NCPA Commentaries by Devon Herrick
Devon Herrick is a Senior Fellow for the National Center for Policy Analysis. While Herrick works on a number of issues, he concentrates on health care issues, such as Internet-based medicine, health insurance and the uninsured, as well as pharmaceutical drug issues.
Mar 15, 2007
Mr. Chairman and members of the Subcommittee, please accept my comments for the record regarding the March 15, 2007, hearing about providing health insurance for the uninsured. My comments focus specifically on the issue of health care prices. As was pointed out by many of the witnesses during the hearing, the price of health care is a significant issue to consider as the Subcommittee discusses health care reform.
Prices for medical services have been rising faster than prices of other goods and services for as long as anyone can remember. But the Subcommittee should consider that not all health care prices are rising. Although health care inflation is robust for those services paid by third-party insurance, prices are rising only moderately for services patients buy directly. For example, the real (inflation-adjusted) price of cosmetic surgery fell over the past decade - despite a huge increase in demand and considerable innovation.
Health Care Costs Rise When Others Pay. A primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else's money. When patients pay their own medical bills, they are conservative consumers. Economic studies and common sense confirm that people are less likely to be prudent, careful shoppers if someone else is picking up the tab. Thus, the increase in spending has occurred because third parties - employers, insurance companies or government - pay almost all the bills.
The Extent of Third-Party Payment of Medical Bills. Although polls show that many people fear they will not be able to pay their medical bills from their own resources, the reality is that most people pay for only a small portion of their medical care:
- For every $1 worth of hospital care consumed, the patient pays only about three cents out of pocket, on the average; 97 cents is paid by a third party.
- For every $1 worth of physician services consumed, the patient pays less than 10 cents out of pocket, on the average.
- For the health care system as a whole, every time patients consume $1 in services, they pay only 14 cents out of pocket.
Thus, from an economic point of view, the incentive for patients is to consume hospital services until they are worth only three cents on the dollar, on the average. The incentive is to consume physicians' services until they are worth only 10 cents on the dollar. And for the health care system as a whole, patients have an incentive to utilize everything modern medicine offers until the value to them is only 14 cents out of the last dollar spent.
Medical Inflation. Health care costs over the past 40 years have risen as the proportion of health care paid for by third parties has increased. Prior to the advent of Medicare and Medicaid in 1965, health care spending never exceeded 6 percent of gross domestic product. Today it is 16 percent. These two government programs unleashed a torrent of new spending and led to rising health care prices. For instance, a recent study by Amy Finkelstein of the Massachusetts Institute of Technology found that half the growth in health care expenditures was due to Medicare. There has also been an increase in tax-subsidized employer spending on health care. These two factors, rather than the cost of new technology and drugs, explain why health care costs outpace inflation.
Cosmetic Surgery Prices. Cosmetic surgery is one of the few types of medical care for which consumers pay almost exclusively out of pocket. Even so, the demand for cosmetic surgery exploded in recent years. Of the 10.2 million cosmetic procedures performed in 2005 that were tracked by the American Society of Plastic Surgeons, 1.8 million were surgical procedures. By comparison, in 1992 the American Society of Plastic Surgeons only tracked 413,208 cosmetic procedures - a fraction of those performed in 2005.
Despite this huge increase, cosmetic surgeons' fees remained relatively stable. The average increase in prices for medical services from 1992 through 2005 was 77 percent. [See the figure.] The increase in the price of all goods, as measured by the consumer price index (CPI), was 39 percent. Cosmetic surgery prices only went up about 22 percent. Thus, while the price of medical services generally rose almost twice as fast as the CPI, the price of cosmetic surgery went up slightly more than half as much. Put another way, while the real price of health care paid for by third parties rose, the real price of self-pay medicine fell.
Another example of price competition is the market for corrective eye surgery. In 1999, only a few years after LASIK was approved, the price was about $2,100 per eye, according to the ophthalmic market research firm MarketScope. Within a short time, competition drove the price down to a slightly more than $1,600. The cost per eye of the standard LASIK is now about 20 percent lower than six years earlier. Competition held prices in check until a new innovation arrived for which patients were willing to pay more. By 2003 surgeons began to perform a newer, more-advanced custom wavefront-guided LASIK procedure.
