in favor a “freer” market in healthcare.
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November 17, 2009, 10:30 pmDavid Nieporent says:
Of course you don’t, because you’re not paying for it. If you actually had to pay for treatment, instead of having other people do it for you, then you would want to go to the doctor marketplace to see who will offer you the best rates and services for your condition.
Note that people “shop around” all the time; that’s what a second opinion is. They just don’t do so based on price.
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November 17, 2009, 10:33 pmChrisIowa says:
Price shopping as the sole force of the market operating as discussed previously is an error.
For a while I went to one automobile repair shop, but it seemed that it cost $100 to walk in the door and $1200 to walk out. I started going to another shop, that lets me know what needs to be done now, what needs to be done but not now, and charges me a fair price. I tell people about my experiences which, even without comparative price shopping affects the market.
It is the same with medical practitioners. A patient can go to a doctor and will tell others how they were treated and whether the bill was loaded up with procedures that leave the patient wondering what was necessary. Or on the other hand, some one else can go to another doctor that seems to work efficiently and charges fairly. People talk and word gets around.
This is also how the market works.
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November 17, 2009, 10:38 pmMark Field says:
Because every single client I’ve ever had wants to know.
And why wouldn’t they? Anyone who comes in my door can pay me for an hour of my time (even the poorest). But the hourly rate just isn’t very useful unless I know how long it will take. So that’s what they ask.
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November 17, 2009, 10:39 pmRicardo says:
But that’s not actually how modern markets work. They work through an invisible hand process of supply and demand, not through a process of negotiation as “if he were selling a rug in a souk.”
First, markets work that way when they are highly competitive and when both sides have perfect information. Doctors do indeed compete with each other for patients so the first condition may be satisfied approximately. But the second condition is almost never satisfied.
An example: I had a tooth abscess and needed to go to an endodontist to get a root canal on it. Since it was not covered by insurance I asked the doctor how much it would cost and she gave me two prices: the first was if the walls of the tooth turned out to be strong enough to make it a simple procedure and the second was if the walls of the tooth were weaker than expected and she needed to do additional work to strengthen the tooth. She would only know whether or not the tooth was strong after already drilling inside and removing the pulp, though. I would have to simply trust her to be honest when she charged me in the end (she charged me the low price, btw).
I suppose the argument here is that one could shop around at several different doctors, possibly paying high consultation fees at each stop, just to get the doctor’s price list for every possible procedure and contingency. That’s pretty unrealistic. In any case, being a doctor is a relationship business. The entire reason I saw this endodontist in the first place is that she was recommended to me. The idea that medical savings accounts will drive doctors to advertise and compete on price strikes me as pretty dubious. The only place this would apply would be for routine and standardized services like tooth cleaning, physical exam, sonogram for a pregnant woman, etc. Even doctors who perform Lasik rarely advertise their prices up front and even when they do they are B.S. (e.g. for a procedure that few people would qualify for or excluding all manner of add-ons and other services that are more or less mandatory).
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November 17, 2009, 10:43 pmT.J. Chiang says:
Todd,
You are right that the quote demonstrates an unrealistic understanding of how markets work, but at the same time I think it actually provides some insight into what might prove to be the problems in a market for healthcare. As I see it, there are three related potential problems. First is information asymmetry, in that the doctor knows much more than the patient. Second, healthcare is not a fungible good like the stuff you buy at Target, rather the patient is getting a customized set of services. Third, healthcare is a much bigger deal than what you buy at Target, so it would usually pay the consumer to choose carefully.
The three potential problems mean that your analogy to lawyer services is much closer to the mark than the Target or veterinary care analogy. But here is the kicker: in the market for legal services, clients do haggle over price with attorneys. And the more sophisticated the client, the more haggling. Moreover, we have various safeguards such as the State Bar that are predicated on a theory of market failure based on information asymmetries. None of this is to say that markets will not work or that haggling is essential (they work reasonably ok in legal services, notwithstanding various distortions), but I think you are being rather harsh on the anonymous doctor.
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November 17, 2009, 10:48 pmDavid Schwartz says:
I think it’s a solid example because of the way having your insurance company pay for the repair work typically makes the process much simpler for the consumer.
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Brian K says:
the example still fails because healthcare insurance is not like car insurance. and the whole point of this debate is to (partially or completely) remove the insurance company by having people pay for more of their healthcare out of pocket.
