Tuesday, July 17, 2018

Health care competition?

Continuing the health care series, there does come a time in which innovative disruptors can break open a protected market and bring some competition. Think Uber and taxis. In a very nice essay, John Goodman describes one such effort, MedBid, an online marketplace where hospitals (gasp) bid for your business:
[entrepreneur Ralph] Weber says MediBid got about 3,500 requests last year from patients; and providers made 12,000 bids on those requests. ...
The average knee replacement on MediBid costs around $15,000. The normal charge by U.S. hospitals is around $60,000 and the average insurance payment is about $36,500.  A similar range exists for hip replacements, with an average Medibid price of about $19,000.
Recall prices of $180,000 per hip in my last post. The most interesting feature of Goodman's essay is the nature of price discrimination hospitals practice. It turns out they will negotiate lower prices for cash customers... Sometimes:
...Canadians can come to the U.S. and pay about half as much as we Americans pay. By taking advantage of Medibid, you and I can do the same thing. So can employer health plans. 
So which hospitals are giving Canadians and MediBid patients 50% off? It could easily be a hospital right next door to you. Strange as it may seem, hospitals are willing to give traveling patients deals that they won’t give those of us who live nearby. 
The reasons? Hospitals believe that if you live in their neighborhood, they’re going to get your business, regardless. Also, after your operation, your insurance company might argue over whether the operation should have been done in the first place. They might argue that there was no pre-authorization. They may argue over price. They may argue over many other things. And when the hospital finally gets its money, it might be a year or two after the fact. 
The “medical tourism market,” as it’s sometimes called, has three requirements: (1) you have to be willing to travel and (2) you have to pay up front, and (3) there can be no insurance company interference after the fact. 
This last part is really interesting. You have to travel to get the discount.

We'll see how long the price discrimination lasts in the face of a market that organizes people around it. More and more people have high copayment policies, ACA policies that have such narrow networks they can't get the treatment they want, health savings accounts and so forth. Employers can steer you to Medbid as well.


  1. First of all, 50% off is still high. I do a fair amount of medicolegal consultation in personal injury cases. Besides trying to determine if the care provided was reasonable and necessary I have to analyze billing and try to determine a reasonable fee.

    This is very difficult as there are very little data on what a hospital or doctor really gets paid under ordinary circumstances. I'd say that in emergency cases it's about 10% of billed charges with commercial insurance, based on the times I get records where the plaintiff used their insurance. I see what's billed and what insurance really pays after contractual write-offs. The last case I reviewed had about $13,000 in ER bills and the insurance paid about $1300. My wife's bill for her appendectomy was about $20,000 but $2,000 after contractual write-offs.

    The Surgery Center of Oklahoma became famous for its transparent pricing but IMHO their success was largely due to comparing their overpriced cash services to the massively bloated chargemaster prices hospitals use.

    You can usually do better paying cash. If your insurance has a negotiated price of $1,000 for an MRI and your remaining deductible is $5,000 you're going to pay $1,000. The same hospital will often do it for cash for half that. Before I started on Medicare I always asked about a cash price.

    Once again, in my personal injury consultations I see MRI charges that are quadruple (or more) what the same facility might advertise on the Internet as their cash price.

    I can tell you at least two reasons why the cash price is lower. In my case, I actively pursue cash patients because I don't have to pay my staff to do all the insurance-related work (checking benefits, getting pre-authorization, fighting to get paid afterwards, etc). I can pass my savings on to the patient. I also like the fact that there is no middleman; the entire decision is just between the patient and the doctor. We agree on what to do and agree on a price without third party interference.

    Secondly, from a facility standpoint, if you have empty beds or your MRI is not being used, you can fill those gaps by advertising a low cash price. Getting $500 for an MRI is better than having it sit around unused. I have literally had patients tell me they can't get an MRI because it would be $1,000 (insurance negotiated price) and they hadn't met their deductible. I tell them to go back and ask for the cash price.

    These horrible insurance-related market distortions have been a windfall for people like me who can provide the same service as a hospital or ASC for 1/3 to 1/2 the price that Medicare pays these facilities. I actually make more than if we'd used a facility and the patient pays less.

