What tummy tucks can teach us about health care reform

The conventional wisdom is that market forces don't apply to pricing for medical care. A new study of the cosmetic surgery industry shows how wrong that belief is.


by Shawn Tully

Source: CNNMoney

Fortune -- We're constantly hearing why the market forces that bring us great deals on cars, cellular phones, and houses can never work in health care.

One leading myth is that each patient is so different, and every procedure so tailored, that doctors can't determine the cost, or tell patients the price, in advance. Hence, providing consumers with prices they can compare is totally impractical. Another holds that medicine is so sophisticated that consumers are incapable of choosing deals that combine low cost with the promise of excellent outcomes. A third is the concept that -- in contrast to every other area of the economy -- new technology inevitably makes everything more expensive.

Those oft-repeated beliefs are wrong. And the best evidence is the ultra-competitive field of cosmetic surgery and minimally invasive treatments.

A new paper from conservative think tank the National Center for Policy Analysis, shows just how the industry's dynamics follow the patterns that prevail everywhere else. The author, economist Devon Herrick, collected and analyzed data from the annual statistical surveys of the American Society of Plastic Surgeons, and the trends he has identified are extraordinary.

Over the past two decades, U.S. medical prices –– not total spending –– have been rising at around 5% per year, or twice the increase in the CPI. By contrast, prices for cosmetic surgery are inching forward at just 1.3% a year, or a full 1.2 percentage points lower than inflation.

The reason is that patients spend their own money on cosmetic treatments, and in doing so behave just like consumers everywhere else. They shop for the best deals and love doing it. In every other medical field, costs are largely covered by third parties, employers, insurers, or Medicare and Medicaid. Consumers pay just 11 cents for every dollar in care they consume. The rewards for seeking the most favorable prices are nil.

It's just the opposite in cosmetic surgery: Whatever you can save on a facelift or Botox treatment is money you get to spend on a vacation or your kid's tuition. Doctors compete vigorously to win business using steep discounts. Websites such as Groupon (GRPN) and LivingSocial regularly offer "deals-of-the day" for cosmetic procedures. The average cost of Botox, Herrick found, dropped from $500 in 2007 to $365.

The growth in cosmetic procedures outstrips virtually every other area of health care. The volume of surgical procedures, such as facelifts and liposuction, is rising at 8% a year, while minimally invasive treatments like hair and spider vein removal with lasers are increasing 28% annually.

Yet the explosive demand has not been accompanied by big prices. The keen competition forces doctors to prize efficiency. Most of the procedures are conducted in clinics where costs are far lower than in hospital surgery rooms. The supply of practitioners and facilities is highly elastic -- a great argument for why allowing manpower to freely follow the market works in medicine just as everywhere else.

For example, nurses and aestheticians perform many of the minimally invasive treatments, including teeth-whitening and chemical peels. Physicians don't need to be board certified plastic surgeons to do chin implants. And OB/GYNs are becoming experts in tummy tucks.

Doctors are also touting enhanced and advanced procedures to garner premium prices. A case in point is Lasik eye surgery. The going rate for basic Lasik was $2,100 per eye in 1999. By 2011, the price had dropped 18% to $1,630. So ophthalmologists developed Custom Wavefront, a laser procedure that better customizes the surgery to the exact shape of the patient's eye.

Custom Wavefront commands a premium price of $2,151 per eye –– about the same rate standard Lasik cost over two decades ago. As Wavefront grows in popularity, it's likely that competition will hold down its price, just as it did for basic Lasik. In eye care, it's clear that new technology coupled with stiff competition leads to reasonable, and even declining prices, but still gives doctors an incentive to get at least a temporary premium through innovation.

The market will work in medicine. Rules that lavishly subsidize demand and at the same time shackle supply are not the answer. Follow the lessons from facelifts and tummy tucks: The more consumers spend their own money, the more efficient health care will become.