NCPA - National Center for Policy Analysis

The Role of Prices in Health Care

June 19, 2012

The price of a knee replacement for a dog -- involving the same technology and the same medical skills that are needed for humans -- is less than one-sixth the price a typical health insurance company pays for human operations, and less than one-third of what hospitals tell Medicare their cost of doing the procedure is, says NCPA President and CEO John C. Goodman in his new book, Priceless: Curing the Healthcare Crisis.

To be fair, let's say you spend two nights in a hospital room, with hotel-like luxuries.  Fido recovers in a cage, which presumably costs much less.  But even with meals, two nights in a hotel should come in under $1,000.  The price difference we are trying to explain is many times that amount.

Then, there is the difference in surgeons' skills.  

  • Presumably, the surgeons who operate on humans are more talented and therefore more valuable.
  • But an orthopedic surgeon in Dallas typically gets paid an amount equal to about 10 percent of the $32,500 an insurer pays to the hospital.

As a patient, you would get more attention than Fido from nurses and support staff for the one or two days of recovery.  Guess how much a nurse gets paid in Dallas?  It's about $30 per hour.  That is nowhere near the explana­tion we are searching for.

Let's take the actual cost hospitals tell Medicare they incur for this proce­dure.  

  • It's about $15,000, not including surgeon's fees.
  • But if veterinarians can do it for a third of that amount, it's hard to see why the human hospital cost isn't at least half of what it actually is.

The explanations for why human knees cost so much more are (1) government regulations, (2) malpractice liability and (3) the inefficiencies created by the third-party payment system.  It looks like these three factors are doubling the cost of U.S. health care.

In his new book, Priceless: Curing the Healthcare Crisis, Goodman explores these factors and tries to explain why a procedure such as knee surgery cannot only cost exponentially more for a human being than for a dog, but can cost much more for an American than a Canadian.  He concludes that this is due, in part, to the fact that in the entire medical marketplace, there is no natural evolu­tion to uniform, market-clearing prices, the way markets work in other sectors of the economy.  Even MRI scans vary by over 650 percent in a single town.  Furthermore, most providers don't even know how to price their services because they don't know what their costs are.

Source: John C. Goodman, Priceless: Curing the Healthcare Crisis, Independent Institute, June 2012.

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