Wednesday, September 19, 2018

Supply-side health care

The discussion over health policy rages over who will pay -- private insurance, companies, "single payer," Obamacare, VA, Medicare, Medicaid, and so on -- as if once that's decided everything is all right -- as if once we figure out who is paying the check, the provision of health care is as straightforward a service as the provision of restaurant food, tax advice, contracting services, airline travel, car repair, or any other reasonably functional market for complex services.

As anyone who has ever visited a hospital knows, this is nowhere near the case. The health care market in the US is profoundly screwed up. The ridiculous bills you get after the fact are only one sign of evident dysfunction. The dysfunction comes down to a simple core: lack of competition. Airlines would love to charge you the way hospitals do. But if they try, competitors will come in and offer clearer, simpler and better service at a lower price.

Fixing the supply of health care strikes me as the policy win-win. Instead of the standard left-right screaming match, "we're spending too much," "you heartless monster, people will die," a more competitive health care market giving us better service at lower cost, making a cash market possible, makes everyone's goals come closer.

But even health insurance and payment policy is simple compared to the dark web of restrictions that keep health care so uncompetitive. That is deliberate. Complexity serves a purpose -- it protects anti competitive behavior from reform. It's hard for observers like me to understand what's really going on, what the roots of evident pathology are, and what policy steps (or backward steps) might fix them.

Into this breach steps a very nice article in today's WSJ, "Behind Your Rising Health-Care Bills: Secret Hospital Deals That Squelch Competition"  by Anna Wilde Mathews. Excerpts:
Dominant hospital systems use an array of secret contract terms to protect their turf and block efforts to curb health-care costs. As part of these deals, hospitals can demand insurers include them in every plan and discourage use of less-expensive rivals. Other terms allow hospitals to mask prices from consumers, limit audits of claims, add extra fees and block efforts to exclude health-care providers based on quality or cost.
The effect of contracts between hospital systems and insurers can be difficult to see directly because negotiations are secret. The contract details, including pricing, typically aren’t disclosed even to insurers’ clients—the employers and consumers who ultimately bear the cost.
Among the secret restrictions are so-called anti-steering clauses that prevent insurers from steering patients to less-expensive or higher-quality health-care providers. In some cases, they block the insurer from creating plans that cut out the system, or ones that include only some of the system’s hospitals or doctors. They also hinder plans that offer incentives such as lower copays for patients to use less-expensive or higher-quality health-care providers. The restrictive contracts sometimes require that every facility and doctor in the contracting hospital system be placed in the most favorable category, with the lowest out-of-pocket charges for patients—regardless of whether they meet the qualifications.
 The restrictions in some hospitals’ contracts mean “you must always include them,” said Chet Burrell, former chief executive of CareFirst BlueCross BlueShield, which offers coverage in Maryland and the D.C. area. “If their costs are 50% higher for the same service, you have to include them. That cost is directly built into premiums…in the end the buyer of the service pays that.”
Hospital systems with restrictive language in their contracts can also protect their position by limiting rivals’ ability to draw patients based on lower prices, insurance executives said.
In some cases, contract clauses prevent patients from seeing a hospital’s prices by allowing a hospital operator to block the information from online shopping tools that insurers offer. Because of such restrictions, some health-insurance enrollees can’t find prices for hospital systems, including BJC HealthCare in St. Louis and NewYork-Presbyterian.
The article is full of these great details, but less clear (understandably) on the fundamental mechanism driving this behavior. One pattern I see is that lack of competition is necessary to buck up government-mandated cross-subsidies. (Previous posts here and here.) The government mandates that hospitals cover indigent care, and medicare and medicaid below cost. The government doesn't want to raise taxes to pay for it. So the government allows hospitals to overcharge insurance (i.e. you and me, eventually). But overcharges can't withstand competition, so the government allows, encourages, and even requires strong limits on competition.

You get a flavor for that here:
... hospitals often receive extra charges, known as “facility fees,” that are supposed to cover the extra costs associated with care given in a hospital setting, including regulatory and safety standards that apply to hospitals. Hospitals can often impose these fees after they acquire an off-site clinic or office.
American Hospital Association executive vice president Thomas Nickels said facility fees, which are also paid by Medicare, are needed to cover the extra costs that hospitals must shoulder, including treating any patient who needs care. “We have far more regulatory requirements, legal requirements, facility and structural requirements” than other providers, he said
Indeed. But in a competitive system, high cost producers are driven out, whether that high cost is real or regulatory.

Medicare and Medicaid abet this cross-subsidy by paying higher rates for the same service offered in a hospital than they do at an outpatient clinic, and more at a clinic than in a doctor's private office.  Hospitals have cleverly reacted to this opportunity:
Hospital systems have also been snapping up other types of providers, including doctor practices, clinics and outpatient surgery centers, and raising these providers’ prices. A study published in April in the Journal of Health Economics found that doctors’ prices increased on average by 14.1% after they became part of hospital systems.
In many cases, insurer-hospital contracts allow hospitals to move these new acquisitions immediately to the hospitals’ reimbursement rates—which are typically far more generous for the same services. That leads to a fast markup in prices.
SourceL WSJ
The nice graph to the left illustrates this phenomenon.