    There are some rays of hope. The Texas Department of Insurance has started publishing charges vs actual insurance payments for various services.

    The Texas Supreme Court recently ruled that an uninsured patient can demand information from a hospital regarding what it usually gets paid. The case was based on a typical situation: an uninsured patient getting slammed with astronomical bills from the ER. The court ruled that a reasonable price could be derived by seeing what insurance (including Medicare) would pay the hospital for that service (IN RE NORTH CYPRESS MEDICAL CENTER OPERATING CO., LTD., RELATOR).

    Before this ruling if I wanted to testify that the hospital charged 10 times what an insured patient would pay for ER services the judge would usually not allow my testimony. You would think you could argue that if they accept a contracted rate then that was obviously what the hospital considered reasonable. Otherwise, why accept the contract? You literally couldn't do that until this ruling.

    Most of the healthcare pundits are a joke who don't understand how American healthcare works at the margin. John Goodman happens to be the person I alluded to in the last blog post who didn't believe insurers had gag clauses in physician contracts.

    1. Mr. Gorback,

      I am going to assume based on your post that you are an MD. First up, my son just got accepted to med school. I've watched what he has gone through in pre-med studies, and I really had no idea the pure quantity of information an MD is expected to know. So kudos to you and now I get why docs command their salaries. Justifiably so.

      So here's my question. Doctor's work the same as hospitals. I have no idea what my doctor charges for an activity. I have no mechanism for choosing a doctor based on price or quality. You know stuff about medicine that I need 10 years of schoolin' to catch up to. That's not going to happen, so we are going to have some severe information asymmetry issues.

      So critique my proposal if you have time. Why not just charge by the hour, labor and materials, like a carpenter or plumber? And publish that hourly rate? It seems this "bill by medical code" system is purposefully designed to obfuscate actual costs that would allow a market to work.

    2. Jon, sorry to be late responding. I recently had a memorable encounter with a kidney stone.

      Here's the TL/DR version: Insurance obfuscates price discovery.

      The problem with your proposal is that if I advertise a price and you use your insurance we have to analyze your benefits to figure out what your actual out of pocket cost will be. There's my contracted rate with your insurer, your deductible and how much has been met, any co-payments (often cloaked in your policy as "co-insurance" - has a nice ring to it don't you think?) and so on. If we need to go to a facility to do a procedure we need that analysis from them too. Good luck with that. Typically they will say they don't know but the day you walk in to register suddenly they'll know exactly what you need to pay before they'll let you through the door.

      Even then you're not done. The anesthesia service will bill you separately and even if the facility is in-network with your insurance they might not be. The same applies to radiology or pathology. Who thinks of that in advance?

      That's why I like cash. If you want to proceed and we can do your procedure in my office everything is decided by the two participants in the transaction with completely transparent pricing.

      If I had the kidney stone under my old insurance Blue Cross would apply their contractual write-off which, as I mentioned, would cut my bill by about 90%. With a $6,000 deductible I would have eaten the rest of the bill. But for my 65th birthday I got the best present ever: Medicare. I bought a supplemental plan G (the most popular plan is F, which is Plan G for people who can't do math). So I paid zero. What a difference a month makes.

      Every time I write about health care economic issues it always comes back to insurance. It's nice to have it but it also disconnects the consumer from the price. As deductibles have risen the consumer is starting to feel the bite more and now people are asking hard questions about pricing. I was paying $950/month for an HMO with a $6,000 deductible. I did that because for me $6,000 is painful but not lethal. I just wanted catastrophic coverage. For the average American $6,000 is a complete disaster, not to mention the $11,000 or so in premiums. $17,000 out of pocket before insurance kicks in. No wonder people are going without insurance.

      I don't understand why one insurer can have over 50% of the market in a state and not get sideways with the FTC. I don't understand why Medicare can set hospital and physician fees but is prohibited from negotiating drug prices. Oh the magic of the workers on K Street!

      If you go to Wolf Richter's blog Wolf Street he has published some of my observations. Just type my name in the search box.