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November 17, 2009, 10:58 pmRicardo says:
One point that is missed here is that insurance companies actually do bargain with doctors and hospitals over charges within their network. I’ll repeat my own anecdote: when an ER tried to bill me $1300 my insurance company shaved $600 off the price. As an individual you could never exercise that kind of bargaining power, especially if you are in an emergency. Doctors are quite familiar with the bargaining power exercised by insurance companies which explains why Dr. Gawande focuses on this aspect.
However, I find in these debates that proponents of getting rid of group health insurance and replacing it with health savings accounts almost always skip over this crucial benefit of health insurance. If a doctor or hospital tries to overcharge you, you have a 600-pound gorilla fighting on your behalf if you have insurance. If you don’t have insurance, then your choices are to either work out a payment plan with the billing department or else be prepared to deal with a collection agency.
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November 17, 2009, 11:00 pmShelbyC says:
I’m using the term inelastic to mean that, to the extent the plan is funded by the government, you cannot not pay for it. Governemnt services are essentially inelastic, although that may be an inexact use of the term. And people are free to demand whatever they want, and politicians are free to promise whatever they want, even though things that people demand and politicians promise are often impossible. In this case, people seem to be demanding that someone else pay their health care costs. But the solution that the politicians are promising seems to be one where information about the most efficient options is less available, and incentives to become informed about and choose the most efficient options are fewer. This sounds like a recipie for a less efficient market.
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November 17, 2009, 11:12 pmShelbyC says:
OK, to the extent the bar association limits your price you don’t have a market. But not because you don’t know how much the total cost will be, any more than the the fact that I don’t know how much rice I’m going to eat next week means that there is no market for rice.
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November 17, 2009, 11:15 pmPatHMV says:
Ricardo, are there really people who want to get rid of group health insurance in favor of health savings accounts? I know plenty of people who want to combine high-deductible group health insurance with HSAs, but have never heard of anybody wanting to get rid of catastrophic coverage.
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November 17, 2009, 11:19 pmRicardo says:
You’re right that I was slightly imprecise. It is the case though that part of John McCain’s health platform during the campaign was eliminating the tax deduction for group health insurance with the idea that individuals’ searching the private market for their own individual insurance would lead to a more competitive insurance market. That is, an idea popular among many free-market think tanks is that group health insurance should be gradually replaced with individual health insurance to increase portability and supposedly control costs.
My point was really about shifting more of the burden of medical expenses onto individuals. To the extent that people would ever feel compelled to bargain or shop around for the best price on a medical procedure, that procedure would presumably not be covered by insurance, either individual or group.
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November 17, 2009, 11:35 pmDavid Schwartz says:
Healthcare insurance is not like car insurance because the market has been heavily distorted. In a functioning market, it may well be. And I thought the whole point of this debate was that health care could function as a market — arguing that we can pick and choose healthcare models is the opposite of arguing that a market can work.
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November 17, 2009, 11:39 pmKilo says:
I have pretty good insurance. I used to pay the doctor directly, and file the insurance claim afterward to be reimbursed. I explicitly wanted the financial relationship to be between the medical service provider and me, i.e. I wanted it clear that I was responsible for paying the bill.
On one visit, the medical office staff more or less insisted on filing the claim directly. I got an informational copy of the transaction later on, and was amazed to find out how large the discount was that the insurance company had negotiated. (It was on the order of 50%). I immediately got out of the loop at that point.
My point is that it would be worth quite a bit to me to — certainly many hundreds of dollars per year — just to have the advantage of the negotiated rates that my insurance provided, even if they provided NO actual insurance at all. For example, a simple blood test might “retail” for $150 and have a “negotiated” price of $20.
I’ve never seen this discussed. But it would seem that like a Costco or Sam’s Club membership, it should be possible to pay someone with expertise and data to negotiate fees with providers, even without any insurance role.
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November 17, 2009, 11:46 pmAlanDownunder says:
Good observation. American medicos are much better at collusive price maintenance than arabic rug traders.
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November 18, 2009, 12:08 amKilo says:
One data point on the the market.
A few years ago, I had some anomalous results in a cardiac stress test. I was referred to a cardiologist. More (relatively) simple tests, unclear results. He recommended an angiogram, which is the standard next step, and which involves threading a little tube into your heart, pumping is some dye, and taking x-rays. He said “doesn’t have to be today” but “soon”.