The tone of the article leads naturally to the usual morality play of nefarious behavior and greed. That's the wrong lesson. Hospitals do have to satisfy the government's demand for cross subsidies, and if they must compete they can't do it.

This won't be fixed by more regulation, or the FTC going after hospitals to force them to be more competitive while the rest of the health care system forces them to be less competitive.

I am reminded of two old Soviet Union jokes.

1) The border guard catches an American trying to smuggle in jeans. (Selling jeans in Russia used to be very profitable.) He demands a bribe. The American answers indignantly, "what kind of communist are you, demanding personal bribes?" The Russian answers, "you Americans should be pleased to see entrepreneurship! That's the capitalist system, no?" The American answers, "no, the capitalist system is greed subject to the discipline of competition."

Medicine is missing the discipline of competition.

2) The Soviet citizen goes in to buy his car. The manager says, "your car will be ready in 10 years." The man answers, "is that in the morning or the afternoon?" The manager says, "how can you possibly care, that's 10 years from now?" The man answers, "that's when the plumber is coming too."

I made two minor appointments with the Stanford health care system. I called the first, and the first available appointment was December 12, three months out. I called the second, and the nice lady answering the phone said "Our first appointment is December 12." She didn't understand why I guffawed when I answered, "Is that in the morning or the afternoon?"

I also made an appointment to see a private doctor to get an FAA medical exam. (That's another example of a complete waste of time and money, but that's for another day.) There is no insurance, you pay for these out of pocket, and a lot less than any bill from Stanford hospitals. The lady who answered the phone said, "do you want to come in this afternoon or tomorrow?"

48 comments:

  1. Make Health Care Great Again! This reform agenda is perfectly aligned with the Trump Administration agenda of eliminating wasteful complexity and unleashing the power of the American economy.

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  2. So, two market failures going on here it seems. Monopoly/oligopoly *and* moral hazard as it relates to insurance markets on the supply (of services) side -- adverse selection issue? I know you mention greed is the wrong message to take away here. However, the secret contract negotiations, the buying up of smaller providers, and government aversion to raising taxes for social insurance seems ripe for the eventual (and nasty) adverse selection problem to rear its head. It seems like a formula for an eventual across the board market failure.

    So, are you suggesting something similar to anti-trust legislation for health care? What about Aetna, who pulled out of many insurance markets altogether and only stayed in the ones that had the "proper" margins? How do market exits like that "fit in" in your mind? Is this another stepping stone down the road towards single payer? Different dog, same fleas?

    Another informative and great post from you. Ha.

    Best,
    M

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  3. Egads. What an interesting and depressing post.

    I am old, and when you get old you are inclined to throw in the towel. Let's copy Israel or Canada and be done with it.

    My personal favorite is going back to universal conscription and then everybody qualifies for the VA.

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  4. Great blog post as always John. On this issue of healthcare I think one of the biggest problems is the sloppy terminology and the correspondingly imprecise arguments being hurled from both ends.

    For one, I think it is possible to have a good service run by the government with sufficient allocation of money and resources. But that's exactly why you wouldn't want the government to run it. For there to be "good service" with "sufficient" resources would really require far greater resource allocation than people would actually surrender at the margin, since it takes that much more in resources to provide a pristine service that completely ignores the inescapable trade-offs and opportunity costs in order to satisfy a public who would not have to make these trade-offs. The rest of the economy would suffer but the health service would be so visibly wonderful that the public wouldn't decry it.

    So when the "right" tries to paint the picture that a good government-run health service is impossible I think really they should be arguing that it's a corner solution that is technically possible, but also that (like most corner solutions) it's probably not desirable. I really think the discourse needs to move away from arguing whether the cost of Medicare for all is "worth it" or too costly, and more towards who gets to decide what is "worth it" when it comes to healthcare costs. Saying things like the government will be inefficient is again just sloppy rhetoric that conflates forms of efficiency - you can run a great health-service on some point along the PPF but it may not be an allocatively optimal point for the required resources.

    It's basic economics but no one is talking about these things. And so long as this remains the case I see little hope of convincing the "left" that Medicare for all (or whatever else) is not worth the economic costs.

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    1. And yet, it seldom works that way. To use a different complex system, the Soviet Union and the German Democratic Republic tried to produce the perfect car for their citizens and it never worked out. They put a lot of ressources on it and yet the product was a mediocre gadget for aficionados and the unsellable Lada. So while in theory you might be right, there are so many forces in government that derail this attempt, that it rarely or never works out.

