The Market for Medical Care Should Work Like Cosmetic Surgery

Studies | Health

No. 349
Tuesday, May 21, 2013
by Devon M. Herrick

Executive Summary

Cosmetic surgery is one of the few types of medical care for which consumers pay almost exclusively out of pocket. In health markets without third-party payers, doctors and clinics use price competition, package prices, convenience, and other amenities in order to attract patients willing to purchase their services. When patients pay their own medical bills, they become prudent consumers. Thus, the real (inflation-adjusted) price of cosmetic surgery fell over the past two decades — despite a huge increase in demand and considerable innovation. Since 1992:

  • The price of medical care has increased an average of 118 percent.
  • The price of physician services rose by 92 percent.
  • All goods, as measured by the inflation rate, increased by 64 percent.
  • Cosmetic surgery prices only rose only about 30 percent.

Cosmetic services have become competitive for a variety of reasons: As more people demanded the procedures, more physicians began to provide them. Licensed medical doctors are free to perform any cosmetic procedure they have been trained to perform, so there are few barriers to entry among competing doctors. Physicians hire and train aestheticians and nurses to perform some minimally-invasive cosmetic treatments — boosting capacity. Many providers increase efficiency by locating operating rooms in their clinics to reduce the cost of outpatient hospital surgery. Surgeons generally adjust their fees to stay competitive and quote package prices. New products and procedures have also become available.

Consider the ubiquitous deal-of-the-day emails where Groupon and Living Social offer subscribers goods and services at greatly reduced prices for a limited time. A quick Internet search of these discount websites will find numerous medical-related services offered to the public, including: Botox, corrective eye surgery, dental teeth cleaning, teeth whitening, laser hair removal, laser facial resurfacing, cosmetic fillers, spider vein and blown spot removal, and numerous other cosmetic procedures at highly discounted prices. For example:  

  • The cost of having a physician administer botulism toxin averaged $365 in 2011, about the same as it was more than a decade earlier. Yet deals on Groupon and Living Social occasionally offer Botox for as little as $99, with $149 quite common.
  • The price of liposuction has steadily increased in price from $1,622 in 1992 to $2,859 in 2011, but deal-of-the-day web sites show physicians willing to perform liposuction on one area for $999.
  • The cost of laser skin resurfacing was $1,223 in 2011. Yet, couponing websites have offered numerous laser resurfacing deals for only $299.

Wherever there is price competition, quality competition tends to follow. Consider corrective eye surgery. From 1999 through 2011, the price of conventional Lasik fell about one-fourth due to intense competition. Eye surgeons who wanted to charge more had to provide more advanced Lasik technology, such as Custom Wavefront and IntraLase (a laser-created flap). By 2011, the average price per eye for doctors performing Wavefront Lasik was about what conventional Lasik had been more than a decade ago; but the quality is far better. In inflation-adjusted terms, this represents a huge price decline.

By contrast, the market for medical care does not work like other markets. 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. Most patients never learn the true cost of their care.

Why do doctors and hospitals fail to disclose prices prior to treatment? The answer is simple: because they do not compete for patients based on price. Patients are largely insulated from the adverse effects of not making price comparisons and acting like consumers because third parties — employers, insurance companies or government — pay most of the costs of their health care. Consider:

  • For every $1 worth of hospital care consumed, a patient pays only about three cents out of pocket, on the average; a third party pays the other 97 cents.
  • For every $1 worth of physician services consumed, a patient pays less than 9 cents out of pocket, on the average.
  • For the health care system as a whole, every time a patient consumes $1 in services, he or she pays only 11 cents out of pocket.

When consumers pay only a small percentage of their medical bills directly, they have little reason to discover or care about prices. Thus the incentive for patients is to consume health care services until those services are worth only 11 cents on the dollar, on the average.

Prior to the advent of Medicare and Medicaid in 1965, health care spending barely reached 6 percent of gross domestic product (GDP). Today health care spending is 18 percent of GDP. In addition, medical prices have been rising at three times the rate of inflation over the past few decades. The price of medical care has risen about 2,700 percent of what it was in 1950. By contrast, inflation has only boosted the prices we pay for consumer goods and services by about 800 percent. Although health care inflation is robust for services paid by third-party insurance, prices are rising only moderately for services patients buy directly. Economic studies and common sense confirm that people are less likely to be prudent, careful shoppers if someone else is picking up the tab. The contrast between cosmetic surgery and other medical services is important. One sector has a competitive marketplace and stable prices. The other does not.


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