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.

Policy Reports | Health

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

Consequences of the Lack of Competition

The 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 insurers have determined which medical services they will pay for and which ones they will not.  They have also negotiated the fees.  As a result, physicians have a financial incentive to provide services that will be reimbursed and to avoid any that will not.  Physicians also have an incentive to provide those services that are generously reimbursed over those for which reimbursement is skimpy.  The result is a highly artificial market which departs in many ways from how real markets function. The following are some examples. 

Lack of Integrated Care.  In normal markets, goods and services will naturally be bundled and priced to please the customer.  But in health care, services aren't bundled and priced the way they would be if the medical marketplace even remotely resembled an efficient, competitive market. Care is fragmented among specialties and different providers, and communication among providers treating the same patient is often nonexistent. 12

Take diabetes, for example.  Care tends to be delivered in discrete bundles, each with its own price.  No single provider is responsible for desirable outcomes, such as fewer emergency room (ER) visits, lower blood sugar levels and so forth.  This is because no one has bundled "diabetic care" as such - taking responsibility for final outcomes over a period of time in return for a fee.  Because of the failure to bundle and price in sensible ways, costs are higher and quality is lower. 13

“Most insurers do not pay physicians to use e-mail or store medical records electronically.”

Physicians Using E-Mail

Most consumers take for granted that goods and services will be bundled and priced in customer-pleasing ways.  The restaurant market, for example, is teeming with activity - almost continuously bundling and rebundling and pricing and re-pricing - all to attract and retain patrons.  But suppose Blue Cross "negotiated" restaurant bundles and prices, making changes, say, every decade or so.  Then going out to eat would be about as pleasant as a visit to the Department of Motor Vehicles.

Lack of Telephone and E-Mail Consultations.  To get an answer to even the simplest medical question from a physician, patients must usually make an office visit.  Lawyers and other professionals routinely communicate with their clients by telephone and by e-mail.  They charge clients for the time, but clients are willing to pay for convenience.  Few physicians communicate with patients that way - even for routine prescriptions. 14   [See Figure II.]  The reason?  Few health insurers pay physicians for telephone or e-mail consultations.

“Medical services are not bundled and priced in consumer-pleasing ways.”

Lack of Electronic Medical Records.  Patients technically own their own medical records and have the right, at least in principle, to access them.  But if they request a copy of their medical records, they are likely to receive a stack of smudged copies that includes illegible handwritten notes, undecipherable codes and obscure, abbreviated medical terminology.  On their first visit to a medical practice, patients are required to fill out a medical history.  Every time they are referred to a specialist, they are typically required to fill out similar forms again.  But unless patients are in a managed care plan that emphasizes coordinated care or pharmacy benefit management, no one will compare their medical records for consistency and completeness or to detect the possibility of adverse drug interactions.

Manual record-keeping is inefficient and dangerous.  It adds to administrative costs: An estimated $41.8 billion could be saved each year if medical records were stored electronically. 15 Handwritten prescriptions are also a major source of medical errors.  Nearly 200,000 adverse drug events occur in hospitals each year because they don't have computerized physician order entry. 16 Furthermore, because most patients see a number of physicians over time, their medical records are fragmented and scattered.  Assembling a complete record is time-consuming, often expensive and sometimes impossible.

Despite the capacity of electronic medical record (EMR) systems to improve quality and greatly reduce medical errors, less than one-in-five physicians and only one-in-four hospitals have such systems. 17   [See Figure II.]  The reason?  Few health insurers pay physicians to install or maintain EMR systems.

Lack of Efficient Care.   In general, the historical increase in health care spending has led to improvements in medical services. 18   But a substantial proportion is spent on care that is apparently unnecessary or wasteful.  For example, regions of the country with the best outcomes for Medicare patients with chronic conditions typically spend less per patient than regions that have worse outcomes.  Compared to regions that use far more resources, patients in low-cost, high-quality regions such as Salt Lake City, Utah, Rochester, Minn., and Portland, Ore., are admitted less frequently to hospitals, spend less time in intensive care units and see fewer specialists.  They also have lower mortality rates. 19

If every region provided care similar to the Mayo Clinic (in Rochester), one in every six dollars currently spent could be saved.  If hospitals and physicians in every region in the country followed practice patterns similar to those in Salt Lake City, Medicare spending would be reduced by nearly one-third. 20

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