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    2. 2 comments
      one. When Robert McNamara headed Ford he wanted to make the car for everybody The Regular Guyn one you could work on yourself and that was a reasonably priced. His Executives were against it and the famous quote is if you want to build a car like that do it in Russia. What was built was the Falcon which was a good car

      two. At Yalta Churchill and Stalin or talking about their respective systems and Churchill said well what is the difference between capitalism and communism and Stalin said that's easy under capitalism man exploits man in communism it's exactly the opposite.

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  5. I struggle with the idea of a lack of health PROVIDER level competition, because I don't suffer the negative side-effects personally. It has been many years* since I've suffered long waits for appointments, opaque pricing, etc. There does seem to be a shortage of traditional PCs in my area, but I'm not sure why I'd ever need one.**

    My issue is rather the lack of health PLAN competition. For all practical purposes, I have zero options in terms of what health plan to buy/not buy. And the three-sizes-fits-all plan I am forced to buy is very a poor fit for my current situation. Given how perfectly average my current situation happens to be, it strikes me there must be a severe market failure at the plan level.

    This is of course not to suggest anything you wrote is wrong, just that it's hard for me to worry about too much at this point in time. Until the health plan markets are fixed, healthcare cannot work no matter how great hospitals are (or aren't).

    *Many years ago I discovered asking PROVIDERS for basically anything is a losing proposition, whereas asking my PLAN for help is very effective.

    **I get this is a personal preference/comfort thing, and that many (most?) people badly want to have a trusted PC they can develop a relationship with. There's nothing at all wrong with that, it's just not something that I personally care about.

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  7. I'm trying to imagine what a transparent tax and subsidize system would look like. Would it be similar to housing or like public schools? In the former, only a small percentage suffer. In the latter, the effects are more widespread.

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  8. Something's missing here.

    Why are insurance companies putting up with hospitals charging crazy premiums? Who are the monopolists here insurance companies or hospitals?

    Also, how does government spending more on services lead to lack of competition? We are constantly told that medicaid doesn't pay much to begin with which leaves medicare which accounts for 20% of total spending.

    I can see higher spending and regulations leading to higher costs and inefficiencies overall, but I don't see how they would lead to lower competition. Same with the examples you cite - they should lead to higher costs, I just don't see the link to competition. Maybe you can clarify.

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    1. Not to speak for JC, but I assume his point is that PRICE competition is what's being restricted, not the number of firms or their relative power in the market.

      It's sorta like airlines back in the day... they couldn't compete on price due to government regulation, so instead they competed in other ways that tended to be wasteful (e.g., who could provide the best in flight meal, who had the best stewardesses, who had the biggest-and-coolest planes, etc.). So while there were plenty of airlines engaged in profit destroying battle with one another, none of that vicious competition lowered prices. If I understand correctly, JC is saying this is what's happening with the hospitals today.

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  9. My EOB shows all prices A. Doctor billed, B. Insurance approved, C. Insurance paid, D. patient owe (which is B minus C).

    One problem is the doctor billed are always sky high! They should know they have contracted price, right?

    Another problem is insurance contract price is higher than without insurance especially in medical devices.

    My friend visited pharmacy to buy a snore control device with prescription, $150 co-pay with insurance covered. The pharmacist said without insurance price is $100.

    Anyway, we need more medical doctors in the States.

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  10. Only catastrophic health care insurance is needed and insurance companies can compete with each other to provide the best plans for consumers. All other health care needs can be acquired through the free market without insurance companies at much lower costs. The huge amount of savings can be used for a stronger safety net, since consumers will spend less on health care and health care costs will be much lower.

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    1. Ben Franklin: "An ounce of prevention is worth a pound of cure."

      Thus it is worth subsidizing preventive care and early detection of medical problems to avoid much higher costs later--as $150 or so for a doctor's appointment strongly discourages most people from going unless they perceive a serious problem.

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  11. I see this as a political problem. The Hospitals are the alpha dogs of the Health care System. They have restructured the system to enrich themselves. Obamacare was structured to make sure that hospitals never had to give away services.

    The political problem is that the hospitals have real political power because they are often the largest source of good jobs in an area. They also have a warm and fuzzy image with the general public as the sources of cures and caring. And, because the general public does not pay the bills, they have no idea of where the money comes from or where it goes.

    Not only that but the hospitals have the perfect fall guy to take the blame for soaring costs. The insurance companies have to collect the money that winds up in the hospitals's pockets. They give the people nothing but bills, paperwork, and the occasional denial. People hate insurance companies.

    The hospitals can spout bovine dejecta like this from the WSJ article: “It’s the insurers that retain the greatest leverage,” said Melinda Hatton, general counsel of the American Hospital Association. That is nonsense. The insurance companies cannot have any leverage by reason of their role and their structure. It is the hospitals that run monopolies that gouge the consumer.

