Vijay K. Mathur
Published in Standard-Examiner, April 14, 2013, Ogden, Utah
It is well known that
the price people pay for medical care either directly or indirectly is
increasing at a rapid rate. In 2011 the national expenditure for health care
was $2.7 trillion, a 92 percent increase since 2000. If the medical care market
is competitive, the interaction of demand and supply would determine its price,
and that price will be efficient and welfare maximizing. However, despite
the usual rhetoric of politicians and free market ideologues, the medical care
market suffers from what economists call market failure. Competition in the
medical care market, for example, requires a large number of buyers and independent
providers of services, a relatively small size of providers to avoid dominance,
full information about quality and prices of services.
On the demand side,
competition works when consumers are well informed about the quality of medical
care services and prices actually paid by them so that they can shop for
services. Usually though, patients depend upon their doctors for information
about medical procedures, need for those procedures, drugs, and hospitals’
quality.
Physicians are the
agents who look after patients’ interests. However, when doctors are either
employed by hospitals or have privileges in using hospital services, their
loyalty is split between patients and hospitals.
Doctors have
incentive to overuse medical services, because their own compensation is based
upon the amount billed to insurance companies and/or to government programs
such as Medicare and Medicaid. Third-party payment systems encourage doctors to
create demand for hospitalization and/or medical services. For example, a
Rand Corporation study, “ Health Insurance Experiment” in 1982, found that when
patients shared in the cost of medical care in an HMO, their use of all medical
services was much less than those who had free care, without affecting quality
of care and health outcomes.
Most of the
discussion about medical care costs centers around demand and not much
attention is paid to the supply side (cost). There is no doubt that something
has to be done on the demand side, such as, increasing means tested and capped
co-pays as a percent of the total bill of services as opposed to flat amounts.
This will make consumers aware of their costs in relation to prices
charged. In 2011, those 65 years old and over constituted 13 percent of
the total population while federal spending on Medicare and Medicaid was 30
percent of the total health care spending. Per capita spending on older people
in 2011 was close to $14,000.
On the supply side,
hospitals operate in a non-competitive market. The March 4, issue of Time
magazine presents an in-depth investigation by Steven Brill on hospitals’
pricing strategy. He finds that hospital pricing cannot be explained by costs
of medical services and procedures. It resembles monopolistic pricing strategy,
in which hospitals dictate prices as opposed to being subjected to market
prices. Steven Brill states, “ No hospital’s Chargemaster prices are consistent
with those of any other hospital, nor do they seem to be based on anything
objective — like cost — that any hospital executive spoke with was able to
explain.” Chargemaster prices are prices most hospitals use in their billings,
however they are discounted for insurance companies and Medicare. Even with
discounts hospitals earn abnormal profits, unlike other businesses.
Contrary to other industries,
improved technology in medical care, has led to an increase in costs. This is
partly due to more ease in conducting various tests, fee for service pricing
and efforts to ward off complaints. The evidence does show increase in
costly tests and medical procedures, a result of lack of attention to
preventive care.
Tests have increased
by extending the population group, e.g., screening younger groups for breast
cancer (extensive margin), and by increasing the number of tests on the same
population group, e.g., more frequent colonoscopies (intensive margin). This
has increased cost as well as profits of hospitals and physicians’
compensation.
Since evidence-based
tests and treatments have not been extensively implemented either in hospitals
or physicians’ clinics, we find a great variation in tests, procedures and
hence, cost of medical care. In addition, since physicians are not sole
agents of patients, they have no incentive to shop around for best prices on
behalf of their patients. Also, control of prices due to monopoly power puts no
pressure on hospitals to restrain abnormal compensation packages for
administrators, physicians and other personnel, hence escalating total costs of
care.
It is ironic that we
regulate gas and electricity prices but not prices of medical care services,
even though this market is monopolistic. It is only through Medicare, Medicaid
and to a certain extent through insurance system that the cost of medical care
for most consumers is kept below Chargemaster price level. The Affordable Care
Act also contains provisions to contain costs of medical services (e.g.,
payments based on treatment outcomes) and insurance premiums. However, a single-payer Medicare system
for all, with a means tested increase in Medicare tax and supplemented by
private insurance system, would be more cost effective than the mish-mash
system we have now.
Mathur
is former chairman and professor of economics and now professor emeritus,
Department of Economics, Cleveland State University, Cleveland, Ohio. His
articles also appear in mathursblogonomics.blogs.com. He also writes a blog for
the Standard-Examiner at http://blogs.standard.net/economics,etc.
