cost

Health Care: Cost vs Price

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We are so lucky to live in a State where we have an incredible group of health care providers. Doctors, nurses, and technicians, Family Nurse Practitioners, and Physician Assistants are as knowledgeable and skilled as any place in the world and I have practiced all over the world.

That being said there were two recent articles in the Idaho Statesman one by Audrey Dutton on Health Care Pricing transparency and a response in the editorial section on Sunday, Jan. 27 by Odette Bolzano the CEO of St. AL’s Hospital in Boise. I share with Ms. Dutton her skepticism about the process of pricing transparency. The real problem, however, is reflected in Ms.Bolano’s comments.

Ever since the ACA came into being with its promise of coverage and increased access to care, costs of providing medical services have gone up every year and the cost of insurance coverage in every State has at least doubled, or in many States even quadrupled. We have been very lucky in Idaho.

Eight years ago, economists rightly predicted that as large hospital systems and their networks merged and consolidated and as insurance carriers did the same often times claiming through a process of “vertical integration” buying up provider hospitals and practices and taking on the role of benefit managers that in reality is nothing more than a purposeful move toward natural monopoly. The promised “economies of scale’ have been more than offset by having fewer players in the market place. With the decreased supply and increased demand, prices have gone up.

With increased prices, the spending on non-medical line items of these large corporations, many of them non-profits, has increased. Because of the economic conditions created by the ACA the incentives to contain costs have gone away.

Ms. Balono in her second paragraph states, “that the mission of healing is not in the business of selling a service or commodity”. She is making the assumption that health care is either a “right” or a common good, both of which are not true. If it were a “right”, in this case, a term rooted in the natural law, there would be no need for an agent or agency to secure that right. The only thing government or anyone one else would need to do would to not interfere in the “right” of the individual to exercise their own free will. This is interestingly the “dispositive” argument that Barak Obama made when describing our own Bill of Rights and “The Natural Law. Therefore if the government is the agent exercising that right it is doing so in a positive not a dispositive manner—it is therefore not a natural right.

Is health care a “common good”? Hardly. The term “common good” has a very specific definition when talked about by economists, political scientists, and sociologists. In order for a common good to exist, it must meet three criteria: 1. Non-exclusivity of consumption. It is available to everyone without a need for a distribution process. 2. Jointness of consumption. There is no scarcity of the good or service and when one unit is consumed there is no decrease in the number of available units for subsequent consumption. The air we breathe is an often-cited example though that may be changing. And 3. Neighborhood affect. When one person uses the good or service everyone benefits—think about police patrolling a neighborhood.

Health Care does not meet the criteria of being a “common or public good” The common sense method of determining if health care is “a right” is to simply ask do the people providing the service get paid and do the consumable goods have a cost? There is human and physical capital involved in distributing health care and this cannot be ignored or marginalized when making a feel-good argument. In the same paragraph it is mentioned that buying health care——I thought health care was a right, is a very complex situation not like buying a car or a home. This argument is continued in the last sentence of the next to last paragraph where it is stated, “that one must understand the insurance benefits that one has in order to more accurately understand the true cost”.

This mixes up the definition of “cost” and “price”. It is almost unheard of for a buyer in an unfettered market to have complete insight into a supplier’s cost, though buyers are constantly trying to figure out costs of production, suppliers—like insurance carriers who won’t disclose the rates they pay physicians—publically guard their costs aggressively.

Prices are determined in the market place and when the price that is willing to be paid falls below the equilibrium price—really not the true equilibrium price but a price that does not cover the supplier’s costs, then the supplier drops out of the transaction. The price is thus set in the market place as the buyer and seller negotiate. If the price is to low the seller drops out and if the price is too high the buyer looks for another seller—except in our medical market place there are only a limited number of sellers.

Finally, the idea that the Medical Market place is unique and complex is folly, but folly that succeeds for 65 years is folly nonetheless. Think of the many thousands of transactions that are made to make a car. Every spark plug, hubcap, battery, fuel pump, and filter is the result of a transaction between a buyer and a seller. When I buy a car, I don’t ask to see a list of all these transactions. I look at the car, see what other similar models offer and cost and make a decision based on price and quality, not on cost.

When we shop at the grocery store for vegetables do we ask to see the fuel and fertilizer and seed prices of the farmer and how much he paid his labor force. I think not. We shop and look for the best price with the most quality. Albertson’s would love to have the margins that our large hospital systems and insurance carriers have today. But because of the competitive market for food and household goods, their margins are continually being squeezed and the consumer benefits. Do the Executives entrusted with making health care business decisions not go to the grocery? Maybe they are just making so much themselves that they never have to pay attention to market prices like everybody else does.

There has not been an unfettered market in health care for 65 years, but in those places that there has been such a situation think about how prices have come down. When I first had my Lasik surgery in 1992 it cost $5000/eye. Today it costs less them $500/eye. Same with cosmetic surgery where prices have gone down for many procedures 500%. In each case there is a very competitive market for those services and for those who ask about the emergent nature of medical care not being conducive to market forces, a recent New England of Medicine article pointed out that over 80% of medical interactions are non-emergent.

What we do need is to relook at the medical practices act and allow for more mobility and accessibility of providers applying for licenses in Idaho. We need legislation providing for malpractice coverage for physicians giving of their services “pro bono”. Many retired physicians would love to provide charity care but they can’t afford the malpractice coverage.

We need to have all non-profit hospitals and carriers that receive over $100million of Federal Transfer Payments be required to undergo an independent outside signed partners audit presented to the representatives of the people—our legislature, who provide for them their tax exempt non-profit status. And the reason for this is not to look into “costs” but to look into how the transfers themselves are being accounted for.

We need the legislature to require that all non-emergent services be proceeded by an estimate for services that can later be married with an invoice and then a final bill.

We need to have an external audit of the Department of Health and Welfare immediately so we can see if those truly in need are receiving the proper available services and if there is anyone gaming the system. We need to see if illegibility criteria are being properly vetted by State and Federal—IRS agencies in a timely fashion.

Finally, we need the Governor or Legislature to set up a “Blue Ribbon Panel” that will not just be the usual “stakeholder” insurance carriers, state agencies, and large hospitals, but rather people who don’t currently have a “hook” in the health care industry.

So we have a lot to be thankful for in Idaho with our health care—doctors, nurses and technicians being the cream of the crop. But when the people in charge of running the business side of health care don’t know the difference between a price and a cost, health care will always be priced at “premium plus”.

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