    It would take a very clever politician indeed to take on the hospitals. The current crop of grey suited grafters is more likely to solve the problem of quantum gravity than they are to figure out the hospitals game and figure out how to counter it.

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    1. Hi FM,

      Health care ends up being a public good in the end. There's a real positive externality the government wants to ensure. Private markets end up underproducing a public good. But, the government could correct the market failure/wobbliness by stepping in. Yes, there's issues of crowding out and minimizing contributions.

      As Dr. Cochrane said, the government is loathe to increase taxes for provisioning it. By making insurance and healthcare function as a good with value, you have classic issues of supply, demand, utility, risk, asymmetric information, and adverse selection. A monopoly/oligopoly will naturally control supply to maximize their own benefit. Plus, insurance markets don't want to lose their shirts in offering plans that potentially make them lose money. Actuarially Fair Premiums balloon as risk for a bad event increases.

      Welfare analysis in the end is positive analysis, but the normative side ends up being Pandora's Box. Society coalesces into pockets/factions that have different preferences. Central planning has its downsides, but, again, health ends up being a public good with positive externalities. When people are healthy, they are more productive. Can't work or function if you're sick and can't get the help required.

      Try functioning with a chronic condition that's genetic and having to essentially pay a tax (not really a tax but it reduces consumption and disposable income) for having a disease you cannot get healed from. In my case I'm diabetic, and with private insurance it costs me about $9,000 a year with premiums, prescriptions, and doctor visits. If I wasn't diabetic? Yeah. Much cheaper to get through life. My drugs out of pocket without insurance would be about 12,000 a year because they're name brand insulins. There's at least 2M other type I's in the US with the same challenges.

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    2. Health care is NOT a 'public good', which is determined by how it is consumed. The classic Samuelson definition is that a public good is consumed non-rivalrously and is non-excludable. Medical care is neither if those.

      The premise from which you reason is simply wrong.

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    3. Patrick,

      Public goods exist on a spectrum of non-rivalry and non-exclusivity. I never said health care was a "pure public good." Consumption of the goods and service produce externalities that benefit society. If people can't function because they don't have access to health care, you have a situation where productivity and GDP are affected.The issue of adverse selection is a whole different mess, but it ends up hurting markets, too.

      You can't tell me there's a benefit to society when people are sick, unhealthy, and unable to produce effectively.

      Let me give you a concrete example about the power of mental health.

      There was an "experiment" of sorts with homeless veterans. Gobs of money was spent on mental health services, treating veterans with PTSD and addiction of various types. Well, the experiment was let's get housing for these homeless vets and see what happens. What happened? Well, their mental health issues decreased dramatically. Their substance abuse reduced as well. The effect sizes were not only statistically significant, but clinically, too. They were able to function better, their GAF improved, and able to find employment,and get back on their feet.

      I bring up the issue of mental health because it's a part of overall health. What I'm getting at is that when resources are allocated properly, you have better outcomes that only affect the microeconomics of the individual, but it creates a positive externality that benefits society. That ends up being a public good because the whole of society benefits. What's the benefit? Social harmony and stability. That is non-rival and non-exclusive. Sure, health care itself is not a pure public good, but there's what's called a "warm glow" effect, too.

      Rrmember, all political failures are economic in nature and vice versa. It goes for successes, too. It's not a matter of luck. It's a matter of the role of institutions and how they're structured. White's "path determination" is a good read on the effect on economies when institutions are formed in a particular manner. What do we really value, hmmm?

      Unfortunately, right now (probably in the past,too) the major fight is about two things: who owns what and who deserves what. Rivalry is formula for conflict in the end.

      Again, this goes to the issue of health care generating a "public good." I probably didn't phrase it right when I started out. So, I apologize for that. Ha.

      Rant over.

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    4. 'Public goods exist on a spectrum of non-rivalry and non-exclusivity. I never said health care was a "pure public good." Consumption of the goods and service produce externalities that benefit society. '

      You are confusing two different things; 'public goods' with 'externalities.' The trade-offs inherent are different for the two things.

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    5. 'Again, this goes to the issue of health care generating a "public good." I probably didn't phrase it right when I started out.'

      Yes, that is your confusion. 'The' public good is a different thing from 'a' public good.

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    6. Perhaps. I think you're misunderstanding how underproduction of a good affects overall well-being. We can chart this out with very simple welfare analysis. Overproduction has the same story, with different DWL. But, you're right in that it seems that I confused the two of public goods and externalities. However, they're very much related. The trick is encoding intangible benefits with a model that makes sense.

      The ultimate problem is paying for it in the end. Subsidies are a solution, but, the money has to come from somewhere. Doesn't grow on trees. My own take is the entire cost structure needs to get fixed. That's hard to do when the industry is entrenched and is loathe to be modified. Remember that insurance companies hold nearly 7T in assets, which is half held by FDIC insured banks (14T), for a total of 21T of assets under management. Gee, where did those 7T in assets come from? Side note: that's the entire insurance market, which includes health, life, auto, etc.

