June 23, 2013
Medical Care Costs
Medical Competition and the Cost of Medical Care-Becker
Patients in the United States pay considerably more for standard medical procedures, like colonoscopies or mammograms, than do patients in Switzerland, Germany, and other rich countries. One important qualification is that international comparisons of health costs, as in the New York Times' article referred to by Posner, do not adjust for differences in quality of treatment, such as quickness of access to the procedures, speed of reporting the results, and so forth. The US does better on some of these quality dimensions, but probably patients pay more in the US even after adjustments for the quality of treatment.
The health care delivery system in the United States is based on strong competition among private physicians and not for profit hospitals. Although a full consideration of why procedures are more expensive in the US would require the analysis of many factors, I will concentrate my discussion on whether this competition among physicians and hospitals is an important factor raising the cost of procedures.
As Posner indicates, the great majority of patients have only limited knowledge about the procedures they need and the quality of physicians and hospitals. Doctors and hospitals interested in increasing their revenues can sometimes take advantage of this consumer ignorance by suggesting expensive procedures and medical treatments that are not warranted. This incentive to push for excessive treatments may be stronger in the US because physicians and hospitals' incomes in the US are more closely related to the cost of treatment than in most of Europe and Japan.
However, most American consumers of medical care, even when ignorant of the treatments they need, have some protection against excessive medical care. The federal and state governments through Medicare and Medicaid pay over 35% of total spending on medical care in the United States. The American government officials involved in approving payments for different procedures have no more financial interest in approving excessive charges for different treatments than do officials in other countries.Medicare and Medicaid do get lower prices for different procedures than most private insurance companies because the government can use its economic power in the health market to get better prices.
About 55% of Americans, 68% of employed persons and another 1/3 of those without jobs are covered by employers' health insurance. The tax deductibility of their health care costs gives employers an incentive to increase the extent of the coverage provided employees, and reduces their incentives to increase co-pays and other costs borne by employees. This distortion in incentives to keep down health care costs is not caused by competition in the health care sector, but by the tax treatment of employer spending on health care. The Affordable Care Act reduces the tax advantage to employers of more expensive health insurance plans-the so-called "Cadillac" plans-presumably because of the belief that these plans allow treatments and other medical care that are not necessary and too expensive.
Still, even when their spending is tax deductible, employers have the same financial incentive to reduce their spending on expensive medical care as they do in lowering other costs that are tax deductible. They try to reduce health costs by the type of health insurance coverage they provide employees. The larger firms also hire knowledgeable specialists on health care that are informed about what kinds of treatments are useful for different medical problems and what they should cost. They also try to educate their employees about healthy eating and other behavior. Employers help themselves while protecting their employees against redundant and expensive treatments and care suggested by physicians, clinics, and hospitals.
Even consumers ignorant of their health care needs have an incentive to reduce their medical spending because they have to pay health insurance premiums and out of pocket payments for medical care. Yet one problem with the American health care delivery system is that it has much lower co-pays than many European countries; out of pocket spending on health care is only about 11% of all US spending on health care compared to, for example, over 30% in Switzerland. This means that American patients have much less incentive to economize on their health care spending than do the Swiss.
I am not arguing that the American system of health care is ideal or efficient, or that it does not allow for excessively expensive procedures and other treatments. I am suggesting, however, that strong competition among doctors and hospitals is not the major reason why the US spends much more on health care than do other countries.
Does Medical Care Cost Too Much in the United States? Posner
A New York Times article of June 1 called "Paying Till It Hurts," www.nytimes.com/2013/06/02/health/colonoscopies-explain-why-us-leads-the-world-in-health-expenditures.html?pagewanted=all&_r=0, by Elisabeth Rosenthal, presents disturbing data concerning prices of medical procedures in the United States relative to the prices in other wealthy countries. The article reports that the average price of an angiogram is $914 in the United States and $35 in Canada, of a colonoscopy $1185 in the United States and $655 in Switzerland, of an MRI scan $1121 in the United States and $319 in the Netherlands, of a hip replacement $40,364 in the United States and $7731 in Spain, and of Lipitor (probably 90 mg., although the article doesn't state the quantity) $124 in the United States and only $6 in New Zealand—a greater than 20 to 1 difference.
