Priceless: Chapter (2)
by Austin Frakt
September 19, 2012
Source: The Incidental Economist
Housekeeping: A few days ago, I finished reading all of John Goodman’s book Priceless and wrote forthcoming posts commenting on every chapter. Let me give you an emotional sketch: we will enter a dark period in which my posts are very critical. Then, about one-third into the book, things turn brighter; I agree with some of John’s ideas. After that, it’s a mix. All told, it’s a roller coaster. So, if you think I’m being too hard on John, just wait, it’ll change, and change again, and again, … Something for everyone.
Also, by way of timing, my remaining posts will publish over the next four weeks, three posts per week collectively covering between three and five chapters. All posts to date are found under the Priceless tag, including those by Aaron. In the first one I wrote that I might round up reader comments for a post. I won’t. It’s too much work, and I’ve already done plenty to read and react to every chapter. However, you can read the comments to posts in place. Many are excellent.
Reading Chapter 2 reveals just how large an undertaking this blog project is. I could easily write a half-dozen posts on this chapter alone. I won’t. Instead, I’ll pluck out a few points. Please raise whatever you wish relevant to the book in the comments. What I’ve just written in this paragraph probably applies to every chapter. I won’t repeat it.
Comment 1: John is close to right in saying that when hospitals compete, they tend to do so on amenities (and technology). This is the medical arms race. What he left out is that the pace of this race depends in large part on the degree to which insurers have and exercise leverage (market power) to constrain hospital behavior.
Comment 2: John is also right that there is no market clearing price for a health care service. Different payers pay different amounts, even for the same service from the same provider. He suggests that if the market were less constrained and patients paid more out of pocket, we’d see such a market clearing price emerge, as we do for other goods and services.
But let’s be clear about what John is and is not talking about. He is also not talking about getting rid of all insurance, just about loosening regulations to open up the market for more catastrophic plans tied to medical savings accounts. Also, due to political constraints, Medicare is not likely to move very far in this direction. In light of these practical and sensible constraints on John’s ambition, I’m not sure how a market clearing price will emerge for all services. There will still be a lot of third-party rate setting going on, much of it by the government. Those third-party payers are not all going to agree to a single price.
But there is another way to force them to do so. Just pass a law that each provider must list one price, available to any payer, for each service. Think of it as the shelf or sticker price. No haggling. The law does not dictate what the price(s) are, just that there can only be one per provider, per service. Variation across providers would still exist. There would still be price competition. In fact, there’d likely be more of it. But price discrimination and cost shifting (if any) would be gone. The prices could be listed in a book or on a website trivially. Consumers could look them up and know what they’d pay out of pocket or what their insurer (public or private) would pay on their behalf. Simple. Clear. Empowering? I would very much like to know what John thinks of this idea.
Comment 3: John’s lesson about how rationing by waiting is potentially more costly than rationing by price is convincing. Just note that the amount by which it is more costly is driven by assumptions. It may not always be twice! I presume you read the chapter, so I’m not going to quote it. (See the section titled “The Cost of Non-Price Rationing”.)
Comment 4: John works hard to convince us that health care is like other goods and services. He admits it is too different from supermarket products to make his analogy to them sound. But he thinks cell phones are an apt comparison. Sorry, no. When my cell phone is on the fritz, or my wife’s, it’s an inconvenience, but by no means a crisis. We can work around that problem easily, even if we can’t get our device fixed quickly. But, when (or if) I have a major health issue, or my wife or kids or any loved one, it’s a huge deal. I can’t think straight. I’m not really myself and far less able to function as a consumer. I don’t think its just me. And, just to be clear, I’m not talking about health issues that are addressed by LASIK or cosmetic surgery. Surely we can agree that what those procedures treat are not representative of the truly dreadful ailments that might afflict us.
Comment 5: I really think John is half way on to something here:
Everyone on the provider side should be encouraged to make Medicare a better offer. Medicare should accept these offers provided that (1) the total cost to government does not increase, (2) patient quality of care does not decrease, and (3) the provider proposes a reasonable method of assuring that (1) and (2) have been satisfied.
However, can you imagine the bureaucracy required to accept and vet the sundry offers and monitor the implemented innovations? Maybe it is a smaller bureaucracy than otherwise would exist in Medicare as we know it, but that’s not ex ante obvious. Maybe the bureaucracy could handle what John is proposing in a way he’d find acceptable, even competent, but I really doubt it, given what he says (with mostly agreement from me) about Medicare’s inability to sensibly set prices. We can’t lament the bureaucracy that exists and then assume it away for the purpose of our policy proposal. This is the law of one bureaucracy. For all that, CMS is accepting proposals from providers under its Bundled Payments for Care Improvement initiative. Perhaps they are soliciting provider ideas in other areas too. One would have to get under the hood more than I have to know for certain.
Comment 6: Readers, what do you think of this claim?
We cannot find a single institution providing high-quality, low-cost care that was created by any demand-side buyer of care. Not the Centers for Medicare and Medicaid Services (CMS), which runs Medicare and Medicaid. Not BlueCross. Not any employer.
Comment 7: Toward the end of the chapter, John seems to confuse a few things. First, he notes the work of Cutler that shows that health spending is worth the price. Then he points out that there is a lot of waste in health care. As I’ve written before, both things can be (and are) true. John makes it sound like one refutes the other. It doesn’t. Think of it this way, suppose you purchase a car for $20,000, but you’d have paid $25,000. (In other words, you would not resell it for any price below $25,000.) You value it at $5,000 more than it cost you. It was well worth the price to you! Suppose then you learn that in the next town over you could have bought the same car for only $15,000. You got a bad deal! You wasted $5,000. But you still got a car for less than its value to you. Money wasted and a product worth its price can coexist. Health care explains half of longevity gains, despite the waste.
John also spends a few words on the variations literature, noting that variations in health care spending have little correlation with mortality. But, in my view and reading of the literature, he is not right to imply that we can simply cut (in a crude sense) and not affect health. I’ve already explained this. Bottom line: there is waste, but we don’t know where it is. John has not (yet) convinced me a consumer spending his own money could find and avoid it. But I’ve only read through Chapter 2. Onward!
I will post on Chapter 3 on Friday.