I started doing a lot of research, looked at the data, talked to my GP and cardio guy again, and ended up getting instead a Positron Emission Test scan, which was non-invasive, more accurate, took 2 hours, and cost a flat up-front quoted $4000 (vs. the indeterminate but typically > $15K for the standard angiogram). I also got a world class guy to do the test.
Great experience, and a clean bill of health, so I’m a very happy consumer. The market worked here — I got a better product at a lower price (although my insurance company mostly benefited from the price).
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November 18, 2009, 12:08 amGrover Gardner says:
The objection that one cannot price-shop when ordering a time-critical procedure is naive. We have emergencies in other markets and are able to price-shop. Plumbers, tow trucks, overnight couriers. The combination of posted prices, established reputations, and a robust review and rating system makes relatively well-informed snap decisions possible, even in emergencies.
You can’t possibly compare these things to a loved one in the grips of a heart attack or a child unable to breathe. In situations like this, there’s no “market,” only the closest emergency room.
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November 18, 2009, 12:15 amSnaphappy says:
I’ll counter with my own anecdote: My sister was diagnosed with breast cancer and had no insurance. She was not wealthy and her treatment was very expensive. One of the things she quickly discovered, however, is that the number on the “bill” you get for medical services is complete fiction. If you tell them you don’t have insurance, the bill goes down by 50% at least. This makes sense from a market perspective — The insurance companies want to negotiate “discounts” off of the “regular prices” for the many patients they supposedly send doctors. But when most of a doctor’s patients have insurance, then the supposedly “discounted” price is actually the real price for most patients. If every patient gets a discount, then who would blame the doctors for raising the “regular” prices? In fact, the higher the regular prices, the more the doctor can claim they are discounted for the insurance price!
On a separate note, what a nightmare if health care were like car repair. I take the patient to a supposed specialist who tells me that there are a half dozen procedures that the patient needs, most of which the specialist recommends if I want the patient to continue functioning beyond the very near immediate future. It is impossible to figure out whether the procedures are really needed or not, short of going to another specialist, who is as likely to recommend 6 different procedures and claim that those are the ones that will keep the patient alive. There is no negotiation on cost, except that you usually feel like you have to turn down at least one of the recommended procedures just to show you won’t be ripped off.
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November 18, 2009, 12:22 amRicardo says:
I’ve heard anecdotes like this. I’ve also heard anecdotes pointing in exactly the opposite direction: that if you don’t have insurance the billing department will not listen if you want to negotiate the price. They will, however, negotiate a generous payment schedule if convinced of your inability to pay. It seems like it really depends on the hospital or clinic and how bureaucratic it is. More bureaucracy usually means less of a chance of getting to speak to someone who actually has the authority to make judgment calls like this. Plus, if the doctor or hospital somehow knows you have money, your chances of negotiating will probably plummet.
Regardless, the price your insurance company can negotiate will almost always be better than what you can negotiate individually. There was even a movement a few years ago for doctors to unionize since some are so fed up with the way insurance companies are squeezing their profits!
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November 18, 2009, 12:36 amThe easy answer says:
Bizarre mental quirk. People with actual experience of buying things can’t picture themselves buying things. They ignore what they know. Speak in rhetoric about sheep and wolves. Cognitive dissonance? Scared, self-censoring minds? It’s like they’re afraid of violating taboo.
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November 18, 2009, 1:07 amMCM says:
I am more interested in the fact that a quasi-guild regulates the entire profession than any sort of ridiculous analogy to rice or information asymmetry.
Pop quiz: In the United States, what OTHER profession is regulated by a quasi-guild as strictly as lawyers?
There is no market here. Both professions are interfered with at every step by the AMA/ABA. Stop tricking yourself. Capitalism does not work here for the exact reasons Smith explains. The purpose of professional organizations is to hinder competition and increase price.
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November 18, 2009, 2:01 amegd says:
Because if the government fails to provide adequate health care and you die from lack of attention, then you can vote the scoundrels out of office.
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November 18, 2009, 8:38 amProf. S. says:
A lot of people are talking about how a person can’t negotiate for a heart bypass surgery. But you’re focusing on just one example rather than how the market would affect the process in general.
As a lawyer, if a client comes in and says “I want you to litigate this case for me,” I can’t give an exact price. But that doesn’t mean that I’m not constrained by the market. Because of the numerous other transactions in the market, I have a fixed rate for my time. I don’t need to decide on a lawsuit-by-lawsuit basis because the market has already created a means for evaluating lawyers.
