The Market for Medical Care: Why You Don’t Know the Price; Why You Don’t Know about Quality; And What Can Be Done about It.

Studies | Health

No. 296
Monday, March 12, 2007
by Devon M. Herrick and John C. Goodman


Executive Summary

In most markets, prices and quality indicators are transparent - clear and readily available to consumers.   Health care is different:  Prices are difficult to obtain and often meaningless when they are disclosed.  Many patients never learn the cost of their care.

The primary reason why doctors and hospitals typically do not disclose prices prior to treatment is that they do not compete for patients based on price.  Prices are usually paid not by patients themselves but by third parties - employers, insurance companies or government.  As a result, patients have little reason to care about prices. 

And it turns out, when providers do not compete on price, they do not compete on quality either.  In fact, in a very real sense, doctors and hospitals are not competing for patients at all - at least not in the way normal businesses compete for customers in competitive markets.

This lack of competition for patients has a profound effect on the quality and cost of health care.  Long before a patient enters a doctor's office, third-party bureaucracies have determined which medical services they will pay for, which ones they will not and how much they will pay.  The result is a highly artificial market which departs in many ways from how other markets function.

Among the services insurers typically do not pay for are:

  • Integrated Care:   Doctors offer fragmented services to diabetics, for example, but no one offers diabetic care as such - taking responsibility for the treatment of a patient's case from beginning to end.
  • Patient Education:   Diabetics, asthmatics and other patients with chronic conditions could manage much of their own care, if someone taught them how to do it.
  • Telephone and E-Mail Consultations:  Potentially, the chronically ill could have more care, better care and less-costly care through modern communication devices - but few doctors consult by phone, and only one-in-four uses e-mail.
  • Electronic Medical Records:  Despite studies showing that electronic medical records can reduce costs and improve quality (by reducing errors, for example), only one-in-five physicians stores medical records electronically.

In health care markets where third-party payers do not negotiate prices or pay the bills, the behavior of providers is radically different.  In the market for cosmetic surgery, for example, patients are offered package prices covering all aspects of care - physician fees, ancillary services, facility costs and so forth.  Not only is there price competition, but the real price of cosmetic surgery has actually declined over the past 15 years - despite a six-fold increase in demand and enormous technological change. Similarly, the price of conventional LASIK vision correction surgery (for which patients pay with their own money) has fallen dramatically, even as procedures become more technically advanced. 

Increasingly, cash-paying "medical tourists" are traveling outside the United States for treatment or surgery.  In contrast to the typical American hospital stay, a package price includes all the costs of treatment, and often air fare and post-operative hotel accommodations.  Prices are one-third to one-fifth as much as treatment at a U.S. hospital and the quality is typically high.

Retail walk-in clinics in drugstores, shopping malls and big-box retailers are another example.  Originally established to bypass traditional health insurance, they post prices for procedures and minimize waiting times.  They are staffed by nurse practitioners and use computer software to follow treatment protocols.  Medical records are stored electronically and prescriptions can also be ordered online.  The quality of care is often higher because the technologies used encourage best practices, improve care coordination, reduce errors and prevent adverse drug interactions.

Like walk-in clinics, a growing number of medical practices offer discounts for patients who pay bills directly and avoid third-party insurance.  These entities almost always post their prices, and many store records electronically and offer e-mail and telephone consultations .  Patients can also go outside their health insurance plan and arrange for telephone-based consultations with companies like TelaDoc Medical Services.  A similar service, Doctor On Call , claims 70 percent of what physicians do can be done by phone!  These services also store medical records electronically and "write" electronic prescriptions.

The marriage of the computer and telecommunications has also led to innovations that can increase economic efficiency and improve quality.  Several new tools are now available to help physicians and patients find the most appropriate treatments using information on evidence-based protocols.  Information on price and quality is available on the Internet to patients in some health plans. And objective, independent third parties often provide data for a fee.

The Internet is also transforming the market for prescription drugs.  For example, when a patient logs on to Rxaminer.com and enters information about his or her prescription medications, the Web site produces a report including therapeutic and generic substitutes and over-the-counter alternatives for brand-name drugs.  The drug-rating Web site AskAPatient.com lets patients compare experiences with drug therapies.  Furthermore, ordering prescriptions online improves quality.

Patients paying with their own money can also use Internet services to order numerous lab tests on samples collected in convenient settings for fees that are nearly 50 percent less than tests ordered by physicians' offices.

We are likely to see more of these challenges to traditional health care in the future.  The reason?  Increasingly, patients are paying more costs out of pocket.  Deductibles for the average plan, for example, have nearly doubled over the past decade.  And due to recent changes in the tax law, employees are increasingly managing their own health care dollars through personal health accounts, usually coupled with high-deductible health plans.  In 2006, of the approximately 12 million high-deductible health plans, about one-quarter were accompanied by Health Reimbursement Arrangements (HRAs) and about 3.2 million were coupled with Health Savings Accounts (HSAs).  This consumer-driven health care revolution gives individuals the opportunity to benefit financially from consuming health care wisely.

Although the medical marketplace is changing, legal, regulatory and cultural barriers to competition, innovation and transparency remain.  For example: 

  • Medical societies and hospital trade associations have long tried to discourage price competition among their members; as a result, there is a cultural bias against advertising prices or competing on the basis of quality.
  • Laws in many states restrict the practice of medicine to face-to-face encounters between physicians and patients, discouraging the use of the phone, e-mail and other innovative medical services. 
  • Potential lawsuits discourage physicians and hospitals from sharing information on medical errors and other quality indicators. 

The biggest obstacle to transparency is a tax system that favors third-party insurance over individual self-insurance.  For a middle-income employee, government is effectively paying almost half the cost of health insurance.  This has encouraged consumers to use third-party bureaucracies to pay every medical bill.

Transparency is the natural product of a market in which patients control their own health care dollars and providers compete for those dollars.  Thus, transparency will emerge as we fundamentally change the way we pay for health care.  Some of these changes are already occurring, but government can speed the transition to greater transparency by removing obstacles to competition and innovation. 


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