      There are shenanigans with hospitals and pharma as well. Crooked doctors are the petty thieves of medicine. Years ago I helped with a federal investigation that led to two doctors going to federal prison for $42 million in insurance fraud. HCA committed $2 BILLION in Medicare fraud. The CEO at the time had to resign and settle for being Governor of Florida.

      I believe in free markets but if all we can achieve is rigged markets then the outcome will be a single payer system. Perhaps a single payer system where the doctor or hospital could balance bill (i.e., charge more than the single payer "allows") could work. The provider of services could advertise their price and you would be able to just subtract the single payer amount to get your out of pocket.

      For example, Medicare caps prices. If my bill is $200 and Medicare allows $100, I can't ask you for the other $100.

      But suppose I could? Then you might see a market where someone charges $200, another charges $150, and a third accepts the single payer rate of $100. Then you can do some shopping. A good doctor in high demand might get that extra $100 or $50. Right now the worst doctor and the best doctor get the same Medicare fee.

      I'd prefer that to the bizarre two tiered systems we see in Europe.

    3. "I have no mechanism for choosing a doctor based on price or quality".

      You're a member of a very big club. I have unique position: I have Medicare plus supplemental. I also know who's good and bad in the medical community, having been here for over 2 decades. So I know price and quality. That's a really small club.

      But I have no idea how to pick a lawyer, accountant, plumber or dentist other than what you have: word of mouth and maybe sifting through questionable online ratings.

  2. https://texashealthcarecosts.org

    Average total bill for knee replacement in Houston about $65,500 and average insurance allowed about $21,000.

    Hip replacement: $88K vs $35K


    Knee: $$25,800/$10,500
    Hip: $66,500/$27,600

    Maybe you should get your knee replacement in Texas and forget Medibid. ;-) I have no idea why knees cost so much less.

    One other thing to keep in mind is a quote attributed to John Glenn:‘I felt exactly how you would feel if you were getting ready to launch and knew you were sitting on top of 2 million parts — all built by the lowest bidder on a government contract.’

    Whether or not he actually said it is debated but you can see the point. I don't know the author but the following quote is also appropriate: “The bitterness of poor quality remains long after the sweetness of low price disappears.”

    Happy shopping!

    1. There is no information to suggest it isn't the exact same hospitals charging insurance companies $35k and accepting $15k on MedBid. It could well be the exact same surgeons at the same hospitals, in which case, your care might actually be slightly better as a private purchaser than as an insurance client.

    2. If your deductible is $5,000 and Medibid gets you a price of $10,000 cash vs $15,000 if you use insurance you'd be crazy to take the Medibid offer. Cash will cost you $10,000 whereas your deductible will limit your cost to $5,000 (assuming no major "gotchas" like "co-insurance").

      Medibid and it's ilk are attractive if you're paying cash. When you dial in insurance it gets tricky. Cash vs insurance is a consideration when the price is much less than the deductible.

      An epidural steroid injection at my office is about $250. At a hospital you'll pay $800 or more. That's where deductibles come into play at the margin.

      But $10,000 cash vs $20,000 with a $3,000 deductible? Use your insurance and limit your downside to $3,000. Just another day in insurance-induced craziness in health care costs!

  3. Mr. Cochrane,

    I was steered here by a fan of your's on Tyler Cowan's blog. I enjoyed both this post and your previous one. I've recently been through incidents in which people close to me have had ridiculous issues with local hospitals. My 3 year old grandson had a tonsillectomy (surgery took 30 minutes), and my daughter received a bill for $29,000. We finally paid $4500. But it took months of effort and negotiation and too often left my daughter in tears.

    It seems outrageous that people have to go through the gyrations my daughter went through or that I would have to fly to Nebraska to get a knee replacement (and $15k is still not an affordable number for most). Not to mention that elective surgery is only a small subset of all medical care. I appreciate what the Medibid folks are trying to do, but I think that can only lead to helping a tiny fraction of folks with important medical issues.

    I'd appreciate your take on the causes of the failures of the healthcare market and what the economics profession would say are the appropriate solutions.


    Jon Sellers

  4. High prices in the US could be eliminated by one law: Health care providers can only charge a single, published, price.

