Prices in Healthcare

Had an interesting discussion with my favorite New England liberal this weekend about the Time Magazine article on Hospital pricing and charges.  We both found the articles to be excellent.  But drew completely different conclusions.  She saw this all as a failure of capitalism, a sign of the inherent corruption that occurs that demands more goverment intervention.  I saw it as a totally screwed up market, from the dominance of third party payers to government-enforced monopolies (e.g. certificates of need), that killed any incentive of consumers to shop. The entire pricing mechanism is broken, and simply replacing it with a set of fiat prices from the government is not going to make things better.

Megan McArdle has a good interview with Bart Wilson on this very topic.  Here is a small excerpt:

Megan: Okay, so let me ask the obvious question: if a whole lot of health care wonks think that government-rate setting would fix health care costs, why should I be skeptical?

Wilson: Who knows the conditions of who values what and the opportunity costs of supplying health care? What set of minds in the government has the knowledge needed to make tradeoffs, to know who is best to supply this service or that one?

The values and costs of healthcare have to be discovered.

Megan: The wonks who favor rate-setting argue that health care simply isn't like any other market. For one thing, there's an information problem: how do I know if I want a heart bypass or not?

Why not let an expert who has read all the studies on heart bypasses make that decision?

Wilson: Right now, the doctor recommends to the patient what the insurance company will pay for. What incentive does the patient have to find alternatives? (None.)

There is the assumption that an expert knows all the alternatives. Doctors are not interchangeable. They know different things.

The function of a market is let us learn who will serve us sufficiently well.

Megan: So let's step back even farther, to 30,000 feet or so, for a second. What does the price do in a market? Why should I want to put a price on my lung transplant?

Wilson: A price is like a symbol at any moment of what millions of people are willing and able to do. All of the technology and services of the doctors have to be weighed against whatever else they could be applied to.

The prices of alternatives to lung transplants are doing the same thing. The difficulty is assuming that a lung transplant is "inelastic". What a price system does is find what part of say, healthcare, is on the margin.

“Inelastic” means that I’m relatively indifferent to the price. The last glass of water in a desert is the quintessential inelastic good; people will pay all they have to get it. Things can be more or less inelastic, which is to say, that demand can be more or less responsive to changes in price. Health care is often thought to be very inelastic.

Megan: But this is precisely the argument that health care wonks make: when I need a lung transplant, I don't have the time, or the emotional ability, to comparison shop. So there's no price discovery mechanism.

Wilson: Does the government know or have the ability to comparison shop for me? Do they know my circumstances?

Also, for some healthcare services, you do have the ability to comparison shop. Those services will then discipline the healthcare market in general.


  1. Mark Alger:

    The difficulty here is that everybody seems to immediately go to the extreme outside of the edge of the envelope. The reason the costs of medicine are so out-of-control has little or nothing to do with the price of extraordinary measures, but of the quotidian goods and services. Just TRY to comparison shop insulin, for one probably-common example. Even the same pharmacy will quote you several different prices contingent on myriad and sometimes unknowable factors. It strikes me as quite fishy that I can simultaneously get a better price paying cash for services for physician care and yet must pay a higher price (if I can discover prices at all) for prescription drugs than someone incurring all that insurance overhead at the pharmacy. If the physician practice can realize a cost savings, why can't the pharmacy? But it also seems clear that that is due to how the incentives are arranged in the market for medicine. And those incentives are badly distorted by government meddling where it, frankly, has no business.


  2. marque2:

    I have the opposite problem. Find it relatively easy to pay low prices for pharmecuticals by calling around, and asking for cash and then whether I get a discount with my insurance policy (I occasionally get a discount not a co-pay) In the end I usually go to Costco, and it isn't worth calling the other chains, unless I get something new. However when I tried to pay cash to my normal doctors the agency they worked for refused to lower the price at all. Not even halfway between list and what they charged my former insurance. I eventually found a discount doctor at some low cost clinic.

  3. marque2:

    I do have a question - for normal care I can shop around. Even the lung transplant case, I probably have a few months to talk to folks about price. What I would have trouble negotiating is things that happen suddenly and or progress rapidly heart attack, pancreatic cancer, car accident.

    How do you negotiate for these? Has anyone on this board done it?

  4. John:

    This is what make a high deductible plan with a health savings account so attractive. You negotiate when you can and benefit from pre-negotiated (insurance) prices when you can't.