      Thanks for your thoughts.

      Best,
      M

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  12. The problem is simple. Any time you have one party consuming a product, a second party providing it, but a third party paying for it, you have a recipe for the inefficiencies we see every time we need medical care.

    Imagine if we paid for food that way.

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  13. Perhaps the scheduler's response that the next available appointment was December 12th was a polite way of prompting a follow up question: "How much would an earlier appointment cost?" Perhaps the scheduler and the Russian Border Guard are related.

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  14. So what is the solution?

    Maybe the patient is billed directly by the hospital/medical provider and the patient then works with the insurance company (or does so in most circumstances).
    This way the hospitals would not get away with charging the patient $12 for an aspirin or send them a bill for $100,000 for an infection picked up while in the hospital...

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  15. The article starts from a false premise: That higher U.S. health spending is a matter of higher prices rather than higher quantities/intensity. But our host long ago linked to a comprehensive refutation of that premise, for example here: https://randomcriticalanalysis.wordpress.com/2018/01/06/its-not-the-prices-stupid-a-response-to-austin-frakts-and-aaron-carrolls-nytimes-article/

    The reason why we have a medical market shot through with vertical bargaining games rather than head-to-head competition and arcane pricing and billing regimes is that a) we have a lot of third-party payment and b) the American public and media will not tolerate rationing of care by third-party payers. (This is not an original concept--it comes from Dr. Richard Fogoros who argued that the reason for complexity and seemingly perverse practices in U.S. health care usually traces back to these serving as (inefficient) facilitators of "covert rationing.") No managed-care system, no hospital, no government program is willing to say "yes, this benefits the patient but the benefit isn't worth the cost so we won't pay for it." So you can't have straight-out price competition because then any quality differentiation, no matter how small, would enable the provider to charge a large premium over rivals without fear of being undercut, because the third-party payer can't be seen denying better care in order to save money.

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  16. One of the reasons competitive markets are difficult in healthcare is because lower prices leading to higher demand and higher consumption is not necessarily beneficial to health. Often overuse of medical care leads to overtesting, overdiagnosis and overtreatment. (https://www.preventingoverdiagnosis.net/) resulting in worse health outcomes. In the US there is a combination of overuse and under use of medical care. This is unlike other industries such as airlines where lower prices leading to more travel may increase choice and leisure and well being of everyone. Patients are largely unable to differentiate between necessary care and overuse which is why most well managed national health systems have several layers of restrictions in receiving services. NHS has proposed to limit certain elective surgery in patients that currently smoke tobacco or who are obese. Medicare is very far from a well managed national system with a purpose of providing cost effective care. It has none of rigorous cost benefit analysis for new tests or treatments(e.g. whole genome sequencing is now covered for all types cancer although no data that it improves outcomes) and it is also well known that Medicare does not negotiate drug prices. It tries to cover anything remotely related to health making it open to fraud and abuse.This may be politically popular to recipients of Medicare or drug and device companies and there is the effect of promoting innovation. However it is not sustainable. From second hand knowledge of other countries such as Canada, France and Singapore I believe a well run national health system(which would be completely different from Medicare for all) alongside a private system with much less government regulation would be ideal.

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    1. Hi MK,

      The unnecessary testing is a sort of side effect with insurance markets: moral hazard as it relates to suppliers overproducing and getting paid by insurance or the government.

      It happens in Worker's Comp, too. The defense lawyers who are hired by insurance companies bill at at least $200 an hour and bill the insurance companies according to the time they put into the case. Since they know they'll be paid no matter what, they bill a lot of hours. The applicant side is different. There, lawyers only get a percentage IF they win. So, it's a gamble on their part, even with what seems to be a slam dunk case.

      Also, look at the mess with patents and generic drugs. Another mess to fix. Drug makers push the name brands while generics are pushed out. Doesn't happen all the time, but drug companies lobby doctors and pharmacists like crazy. Pens, writing pads, mugs -- goes on and on. When doctors are prescribing name brands over generics, which are far cheaper, that's a problem. Even providers here in CA that manage Medi-cal have a tendency to push name brands over generics.

      Look at Lantus. $600.00 a bottle retail. The patent was renewed with a new formula. Is the old formula available? Well... what do you think? There's very little difference between the new formula and the old. But it gets prescribed to diabetics and someone has to pay for it. When I was with Kaiser, I got 3 vials for $90. 1800 dollars worth of insulin for $90 -- 5.00% of the retail cost. Wow. Medi-cal? It's free to the diabetic, but it still has to be purchased and the income requirements are strict. Around 1100 a month MAX if you're employed.

      I know this is long winded, but health care really is dear to me. There's people out there who really need help. Tax revenues can be allocated better if there's the political will to change and repair the system.