In the doctor example, the person doesn’t need to negotiate a particular procedure (as if one were negotiating pieces of art). Instead, the market would come up with some means of evaluating doctors and then keep doctors competitive along those lines.
I suspect you’d end up with a mechanic-type service. You’d have some items (like oil changes) offered at fixed rates. More complicated services would be offered at hourly rates. People would call and get some rough estimates. Sure, there would be some people who may game the system by over-charging (which they can already do, but without the consumer being able to see it), which happens in every industry. But consumer feedback, consumer watchdog groups, and other checks could/would help minimize that problem.
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November 18, 2009, 9:39 ambyomtov says:
It is interesting to read Gawande’s New Yorker article. The situation he describes in McAllen, Texas is essentially one where, in principle, the market ought to be working to hold down costs, but it doesn’t.
The doctors in McAllen are basically ordering unnecessary and expensive tests simply because they are profitable. In other words, the information asymmetry, probably some collusion, and the local medical culture lead to high costs, and market forces aren’t doing anything to bring them down.
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November 18, 2009, 10:04 amWht9 says:
On lasik, cosmetic, and other elective surgery — remember the consumer always hold the ultimate bargaining chip — they can just walk away.
Heart surgery — radiation therapy — brain surgery — trauma care —
The choice to walk away is not really an option. In that case markets will push the price up to fill in that choice gap. Basically markets will decide to overcharge individuals for essential care, because they can.
With essential care doctors and hospitals have something you need, not something yo want. No amount of competition will be able to cure this deficiency that allows doctors to overcharge because patients do not have the most important option (to walk away) that they would for an elective procedure.
Add to that the cartel like limited supply of doctors and the bargaining position of patients in need does not reflect a true open market. The market it is artificial and manipulated. Attempting to pass it off as open only makes the ability to overcharge more likely.
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November 18, 2009, 10:07 amMCM says:
Yes, but when they walk away because the price is artificially inflated, that’s called “deadweight loss”. It is generally considered to be “a bad thing”.
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November 18, 2009, 11:43 amDan says:
Many economists have argued that it’s simply wrong to apply what one called “vanilla Chicago School economics” to health care “markets,” as Zwicki does in this post. Instead, market failures, some of which are pointed out in the comments, are too prevalent for a true Chicago-style market ever to exist in health care — at least for acute, hospital-delivered care. For instance, there is massive information assymetry inherent in any attempted bargain between a lay person and a heart surgeon.
More importantly, though, is that traditional economics focuses on maximization the “welfare” of the entire market, whereas healthcare involves non-negotiable “needs” — a factor mostly ignored by traditional economics.
Here are is some light reading on the subject:
Towards an alternative economics of health care
A Broken Health Care “Market”
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November 18, 2009, 3:38 pmEvilDave says:
Here is how it worked with my Dr.
Me: Do I need that test?
Dr: Well we’ll still do the biopsy regardless of what the MRI says ...
Me: Then why am I spending $2,000 on an MRI?
Dr: Well
Me: Look I am paying for this. If we can skip tests that we don’t need. I understand your fear of a malpractice suit, I do. I’ll pay for what is useful but not for what isn’t. So, can we just jump to the biopsy?
I wasn’t haggling over the price of an item. I was haggling over what items I had to have.
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November 18, 2009, 5:28 pmDavid Nieporent says:
The problem is, there have been individuals who have filed and won malpractice suits after doctors didn’t perform tests even though the patients told them not to perform those tests.
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November 18, 2009, 5:42 pmBrian B says:
As the owner of a high deductible plan both when we were healthy and after my wife was diagnosed with breast cancer, here is really how it works.
When you are healthy there is a free market, as described by Evildave because the deductible is seldom met. There are risk/rewards and price motivations to conserve and make rational choices. The cost savings are the pressures taken out of the system by the underutilization of health services for minor or marginal problems.
Once the deductible is met the free market is gone as it is whenever any type of insurance payoffs become involved. To the limited extent there is price sensitivity and risk/reward it is then born by the insurance company but limited by the policy and now resisted in all ways by the policy holder.
With a chronic disease, wherein I know that every year without fail my high deductible will be met eventually, there is much less price discipline and sometimes an incentive to reach the inevitable deductible as soon as possible so as to utilize the maximum services for “free”. There is no bartering over the astronomical costs of major procedures by the policy holder; only the insurer has that incentive.