  5. BAP:

    If I had to recommend a few quick steps to help, I would urge these. They are carefully chosen to be easy to legislate and cost the govt nothing.

    (a) Outlaw price discrimination, so everyone pays the same. Then when an insurance company negotiates a lower price, it would help everyone. (b) Allow insurance companies to operate across state borders, to increase competition. (c) Require official published price lists, to make comparison shopping possible. (d) Make all health care and health insurance tax deductible, to remove the tax advantage of getting insurance via the employer, and the tax advantage of insurance covering routine care.

  6. J Calvert:

    If markets in medicine are incapable of price discovery, they how are prices set in elective surgery? I'm not buying the argument that consumers turn into emotional basket cases when the product or service is medical. Eyesight is pretty important, and I don't see horror stories of people going blind from discount Lasik procedures. Few things are more important to a man than sexual function, but they still price shop and get vasectomies.

    Price discovery in medicine is possible, but only when people are spending their own money.

  7. LarryGross:

    Singapore which has universal health care also has govt fiat pricing... right? And their health care costs are among the lowest per capita in the world. right?

  8. marque2:

    I guess that is what I am doing - so I have it covered. One annoyance about my plan if I go in network I pay $80 for the network doctor, I have found a doctor that charges only $50 per visit but is out of network, so they double the deductible from 3000 to 6000 for the out of network visits. Doesn't seem fair to punish me when I do a good job of shopping around.

  9. marque2:

    Allowing to cross state borders was a neat idea, that can't work. Much of the difference in rates is not due to competition but due to state mandates. You live in the high mandate state, and get the insurance from a low mandate state provider, and by the time they add all the mandatory benefits, the rate is not the same - but actually worse - because the out of state provider has less negotiating ability across state, and doesn't have the infrastructure to deal with the requirements in the other state anyway.

    I was all for (b) until I thought about it a bit. I think some state tried it and no company took the bait because of the reasons I mentioned above.

    You have a point with (d) but I wouldn't mind if it went the other too - make none of it tax deductible.

  10. marque2:

    Because in elective surgery you are not covered by insurance, so folks tend to shop around. It is interesting that if you look at cosmetic surgery you don't see nearly the price increase you do in insured medicine. That is because there are price signals in cosmetic surgery.

    In some cases for things like in vitro, folks are even vacationing in Czech Republic or Israel and getting the procedure for 1/3 what it costs in the USA. 10K vs 30K - and that should also bring the price down domestically.

  11. LarryGross:

    Federal employees can keep their health insurance across state problem. and it appears that those that get insurance from the ObamaCare exchanges may also have that ability.

  12. nnu-16121:

    I was under the impression that Singapore had private hospitals competing with the public ones, and the one's health expenditures came out of the medisave account that might be pooled among your extended family.

  13. LarryGross:

    " Singapore has a non-modified universal healthcare system where the government ensures affordability of healthcare within the public health system, largely through a system of compulsory savings, subsidies and price controls. Singapore's system uses a combination of compulsory savings from payroll deductions to provide subsidies within a nationalized health insurance plan known as Medisave. Within Medisave, each citizen accumulates funds that are individually tracked, and such funds can be pooled within and across an entire extended family. The vast majority of Singapore citizens have substantial savings in this scheme. One of three levels of subsidy is chosen by the patient at the time of the healthcare episode."

    more at:

  14. marque2:

    I think as usual you are misstating something.

  15. marque2:

    Whatever, I am not going to waste my life debating your distortions any more.

