David R. Henderson  

If You (Insurers) Pay, They (Docs) Will Charge

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John Goodman has an excellent post today on "Value Purchasing" in which he deals with the issue of "dumb payment systems." In the comments, his health economist colleague, Devon Herrick, points to a striking divergence. Herrick looked at rates of increase of prices and found that the price of cosmetic surgery, one of the few medical procedures which is almost entirely paid for by the people getting it, increased at less than one third the rate for medical care in general. Check out the graph.

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COMMENTS (8 to date)
Hyena writes:

I think people have been talking about this for a few years now. Another procedure which has, anecdotally, gotten cheaper every year is common eye surgeries--LASIK, cataract and glaucoma. What's interesting there is that the latter two aren't things people tend to pay for themselves, most patients seem to be on Medicare.

But there are other wrinkles: laser technologies are augmented by labor-reducing computer control. Plastic surgery has faced pharmaceutical competition (Botox), which always reduces prices because of scale efficiencies in manufacturing.

I bet dentistry, which has benefited from numerous pharmaceutical and technological interventions that push down time requirements, has a similar reduction or stability of cost.

In fact, I'd think that if you disaggregated "healthcare spending" you will find that all procedures with effective mechanization or pharmaceutical alternatives have declined or stabilized in price.

David R. Henderson writes:

Good points.

John Goodman writes:

Basically, costs tend to be reasonably controlled wherever providers compete for patients on the basis of price. But when payment is primarily third-party payment, the providers are not competing for patients on price. In fact, the typical patient isn't even aware of the price.

Under these circumstances, providers tend to maximize against reimbursement formulas.

Ivan Grazhdanin writes:

Lasik is the same. If the third party pays, the third party is the customer, not the patient. The incentives to control costs in these situations--and health care isn't the only "market" in which they exist--have nothing to do with market cost control mechanisms, such as technology and development of productive skills, such as education and training. Hence, in health care you get rationing, long waits and, usually, poorer quality, but margins and markets for the third parties are guaranteed.

Al Farragosa writes:

Ask the risk of sounding like Gordon Gekko, competition--the real stuff,not the waiting room variety--clarifies things so that without trying to providers work for the benefit of all patients, not just those who have the right kind of insurance. Or am I borrowing from Adam Smith? Bottom line is that as long as we focus on the needs of the few, not the many, we'll continue to have dysfunctional health care delivery.

Devon Herrick writes:

Thanks for the post. On the graphic referenced above you will notice the index of cosmetic surgeons’ fees took a nose dive beginning around 2007. That was largely a function of doctors lowing the fees they charged for Botox injections by more than 20% (i.e. about $100) in the face of consumers' tightening their belts due to the recession. Also notice inflation leveled off (i.e. CPI). Yet there was no corresponding drop in other physician fees or the Medical Care component of the CPI – 88% to 90% of which is paid for by third-parties.

I would have liked to have included a discussion of LASIK as well but a lack of space prevented me. LASIK is about the same price as a decade ago ($2,100 per eye) but the quality has improved. The price fell during the intervening years after FDA approval, but slowly rose when some providers left the market, while others upgraded to newer equipment to perform the more advanced, wavefront LASIK.

Juan O'Malley writes:

What happened in medicine is rapidly transforming dentistry, and the culprit, largely, is adoption of more comprehensive dental insurance.

T. Beth writes:

I have been in Health Care Administration for over 30 years. My Husband is a Podiatrist with two private office locations(use to be 3 before the onset of PPO's, HMO's and decreasing reimbursements from Medicare, Medicaid and Private Health Insurers).

First, one observation, strange how doctors earn less for their services than they did in the early 1990's and yet Insurance Premiums have steadily risen. They see more patients, work longer hours and earn less.

The problem as I see it is that insurance reimbursement is no longer based on, #1. the cost of providing the service(which doesn't keep pace with the cost of "doing business"). These costs have increased over the years as technology has advanced, requiring purchase and maintenance of expense equipment and more qualified staff. Each time the Federal Government implements new regulations it comes with higher operating costs for the doctor; yet their reimbursements don't increase to offset these additional costs. The new reg. requiring practices to implement a new "electronic health information" system is a huge expense that many simply can't afford.

#2. the difficulty of the services provided,
#3. the knowledge and expertise required
#4. the exposure to potential liability(malpractice) which plays a large part in cost of Malpractice Insurance
#5. the right to earn a profit. Doctors have a right to charge what they believe their services are worth.

It is odd that Physicians and Surgeons are one of the few Professionals that are subject to what I call "reimbursement" fixing. Their fees are regulated in my opinion. Unlike, Lawyers, Accountants and other Professionals.

The Health Insurance system has changed over the years due to the demands of the insured's.

In the 60's and prior years, insurance was meant to pay for hospitalization, surgery and catastrophic expenses. It now covers virtually every medical encounter. Perhaps the types of policies offered should be expanded. Such as Hospitalization only, Outpatient services only including outpatient surgery(less costly than hospitalization). I say Insurance Companies should get creative in the products they offer.

In conclusion, if reimbursements are not high enough to cover costs of treatment and earn the doctor a profit; they will simply stop accepting Medicare, Medicaid and Private Insurance that routinely has low reimbursement.
This would probably result in patients being charged lower fees offset by lower administrative costs. Actually, providing services on a cash-basis isn't such a bad idea for those practices hanging on by a thread.

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