The not inconsiderable systemic savings are all in that relatively small range between a $0 deductible and, in our case, an $8,000 one.
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November 18, 2009, 6:11 pmroguestage says:
You keep using that word. I do not think it means what you think it means.
Demand is inelastic when it responds poorly, if at all, to changes in price. Demand for gasoline is an example — yes, people drive less when gas goes above $4/gallon, but not to the extent you’d expect in an efficient market.
I have no idea how a market gets to be inelastic, only inefficient. And we’ve already been through how the health care market is inefficient, and how faith in the invisible hand to fix the health care market is naive.
I recognize that there is a libertarian argument that government interference in the market is illegitimate — to use your phrase, because you cannot choose not to pay for them — but again, that’s not the point of the post that started this thread, so I’m not sure how this little tangent of yours relates to the larger point about the health care market that was the point of the post. I’m also not sure how the current health care proposals make information any less available than it is now, so again, how do they make the market less efficient?
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November 18, 2009, 9:00 pmShelbyC says:
I was using it to address your comment supporting a public option because, among other things, inelasticity in the demand for health care services created an inefficient market. I pointed out that government intervention in the market, to the extent that it directs a certain amount of resources toward health care, makes demand less elastic because the people doing the paying can’t choose to stop paying when prices get high. As you pointed out, inelastic demand coupled with a lack of information about prices makes for an inefficent market. Government intervention makes for less elastic demand, coupled with less information about prices (I’ll bet you have an idea how much you pay for health insurance, but none about how much you pay for police protection)
And yes, I was using “inelasic market” to mean inelastic demand in a market.
And of course the health care market in inefficient, all markets are inefficient. I’ve been arguing that government intervention makes the market less inefficicent by limiting choices and limiting information. You seem to imply that government intervention makes the market more efficient, but I can’t find where you even attempt to demonstrate why that is so.
And I’ve already explained how they make information less available, and provide less incentive to access available information: When I research health care prices to find the most cost effective doctor, I get the full benefit of that research. When I try to find out which politician is going to provide me with the most cost effective doctor so I can vote for him, not only is that information much more difficult to access, but since my vote has almost 0 chance of affecting the outcome of the election, I have almost 0 incentive to conduct such research.
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November 18, 2009, 9:27 pmroguestage says:
ShelbyC, I suggest you take a look at my original comment. The point I was making was simple: you don’t need to understand how a market works to know that it is operating inefficiently and argue that the political process should be used to reform it. Currently, that reform advocacy is taking the form of the public option. Fifteen years ago it was more geared towards tort reform. Fifteen years from now it may be something else.
The public option has absolutely no effect on the demand for health care. It simply creates additional competition in the market for health insurance. And because of (among other things) the inelasticity of demand for health care, the market for health insurance is extremely inefficient. Opening that market up to greater competition — in the form of an additional competitor, even one funded by the government — will help make it more efficient, since monopolies and markets trending towards monopoly (as the health insurance market does in most states) are inherently inefficient. Like I said before, an additional competitor satisfies additional demand for health insurance, which basic economics tells us will lower prices back towards where they would be if the market were an efficient one.
I’m glad you’ve had success researching health care prices, but it seems that many in this thread have done just that under the current system and been stymied. So again, I seriously doubt that any public option would have any effect on the availability of information about cost. And I’m not sure why you’d have to research politicians to figure out which one would provide you a doctor, since the politicians wouldn’t be doing that — another insurance provider would, just like Medicare, Medicaid, and Tricare do today.
And if your vote is worth so little, I humbly submit that your comments on a blog are worth even less. As, of course, are mine. :)
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November 18, 2009, 10:55 pmBettty says:
Great article. It really caused me to think of health-care in an entirely different way. Somehow the humanistic aspect has been lost approaching medical care as a supply and demand market. I just finished a book called “Time to Care” by Norman Makous, M.D. He explains the importance of the physician-patient relationship and how it’s a critical part of understanding the patient’s medical situation, making a diagnosis, and applying effective treatment. I’m not sure one can put a going market rate on this type of care.
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November 18, 2009, 11:52 pmuberVU - social comments says:
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Tom952 says:
Providers will never do this voluntarily, precisely because they know that it would result in competition.
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November 19, 2009, 2:16 pm