  16. Sean:

    Over at the Sacramento Bee they periodically have data base tool where you can look up the cost to have a medical procedure done at different hospitals throughout the state. Mind you I was not comparison shopping I was just curious to see if a theory of my held up which was the cost of the prodecure would be cheapest in the most expensive zip codes. This prediction was based upon the hypothesis that if most patients had the ability to pay their bills, the bill would reflect the cost of the procedure whereas in poor areas, the losses from unpaid bills would be spread over a relatively small number of people who could pay their bills. In souther California where hospital costs are lower, I looked at Neport Beach and Santa Ana, two towns only about 15 miles apart in Orange County. For a natural birth of a child, the cost in Newport Beach was only half as much as the cost at Santa Ana. I also looked at wealthy San Marino and poor South Pasadena and found similar results. So far so good.
    I then took a trip north to see if a wealthy area and poor area would show the same trends. Surprisingly, the prices for all the hospitals were 50 to 100% higher than is was for the expensive hospitals (in the poor parts of town down south). Turns out that in the Bay area, Sutter Health have a very large part of the market and almost monopoly pricing. You'd think Medicare and Medicaid might put a stop to this but that is where politics and lobbying gets involved. It's aways funny to watch to see when a work rule goes through that would require more registered nurses the administrators at Sutter would not complain about the higjher costs of the RN's vs. the LVN's it was availability of personnel. Turns out Sutter did not much care cost of RN's prior to the ACA because price could be raised indiscrimanately, ever for Medicaid and Medicare. If the Medicare folks ever rejected the price increases, the hospital union reps, the hospital administrators and the local congressional rep would run down the Medicare offices and twist arms. They tried to stop this practice when the ACA bill was being drafted but Congress pulled out the provisions because there was likely a lot of campaign money to be made in changing prices.
    Finally, a few weeks ago the NY Times looked to get the price of knee replacement surgury at a variety hospitals around the country. the price varied from a low of about $10K to a high of $126K. Between wealth transfer pricing in poor hospitals and congressionally influenced price gouging, this did not surprise me one bit. But if you think that Medicaid and Medicare are good at controlling costs and that the government know how to run things best, I'd say your right if you live in a wealthy area and sufficient lobbying money to out muscle the healthcare industry. (Hint, chances of the former are 1 in 10, chances of the latter are substantially lower.) The healthcare industry IS crony capitalism taken to absurd ends.

  17. marque2:

    Another interesting feature of Singapore hospitals is they offer different grades of service. If you don't want to pay as much, you can stay in a room with eight others and on nurse per two rooms. If you want to pay more you can get a penthouse suite with a private nurse. It isn't one insurance policy fits all with the same exact service, as it is in the USA. The rich folk staying in the private suites end up subsidizing the po' to some extent.

  18. nnu-16121:

    I heard a radio advertisement today with an offer that you could get a free iPad if you had Lasik eye surgery at their practice. They might have said free eye-pad, and I'm not sure how one would know the difference in a radio ad.

  19. nnu-16121:

    So with co-pays and subsidy choices, and choices between public hospitals and private hospitals which are required to post prices in order to encourage comparison shopping, and lots of people using their MediSave in nearby Malasia because the universal healthcare with means tested subsidy was too expensive for "poor people", it seems that there are many market-based price signals:

  20. BAP:

    The constitution gives the Federal government the power to regulate interstate commerce. These state-by-state mandates are precisely the sort of barriers to interstate commerce that the commerce clause had in mind. Congress has the power to moot all the mandates with the stroke of a pen, or to standardize them in some way to allow states to differ but make it easier for insurance companies to track the differences. The details would need to be hashed out, but overcoming this problem seems pretty straightforward.

  21. LarryGross:

    I did not think there was any distortion at all. I was responding to the statement(s) that insurance across state lines has barriers that prevent it and I was only pointing out that in some cases, there IS insurance available across state lines because the Feds do it.

    why is that a "distortion"? perhaps I do not understand what you reacted to.

  22. obloodyhell:

    }}} We both found the articles to be excellent. But drew completely different conclusions.

    Clearly, the article wasn't excellent, then, if it wasn't calling questions on both sides of the discussion into the mix to make people THINK about what is going on -- not saying it should ANSWER all the questions, but it does need to make sure those inclined to perceive things one way aren't going to just file everything that way.

  23. FelineCannonball:

    My wife had an elective surgery this summer and was given an estimate 10% of the actual cost once all the 15 to 20 separate bills came in. The surgeon didn't have a clue as apparently most people covered by insurance don't even bother to ask (we had a 10% copay so we sort-of cared). How the hell do you comparison shop that? You don't know the science behind the necessity and the real risks and benefits. You don't know the cost with an approved provider. You don't know the cost for an outside provider to do their own assessment and procedure. You don't know whether your insurance company will fight some of the costs. You don't know how much the hospital is willing to write-off if you talk to them after the fact.

    I'm convinced a lot of our costs are related to lack of transparency and lack of consumer intelligence. Just saying you should dig into this when you go in to get care. The doctors and administrators may get annoyed, but some transparency about what you are paying for, to whom, and how much are just basic aspects of making capitalism work.