This is not actually the correct way to compare U.S. and foreign prices: picking a different nation to compare the United States with for each procedure. For what if (for example) in Canada though the average price of an angiogram is very low the average price for a colonoscopy is very high? Nevertheless the comparisons are illuminating, and are consistent with the fact that the United States devotes some 18 percent of GDP to health care, twice that of most other countries. (The second most expensive nation for health care is Switzerland, which spends 12 percent of its GDP on health care.) The significance of the article is that it plausibly assigns much of the cost differences to higher prices for standard medical procedures and excessive use of those procedures, rather than to demographic differences, such as greater inquality of income in the United States than in the other wealthy nations of the world, let alone to higher quality of U.S. medical care.
According to the article, the difference in cost between the U.S. and the foreign medical procedures is unrelated to quality but has a lot to do with the fact that the foreign countries regulate the price of medical procedures and the United States does not. The difference is between a regulated and a free market, and the free market does not show up well in the comparison. It is not just the bottom line—the relative costs—that illuminates the difference, but the competitive practices that the article describes that, together with absence of price regulation, may explain the difference.
Free-market competition is supposed to optimize quality and price; if quality is the same, price should be lower under competition than under regulation. Quality includes availability. A traditional and well-documented complaint about price ceilings is that they create shortages, resulting, in the medical sphere, in long and potentially dangerous delays in treatment. But at least if the Times article is to be believed, the longer delays in foreign countries (if they are longer, which the article doesn't discuss) do not result in poorer medical outcomes.
The evidence of market failure in our medical care system is reinforced by data presented in the article of large price differences for identical procedures in the same U.S. states, and even in parts of the same state, southern California for example, where according to the article a colonoscopy costs on average $2041 in San Diego and $5559 in Los Angeles.
It appears that in a market in which buyers have poor information, in part because the products and services sold in the market are highly technical and the market itself is pervaded by uncertainty and its products and services are constantly changing and being reevaluated and discarded or improved, and in which extensive private and public insurance obscures prices, and in which on top of everything the consumption decision is often blurred by pain and fear, a private, unregulated market does not operate efficiently. Of course there is government regulation of the U.S. health system, but it is nothing like the public-utility type health regulation found in most other countries. There is in the U.S. regulation in the form for example of malpractice liability, but malpractice liability doesn't deal with overpricing or (with rare exceptions) unnecessary procedures. Medicaid sets tight payment limits, but Medicare, for most medical procedures, does not—for fear that too many physicians will stop taking Medicare patients.
There is an approach to inefficiently competitive markets that is in between regulation or nationalization (as pioneered by the British national health service), on the one hand, and free-market competition on the other. It is the professional model of providing services, about which Becker and I blogged on December 10 of last year, as distinct from the competitive, or business, model. In the professional model, which is the traditional model in which health services like legal services used to be provided, which persists to some degree, but which is rapidly giving way to the competitive model, the physician or lawyer in effect trades the very high incomes earned by those who succeed in business for a reduction in financial risk, brought about by legal or ethical restrictions on competition. With lower rewards for engaging in sharp practices, those practices, involving exploitation of consumers in markets pervaded by consumer incompetence, can be expected to be less frequent.
The professional model can thus, in principle anyway, enhance market efficiency. For example, in a medical system governed by the professional model, physicians' incentive to establish "surgical centers" in their offices in which to perform colonoscopies for which they can charge much higher prices, though there is no need for such centers, is weakened, because physicians imbued with the professional model do not think of themselves, or behave, as profit maximizers.
The professional model remains dominant in career government service, where employees are salaried and have secure tenure, thus trading the possibility of a much higher income for job security and the benefits, which are not merely financial, that come with it, such as not having to compromise ethical standards to succeed. In contrast, free-market competition is Darwinian: the presence of rapacious and unprincipled competitors will often limit the ethical options of the other firms in the market, and of their employees.
The outstanding example of the professional model of medical care in American government appears to be the provision of medical care to veterans, in VA hospitals and medical centers. VA physicians are salaried government employees. A number of studies, including a study by the RAND Corporation, have found that the medical care provided by the Veterans Administration is superior to private health care and costs less. See Arthur L. Kellerman, "'Socialized' or Not, We Can Learn from the VA," The RAND Blog, Aug. 8, 2012, www.rand.org/blog/2012/08/socialized-or-not-we-can-learn-from-the-va.html. Although there is no reason in principle why the professional model should be limited to government employees—and traditionally it was not—it may be that the competitive model has made such inroads in medicine that the professional model cannot survive in the market. It may be worth considering whether the VA model can be extended as part of an effort to improve health care in the United States and at the same time reduce its cost.