doctors would post different prices for services

Providers will never do this voluntarily, precisely because they know that it would result in competition.

This post was mentioned on Twitter by MercatusBlogs: The Volokh Conspiracy: Failing To Understand How Markets Work: http://ow.ly/162rt0...

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. :)

roguestage: 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?

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.

ShelbyC: 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.

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?

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.

EvilDave: 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.

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.

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.

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”

On lasik, cosmetic, and other elective surgery — remember the consumer always hold the ultimate bargaining chip — they can just walk away.

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”.

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.

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.

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.

ShelbyC: OK, so why is the politician-worshiper’s model better?

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.

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.

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.

Snaphappy: 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.

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!

Ricardo: 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

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.

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.

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).

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.

Brian K:
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.

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.

PatHMV: 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.

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.

Moda: 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.

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.

roguestage: 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.

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.

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.

David Schwartz:
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.

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.

Brian K: 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.

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.

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.

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).

I’m not sure why you think knowing the price up front is so important.

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.