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    2. I agree that moral hazard is a major cause of healthcare overuse. In healthcare none of the major players are incentivized to reduce cost. For doctors, ordering more tests or treatments are the path of least resistance. Patients are happier even if it doesn’t improve long term outcomes. Patients prefer more medical care especially if they do not directly bear the cost because they are not familiar with harms of overtesting, overdiagnosis and overtreatment. For government third party payers it is politically popular to cover unproven treatments or tests that seem high tech.
      I was rather referring to the fact that health care with free competition and low cost will lead to higher unnecessary utilization and this may not be an improvement to the current state. Healthcare tends to expand and find new roles when given more space similar to snowballing of government regulation. There is always a feel good reason to do more. At least when dealing with publicly funded or subsidized health care this needs to be avoided.

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    3. A little comment from outside the US:
      - Overuse is in part a result of the crazy litigation risk in the US.
      - Over capacity is less of a problem in Europa as a public unilateral health care system can manage resources and waiting lists better.

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    4. Hi MK,

      The problem is that suppliers act differently when insurance is present. You're right about it not being competitive in the US. They abuse the certainty of being paid. Leads to adverse selection.

      As far as "doing more" it's crazy that nearly 60% of federal expenditures are social insurance programs. A lot of that has to do with the third phase of demographic transition: lower birth rate and lower death rate. I seriously doubt there will be a political and social shift in attitudes that we don't want to help the elderly, sick, and poor. This leads to a serious financing problem that leads to pretzel logic.

      Best,

      M

      Best,
      M

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  17. Are there any long term comparisons of the price increases for cosmetic or elective surgery that the consumer pays for out of pocket versus the price increases for services covered by insurance or government programs? I would guess that cosmetic surgery is the closest thing we have to a competitive market in medicine.

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  18. A key comment in this fine article was from the Blue Cross executive who said "you have to include them", referring to expensive local hospitals.


    Wouldn't some insurance buyers (especially the healthy ones, with no personal doctor) be willing to drive 50 miles to save hundreds of dollars on prmmiums? Wouldn't some consumers buy a cheap insurance plan which required you to have scheduled surgeries in India (and paid your air fare)?


    What happened to the reference pricing experiment by Calpers, which found the lowest local price for hip surgery and then required patients to pay cash if they chose a more expensive hospital?


    As John notes, American hospitals are deeply dug in to prevent competition. Even if EMTALA for indigent care was fully funded tomorrow, the price gouging would continue. The government does not have the manpower to challenge every instance of antitrust and unfair trade practices.


    America is I believe the only advanced nation that allows hospitals to set their own prices. All the others use some form of price control. None of them rely on competition.


    This does not mean that competition is impossible; but it does mean that John may be wrong.

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  19. The restraint placed on competition in the hospital sector can be traced to Congress's passage of the "Health Planning Resources Development Act" of 1974, according to the National Conference of State Legislatures (NCSL).

    According to NCSL, "Certificate of Need (C.O.N.) programs are aimed at restraining health care facility costs and facilitating coordinated planning of new services and facility construction. Many C.O.N. laws initially were put into effect across the nation as part of the federal 'Health Planning Resources Development Act' of 1974. Despite numerous changes in the past 30 years, most states retain some type of CON program, law or agency as of 2016."

    NCSL observes that "The basic assumption underlying C.O.N. regulation is that excess capacity stemming from overbuilding of health care facilities results in health care price inflation. Price inflation can occur when a hospital cannot fill its beds and fixed costs must be met through higher charges for the beds that are used."

    NCSL remarks "C.O.N. programs originated to regulate the number of beds in hospitals and nursing homes and to prevent purchasing more equipment than necessary. Mandatory regulation through health planning agencies determined the most urgent health care needs, contributed to solutions for these needs and attempted to manage the fluctuations in prices often found in a competitive market. The intent was that new or improved facilities or equipment would be approved based primarily on a community’s genuine need. Statutory criteria often were created to help planning agencies decide what was necessary for a given location. By reviewing the activities and resources of hospitals, the agencies made judgments about what needed to be improved. Once need was established, the applicant organization was granted permission to begin a project. These approvals generally are known as 'Certificates of Need.'"
    Source: http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx

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  20. The debate, so far, appears to conflate State and Federal governments under the rubric "government". State governments determine whether to license a health insurer to operate within the state. States that have certificate of need regulations, determine whether new hospital facilities and expansions are in the public interest in the state. The federal government appears to have had no role since the repeal of the Health Planning Resources Development Act in 1987.

    What one needs to do is to look more closely at the competitive situation at the individual state level where the state's regulations of hospital facilities and medical insurance providers has a greater bearing on competition in the sector.

    A 2011 action at law by Yakima Memorial Hospital against the Washington State Dept. of Health addressed two points: first, the matter of 'anti-trust' (s.1 of the Sherman Act) was decided in favor of the State--the court ruled that the State's regulation was not pre-empted by Sec. 1 of the Sherman Act; second, the plaintiff argued that the State's regulation places an undue burden on inter-state commerce--the lower court's finding that the regulation was immune from challenge on the basis of the Commerce Clause was set aside by the appellate court which noted that States lack immunity where Congress has not specifically legislated that States may impose regulations on inter-state commerce.