Keeping Costs Down. What explains this price stability? One reason is patient behavior. When patients pay with their own money, they have an incentive to be savvy consumers. A second reason is supply. For instance, as more people demanded cosmetic surgery procedures, more surgeons began to provide them. A third reason is efficiency. Many providers are increasing their efficiency by locating operating rooms in their clinics, a less-expensive alternative to outpatient hospital surgery. And providers often adjust their fees to stay competitive and usually quote patients a package price. Absent are the gatekeepers, prior authorization and large medical office billing staffs needed when third-party insurance pays the fees. A fourth reason is innovation and the emergence of substitute products.
Fostering Competition. When providers compete for business, the market fosters competition. In competitive markets, producers seek to reduce costs and to offer products that meet customer demands. However, instead of a competitive national market for health insurance, we operate under a patchwork of 50 different sets of state regulations. Since each state insurance market is protected from interstate competition, legislators often require insurers to cover services that drive up premiums. For example, about one-fourth of states mandate benefit packages that cover acupuncture and marriage counseling. More than half require coverage for social workers and 60 percent for contraceptives. Seven states require coverage for hairpieces and nine, hearing aids. Needless to say, these mandates drive up the cost of providing health insurance, often making it prohibitively expensive for an insurer licensed in one state to do business in another state. As a result, consumers have little choice among plans. In many localities, only one insurance product is available, so the consumer is forced to buy an overpriced product, or forgo insurance altogether.
Fostering Innovation. When patients directly control their health care dollars, not only do prices go down, medical providers begin to offer innovative services to meet the demand of empowered patients. Telephone consultations, walk-in retail clinics, electronic medical records, and personalized care are among the innovative services provided by doctors. These new physician services tend to have two characteristics: (a) they offer patients greater convenience and (b) they step outside normal reimbursement channels. Furthermore, many of these innovations (such as electronic medical records) dramatically improve the delivery of quality health care.
Conclusion. As the Subcommittee deliberates health care issues, I hope you will consider the relationship between the competitive healthcare marketplace and stable prices. Thank you for the opportunity to comment.
Jan 11, 2007
In September 2006, Wal-Mart rolled out a plan to sell 291 generic prescription medications at $4 for a 30-day supply at selected pharmacies in Florida. At the same time, it announced plans to expand the program to 14 additional states.
By late October, another 12 states had been added to the program, and the number of generic medications available had increased to 314, including multiple doses of the same drug. In mid-November the company announced it was adding 11 new states and 17 new prescriptions to the program, bringing 38 states under the $4 drug umbrella.
Excluding multiple doses, Wal-Mart now sells about 160 unique drugs at $4 per prescription.
Generic drugs are a bargain for Americans. In 2005, they rang up sales topping more than $28 billion in the United States, according to IMS Health, a market research firm that tracks the pharmaceutical industry.
The Generic Pharmaceutical Association estimates that although generic drugs represent only about 12 percent of drug spending, they comprise more than 53 percent of all drugs sold in the United States.
Discounting Popular Meds
RxList.com, an independent Web site, features a list of the most widely prescribed medications. Nearly one-third of the 30 most prescribed drugs are available at Wal-Mart for $4 (an additional one-third of the top 30 prescribed drugs are branded medications).
According to Wal-Mart, the list of discounted drugs represents about 25 percent of the drugs it sells.
Dr. Gerald Musgrave, president of Economics America, a consulting firm in Ann Arbor, Michigan, and coauthor of the book Patient Power, said that by announcing flat pricing and publishing a list of drugs offered at the discounted price, Wal-Mart has created greater competition in the generic market.
"Making its list of covered medications public is squaring off directly against its big-time competitors, as well as the dwindling fringe of local mom-and-pop pharmacies. Both are formidable adversaries," Musgrave said. "If Wal-Mart has its traditional success in raising the living standards of millions of customers, via lower drug prices, it may also generate new detractors who will seek political advantage to accomplish what they can't win in the marketplace."
Within a day of Wal-Mart's initial announcement, other retail stores followed suit.
