The Healthcare Marketplace — There is No Invisible Hand (until when consumers start paying)
The Tampa Bay Times included on its front page this morning an article entitled: “Big swings in medical prices make for a wild market, but savvy patients can benefit”
“It is a chaotic landscape, which is why it is so difficult for consumers and employers to navigate,” said Castlight vice president Kristin Torres Mowat.
So what gives?
For one, the market for health care doesn’t behave like most other markets. Consumers usually don’t know how much a procedure costs until after they’ve had it, and it can be challenging to compare prices beforehand. That means providers can set their rates somewhat independently of normal market forces — the forces that keep prices consistent at neighboring gas stations.
Bruce Vogel, an associate professor of health policy at the University of Florida (and a dorm mate at UF many years ago) was quoted in the Tampa Bay Times article — “It’s hard to find a market that deviates more from the perfectly competitive structure.”
Even Florida Gov. Rick Scott, a staunch conservative who opposes most government regulation, has expressed concern over the healthcare marketplace, focusing on the transparency of hospital pricing. In the September 29 online edition of Florida Politics, Gov. Scott was quoted:
“This is all about patients and empowering patients,” he told reporters after a Florida Cabinet meeting. “They should know what (a procedure) costs and be able to get as much information as they can.”
You can read the Governor’s official statement regarding hospital price transparency and supportive comments from members of the Commission on Healthcare and Hospital Funding here.
Gov. Scott is a smart guy – an M&A attorney, who founded Columbia Hospital Corporation which merged into the Hospital Corporation of America to become Columbia/HCA, of which he was CEO for a number of years (during which time Medicare fraud issues arose). It is not like he does not know how healthcare providers in general, and hospitals in particular, price their services.
Since the advent of third-party payers, healthcare has always been an artificial market. Vendors of healthcare and consumers of healthcare (those with health insurance) have rarely negotiated prices. The insurance companies negotiated with providers over what they would pay and with the insureds (or their employers) what their premiums would be. Add Medicare to the mix which set an artificial payment standard of some negotiated percentage of the Medicare rate, and pricing for healthcare services became almost completely independent of typical economic forces like supply and demand. Don’t even try to analyze pricing in rural or underserved markets.
So what is happening nowadays, when everyone is supposed to be insured, that makes healthcare pricing and bargaining with hospitals and other healthcare providers such a hot topic? I think it is because of high deductible plans. Health insurance has basically become insurance only for catastrophic claims. When the family deductible may be $5,000 or more, the cost for “unreimbursed” services becomes a matter of personal economics — even if the provider is charging the rate previously negotiated with the healthcare insurer.
Unfortunately, the negotiating for healthcare services is far more complicated than the negotiating over the price of a car. Transparency in healthcare pricing is important, but transparency in healthcare quality is critical. Quality of care will soon be the dominant factor as we move away from procedure based payment for healthcare services to preventive care services (paid 100%) and bundled/global payments focused on the episode of care.
Adam Smith never had a chance in healthcare.