    Source: https://www.dwt.com/advisories/Court_Holds_Certificate_of_Need_Laws_May_Be_Unconstitutional_08_23_2011/

    The DWT article notes, "Under the U.S. Supreme Court’s decision in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970), incidental burdens on interstate commerce are permitted. The plaintiff must show that C.O.N. regulations impose a burden on interstate commerce that “is clearly excessive in relation to the putative local benefits of such regulation."

    Healthcare regulation by the individual states through C.O.N. regulations appears to be the largest hurdle that advocates of pure competition in the hospital and medical sectors face. Recognition of the regulatory burden and impediments posed by state-level regulation is important if effective change is to be achieved.

    ReplyDelete
  21. Data on the effect of regulation on the hospital sector is available. An example is a January 1988 publication by the FTC titled "The Effect of State Certificate of Need Laws on Hospital Costs: An Economic Policy Analysis", Sherman, D., Staff Report of the Bureau of Economics, Federal Trade Commission, found here:
    https://www.ftc.gov/sites/default/files/documents/reports/effect-state-certificate-need-laws-hospital-costs-economic-policy-analysis/232120.pdf

    ReplyDelete
  22. As I like to say: the role of government in capitalism is to bolster competition. Very few see it that way.

    ReplyDelete
    Replies
    1. Some of us see the role of government as doing stuff that needs to be done that won't get done in the normal processes of the private sector.
      --E5

      Delete
  23. Legislate:
    1) that all medical services must have transparent pricing
    2) that the consumer should have to pay x% of any procedure
    3) low income consumers are refunded that same x% (but at least they see it)

    we need basic pricing transparency and a (perceived) incentive to shop around

    ReplyDelete
  24. I can confirm 2 points. My doctor is connected to a hospital and I receive a separate bill from them which is about equal to the doctors bill.

    Next when I had my splints put in they offered to do it for half price if I paid cash.

    ReplyDelete
  25. Replies
    1. Who is asking?
      --E5

      Delete
    2. John Cochrane is an elite-level glider pilot. Check this one :
      https://www.youtube.com/watch?v=bL_5B1bCS2I

      Delete
  26. I work both in a private practice ( doctors office) and am contracted by an healthcare system ( hospital based). i read all of above with great interest. Obviously, i offer no solutions for the great malady of the cost of healthcare. However i hope to draw attention to our ongoing significant wastes as a community in health care practice. Healthcare can be simplified and the government will have to lead the way. Left in the hands of privatization greed will creep in and affect outcomes both financial and health related.

    ReplyDelete
  27. Why is "health care" so hard as a public policy problem? Many reasons, but I'll give you two. One, "health care" is not really a useful term, it's too fuzzy. To begin with, separate it into three basic categories: critical care, preventive care, consumer care. These subdivisions naturally need further definition. Is long term care critical care? Probably. Is providing contraceptives consumer care? I'd think so. But put that aside for a moment. My point is only that these categories should be treated differently in an efficiency oriented market system, both as regards provision and insurance.(As an aside, John, try Basic Med instead of the standard FAA medical -- but why do you even need it flying gliders? Got an SEL license too?) And then add to this a basic feature of medicine, American style: a physician does not provide you care, s/he makes an assessment of your situation, and then outlines options for you to pick from. (My son-in-law, a critical care specialist treating non-communicative patients, meaning relatives have to decide, says that the closer the relationship between patient and relative, the more likely the relative is to let the patient die quietly rather than go for the most expensive interventions, no matter how little hope they offer.) So, in the US, "health care" is already consumer oriented insofar as you have options to choose from, and cost is never an item discussed in the choice (true even for my prostate cancer treatment). So, "health care" is not a service that can easily be defined, it seems to me. It's a very complex item -- a point often missed in public discussions where "health care" is treated as an engineering process defined by clear inputs and outputs. Not so at all, it is very much a consumption and choice driven service, for just about any diagnosis. Second, from the public policy standpoint, can anyone seriously describe the objective function(s) in the minds of our politicians (assuming, arguendo, that they are rational)? What is that they really want? Economy/efficiency? Income redistribution? Public health (define that, if you please, and how do we know when we are done?)? Special interest group protection (oh yes, you better believe it)? Political power (ya think?)? Etc. etc. So, now we have a simple preference aggregation problem with various, and possibly variable, rankings of various elements in a complex ordering. Since "health care" is a very complex notion, every choice is not a binary one, but dependent on various other elements relating to health care. That is, the nice assumption of independence of irrelevant alternatives is nowhere fulfilled. And, so, inevitably, we get cycles and indeterminacies in the collective decision process. The outcome, one degree short of chaos. That's the public choice problem here, as I see it. Any solution? Sure, take politicians out of health care altogether. Solve the income redistribution problem with vouchers, and be done with it. And good luck with that, I say!