Target announced it would match Wal-Mart's price, and K-Mart has begun selling 184 generic prescriptions at $15 for each 90-day supply. At press time, two chains, Giant Eagle and Meijer, had plans to give away seven different generic antibiotics at their locations.
Actions like this worry Dr. Stephen Schondelmeyer, director of the Prime Institute College of Pharmacy at the University of Minnesota, who cautions against using drugs for the wrong reasons.
"Getting the best value on a drug is a good thing. But it is not the best value if the drug is not needed or [not] used appropriately," Schondelmeyer explained. "[The antibiotic] Amoxicillin is a good drug. But we shouldn't be using this to treat a viral cold just because it only costs $4, or even if it is free."
Schondelmeyer urges caution. He says patients should not ask their doctor to prescribe drugs only from Wal-Mart's $4 list, because a few of the drugs on it are not the safest, best generic drug available for a particular condition. In other cases, some of Wal-Mart's $4 drugs are good but are already available over the counter.
Driving Prices Down
Dr. Robert Graboyes, a senior fellow at the National Center for Policy Analysis who teaches economics and health policy at three universities in Virginia, thinks Wal-Mart's move could affect the pharmaceutical industry.
"The real story here is not so much quantitative, but qualitative. The news is not how much they might drive down prices, but rather the fact that somebody is driving down prices at all," Graboyes said.
"Assuming the program works well for Wal-Mart, the effect on competitors could be profound," Graboyes continued. "That's been the case with so much of Wal-Mart's product line. They've demonstrably driven down consumer prices nationally."
Wal-Mart will likely see its business increase. According to the National Association of Chain Drug Stores, in 2005 the average generic prescription drug sold for about $29.82 (compared to $101.71 for name-brand prescriptions) for a 30-day supply.
A Kaiser Family Foundation report released in October found the average co-pay for generic drugs on an employer-sponsored health plan is about $11. At that rate, paying retail at Wal-Mart is nearly two-thirds less expensive on some generic drugs than a standard drug plan co-payment.
Wal-Mart's standard pricing and published list will surely save consumers some of the effort of calling numerous locations, Graboyes said. The price of generic drugs varies widely from region to region and from one store to the next.
For instance, the Web site MyFloridaRx.com tracks retail drug prices across the state of Florida. A search made in November found prices for Fluoxetine (30 20mg capsules), the generic form of Prozac, ranging from $5.20 at Citrus Health Network Pharmacy to $142.30 at a pharmacy owned by Luper Corporation.
Once the Web site is updated, the lowest price on Fluoxetine in the state of Florida should be $4 at Wal-Mart.
Jan 11, 2007
In recent years, patients treated by the Canadian health care system have increasingly experienced lengthy waits to see providers.
According a new study on medical care in Canada, released in October 2006 by the Fraser Institute, "waiting times are the legacy of a medical system offering low expectations cloaked in lofty rhetoric."
Since the mid-1980s, the Vancouver-based think tank has produced an annual report on how long patients are required to wait for medical care in Canada. As a result of the group's research, treatment waiting times are now part of the public policy debate on the quality of the Canadian health care system.
In its 16th annual installment, the report titled "Waiting Your Turn" tracks how waiting times vary across Canadian provinces depending on the type of treatment needed. The report also documents waiting times for referral to specialists and the subsequent amount of time spent waiting for actual treatment from the specialist.
"Despite all of the promises made by Canada's provincial and federal governments, and despite the fact that Canadians are spending more on health care than ever before, the total wait time in Canada continues to hover near the 18-week mark as it has since 2003," coauthor Nadeen Esmail said in an interview for this article. "Equally troubling is the reality that the total wait time in 2006 is 91 percent longer than it was in 1993."
These findings should give pause to proponents of universal coverage, who often cite Canada as an example of a country where health care costs less than care in the United States and everyone has free health care at the point of service.
"While many proclaim Canada's Medicare program to be one of the best in the world, or suggest it should be the model for reform in the United States," Esmail said, "the reality is that health spending in Canada outpaces that in most other developed nations that, like Canada, guarantee access to care regardless of ability to pay, and yet access to health care in this country lags that available in most of these other nations."