    1. Like their own published price or a government mandated price?

  5. Thanks to John Cochrane for keeping this topic alive, and to Dr Gorback for his excellent comments. Here are several observations:

    1. I read in this area a lot, as both a health care writer and manager of a health insurance agency. When it comes to billing disputes, I find that:

    a. Virtually none of them involve persons over 65. Tbis is one reason why 'Medicare for all' is gathering steam, despite its many problems.

    b. Fewer of them occur in NY, CA, CT, OR, MN, IL, or any other states where patient financial protection at least gets on the agenda in the state legislature.

    c. It is awfully tempting to appreciate the single payer Canadian solution, where hospitals are funded like fire or police departments, with annual appropriations, and do not need to bill patients at all. This would save vast amounts of anguish, time, and probably money. Hospitals would secretly love it also. (as long as they got the annual money they wanted, which is an immense problem)

    d. I used to think that binding arbitration was a solution for billing disputes. I thank Dr Gorback for showing what a difficult process this would be.

    e. I think there has to be agreement that the caveat-emptor aggressive-billing model is totally inappropriate for hospitals. Here are a few proposals that might help us get out of the swamp:

    - The uninsured can only be billed at Medicare rates. Forget the chargemaster.

    - Every state must come up with a fee schedule like Maryland's.

    - Insurers must pay medical claims in 10 days, as in Switzerland.

    Comments welcome! Bob Hertz

    1. The Canadian system is great unless (1) you want timely treatment and (2) you don't need medication. Doctors and hospitals are free but medication is not. They have a huge problem with waiting times. It's so bad that each province has to publish it's waiting time stats broken down by service, hospital and doctor. Take a look at any province's data. An American would have a fit if they had to wait like that.

      From https://www.fraserinstitute.org/studies/waiting-your-turn-wait-times-for-health-care-in-canada-2017:

      "From referral by a general practitioner to consultation with a specialist. The waiting time in this segment increased from 9.4 weeks in 2016 to 10.2 weeks this year. This wait time is 177% longer than in 1993, when it was 3.7 weeks. The shortest waits for specialist consultations are in Ontario (6.7 weeks) while the longest occur in New Brunswick (26.6 weeks).

      From the consultation with a specialist to the point at which the patient receives treatment. The waiting time in this segment increased from 10.6 weeks in 2016 to 10.9 weeks this year. This wait time is 95% longer than in 1993 when it was 5.6 weeks, and more than three weeks longer than what physicians consider to be clinically “reasonable” (7.2 weeks). The shortest specialist-to-treatment waits are found in Ontario (8.6 weeks), while the longest are in Manitoba (16.3 weeks)."

      Imagine that if you've been diagnosed with cancer, or if your child has had 3 episodes of tonsillitis. Check out the wait times for tonsillectomy. Think about the lost wages while waiting weeks for an MRI for sciatica. I can get you in for an MRI in 24 hrs or less and provide treatment while the Canadian is still waiting for a consultation with a specialist.

      There have also been instances where hospitals had to send parturients to the US because of overcrowded birth facilities. Hospitals have encountered problems such as using up their oxygen budget too fast. If you like the VA hospital system you'll love Canada.

      Speed, quality, price: pick any two.

      Paying claims in 10 days! One can only dream. I have fought for two years on certain claims. It's not just health insurance; they are slow to pay me for my legal work too.

    2. "n American would have a fit if they had to wait like that."

      I think most Americans would be perfectly fine waiting if they compared the costs, but I could be wrong. After all, waiting ten weeks is a lot shorter than never getting treatment at all.

  6. Thanks for comments. As I type these words, I am recovering from an illness where immediate access to specialists has virtually saved my life. This has happened to me more than once.

    Regarding Canada as well as the American VA, I have always wondered if their problems are "not enough money to hire more specialists", or if their problems are deeper in a bureaucratic culture of inaction and inefficiency.

    Also regarding Canada, I have learned to be a little wary of anything from the Fraser Institute. They really hate Canadian Medicare, does not mean that they are wrong but I go slow with them.

    The suggestion about requiring faster claim payments comes from a health care writer named Joe Flower. You would enjoy him.

    You may email me directly at bob.hertz@frontiernet.net


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