    ReplyDelete
  28. Why is "health care" so hard as a public policy problem? Many reasons, but I'll give you two. One, "health care" is not really a useful term, it's too fuzzy. To begin with, separate it into three basic categories: critical care, preventive care, consumer care. These subdivisions naturally need further definition. Is long term care critical care? Probably. Is providing contraceptives consumer care? I'd think so. But put that aside for a moment. My point is only that these categories should be treated differently in an efficiency oriented market system, both as regards provision and insurance.(As an aside, John, try Basic Med instead of the standard FAA medical -- but why do you even need it flying gliders? Got an SEL license too?) And then add to this a basic feature of medicine, American style: a physician does not provide you care, s/he makes an assessment of your situation, and then outlines options for you to pick from. (My son-in-law, a critical care specialist treating non-communicative patients, meaning relatives have to decide, says that the closer the relationship between patient and relative, the more likely the relative is to let the patient die quietly rather than go for the most expensive interventions, no matter how little hope they offer.) So, in the US, "health care" is already consumer oriented insofar as you have options to choose from, and cost is never an item discussed in the choice (true even for my prostate cancer treatment). So, "health care" is not a service that can easily be defined, it seems to me. It's a very complex item -- a point often missed in public discussions where "health care" is treated as an engineering process defined by clear inputs and outputs. Not so at all, it is very much a consumption and choice driven service, for just about any diagnosis. Second, from the public policy standpoint, can anyone seriously describe the objective function(s) in the minds of our politicians (assuming, arguendo, that they are rational)? What is that they really want? Economy/efficiency? Income redistribution? Public health (define that, if you please, and how do we know when we are done?)? Special interest group protection (oh yes, you better believe it)? Political power (ya think?)? Etc. etc. So, now we have a simple preference aggregation problem with various, and possibly variable, rankings of various elements in a complex ordering. Since "health care" is a very complex notion, every choice is not a binary one, but dependent on various other elements relating to health care. That is, the nice assumption of independence of irrelevant alternatives is nowhere fulfilled. And, so, inevitably, we get cycles and indeterminacies in the collective decision process. The outcome, one degree short of chaos. That's the public choice problem here, as I see it. Any solution? Sure, take politicians out of health care altogether. Solve the income redistribution problem with vouchers, and be done with it. And good luck with that, I say!

    ReplyDelete
    Replies
    1. Hi Carl,

      In essence, what you've described is that health care is essentially inelastic. You need or want health care and there's not a viable substitute at all (death?). But, we see in the insurance markets varying degrees of plans with costs. Adverse selection in insurance markets make people go bananas. It *is* a form of redistribution but only if the pool has a certain composition, meaning people have to be in it.

      Now, one solution of course is just cover everyone in a single payer system. Of course there's little money to be made by the entrenched insurance market. And, would the government be able to drive prices lower and make it affordable for itself and provide it all as a public good? Subsidize everyone? Would that work? Theory says underproduction would be solved, but there's a cost of course, which what Dr. Cochrane mentioned earlier - governments are loathe to raise taxes for a whole host of reasons.

      One of the biggest problems is that people and providers act differently in the presence of insurance. Using vouchers to pass it off to the private market probably won't work, because if providers know the size of the vouchers, they're going to take as much as they can get, leaving little leftover for future care. It's not gonna work.

      One bit of absurdity is that if humans didn't get sick, there wouldn't be a market at all. But, reality is, health matters. That's why I wish politicians would get on board and realize that when you have a healthy society, you have a society that can do more. They're more productive.

      Best,
      M

      Delete
  29. Healthcare over the past ten years has been a two sided affair. The people who go all in on it and the people who do not give a damn about it. The past couple of years the recent presidents have tried to make health care somewhat free for struggling families and this has made slim to none of the people that had not have health care change their minds about it. The prices of health care and hospital cares are through the roof in charging people that people are left broke after one high medical procedure. That’s why their is no balance in company’s competiting within each other. The answer is simple. Make health care at a MUCH lower price so that everyone can have and buy it. More people will bring more competition amongst companies and will be better for the people and the economy.

    ReplyDelete
  30. Healthcare over the past ten years has been a two sided affair. The people who go all in on it and the people who do not give a damn about it. The past couple of years the recent presidents have tried to make health care somewhat free for struggling families and this has made slim to none of the people that had not have health care change their minds about it. The prices of health care and hospital cares are through the roof in charging people that people are left broke after one high medical procedure. That’s why their is no balance in company’s competiting within each other. The answer is simple. Make health care at a MUCH lower price so that everyone can have and buy it. More people will bring more competition amongst companies and will be better for the people and the economy.

    ReplyDelete

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