... and Waiting
In 2006, the average amount of time spent waiting to receive treatment after referral by a general practitioner averaged 17.8 weeks across Canada. At 14.9 weeks, Ontario had the shortest waits. Prince Edward Island, Saskatchewan, and New Brunswick had average waits of 25.8 weeks, 28.5 weeks, and 31.9 weeks, respectively.
Patients referred to a neurosurgeon waited an average of 21 weeks just to see a specialist. Getting treatment required an additional 10.7 weeks.
Patients waited an average of 16.2 weeks to see an orthopedic surgeon, and another 24.2 weeks for treatment to be performed after the initial visit.
The number of people routinely waiting for services is staggering, according to the report. In 2003, the most recent year for which data were available from Statistics Canada, approximately 1.1 million people had trouble accessing care on a timely basis.
About 201,000 had problems obtaining non-emergency services. An additional 607,000 had problems getting in to see a specialist, and about 301,000 patients experienced problems obtaining diagnostic procedures.
"So much for the myth of government-run health care being compassionate and fair," said David Gratzer, a Canadian doctor and senior fellow at the Manhattan Institute. "Canadians wait and wait and wait."
In Canada, waiting lists are considered a way of rationing medical care and holding down health care spending. Because health care in Canada is largely free at the point of service, demand is likely to exceed supply.
In a typical market system, the price would adjust to the point where the quantity of services provided is equal to the amount patients are willing to buy. But in a system devoid of a market mechanism, scarce resources are rationed through means other than price.
"The long waits for needed care in Canada show the danger of abandoning markets in favor of central planning," explained Sean Parnell, vice president of external relations at The Heartland Institute, an Illinois-based think tank. "Just as there were long lines for food and other basic necessities in the old Soviet Union because planners couldn't accurately match supply with demand, the politicians and bureaucrats who run health care in Canada can't provide enough health care to meet the citizens' needs."
"It's like the old Soviet system," Gratzer said. "Everything is free, but nothing is readily available. Except that we're not talking about lining up for toilet paper in Russia in 1976, but queuing for surgery in Canada in 2006."
Economists generally agree such "non-price" rationing of resources is less efficient than a system that uses prices. One reason is that productivity is lost when people are unable to work due to treatment delays. Also, the risk of death while waiting is higher for serious conditions such as cardiac care.
Waiting lists are consequences of the way the Canadian health care system is structured, not a lack of money, critics say.
"The fact that this is the 16th annual report on wait lists for needed care should be enough to prove that the problem isn't a temporary one that can be fixed with just a little more money, as defenders of Canada's government-run system have claimed for years," Parnell said.
"Long waits and widespread denial of needed care are a permanent and necessary part of government-run systems," Parnell noted.
According to the study, Canadian provinces with higher spending per capita did not experience shorter wait times than provinces that spent less.
In fact, increased spending was associated with longer waits, unless the increased spending was targeted to physicians and pharmaceuticals.
"The current health care model simply does not deliver to Canadians the access to care they should expect for the amount of money their governments are spending," Esmail said.
Mar 01, 2006
Early 2006 reports on the kinds of health plans Americans are purchasing signal a shift away from comprehensive health insurance with first-dollar coverage toward plans more tailored to individual or family needs.
Feb 01, 2006
A December 2005 survey found people with consumer-driven health care (CDHC) plans were less satisfied than those in comprehensive health plans. The Internet-based survey by the Employee Benefit Research Institute (EBRI) and Commonwealth Fund paints a far bleaker picture than CDHC proponents believe is true.
Jan 01, 2006
Americans often find themselves taking half a day off from work and waiting an hour in a physician's office, only to see a doctor for 10 minutes. And the primary reason people see a doctor is for access to prescription drugs.
Sep 29, 2004
Democratic presidential candidate John Kerry is proposing to transform the U.S. health-care system with a costly plan that will expand government control without appreciably reducing the level of uninsured.
Mar 30, 2004
Now that the presidential nominees of both major parties are known, it's appropriate to focus attention on their plans to deal with one of the nation's major public policy problems: insuring the uninsured. The differences between the two plans are enormous.
Nov 01, 2001
Americans' intake of prescription and non-prescription drugs has now surpassed $250 billion annually, reflecting a steady increase to new record levels each year.