A market-based approach to health care

In a recent research brief, I argue that if our country is serious about bringing down the rising costs of health care, we need to get serious about making it work more like a true market. Consumers need to know prices and providers need to compete to offer the lowest prices. Forbes contributor John Goodman argues for a similar direction that our system should follow:

Show me a health care market where there is no Blue Cross, no Medicare and no employer. I’ll bet it’s a market that works a lot like the markets for other goods and services…

…After several decades of trying everything from managed care to value-based purchasing, employers need to sit up and take note. The authors say the only thing that really holds down costs is giving money to the employees and letting them buy their own health care. “There is no health care cost crisis in the retail sector,” they write, and there “never has been.”

The most striking examples to start with are the markets for cosmetic and LASIK surgery – two areas where third party payers have never been involved. In both fields there is price transparency and price competition. Patients never wonder what they are going to pay. A package price covers doctor, nurse, anesthetist, the facility and anything else that might be involved. There is no $100 aspirin tablet showing up as a surprise on the final bill.

In both markets the real price has been falling over the past two decades, even as the real price for every other kind of surgery has been rising. And this despite a huge increase in demand (cosmetic surgery has grown tenfold over the last decade) and despite major technological innovations – the type we are told increases costs everywhere else in medicine.

Health insurance isn’t necessarily the main problem, instead, it’s the way that insurance shields the true cost of care from those being treated. When patients technically aren’t spending their own money, they spend more of it, such as the case with health care. This leads to inflated costs because the consumers don’t have the power to shop and compare prices. Goodman goes on to describe how this would look in a hospital setting:

What about expensive hospital care? That too can look like retail medicine if you know where to look. The Surgery Center of Oklahoma(SOC), founded by Drs. Keith Smith and Steve Lantier, posts prices for 112 common surgical procedures. They deal mostly in cash and they don’t take Medicare or Medicaid or negotiate prices with insurance companies. One of SOC’s competitors is Integris Baptist Medical Center in Oklahoma City. The contrast couldn’t be starker, as the authors note:

Integris charged $33,505 for a complex bilateral sinus procedure, which helps patients with chronic nasal infections. This bill covered only hospitalization; the fees for the surgeon and the anesthesiologist were extra. At SOC, the all-inclusive price for the same operation is $5,885. Not surprisingly, Integris’s bill was loaded with overcharges, including $360 for a steroid available at wholesale for just 75 cents, and $630 for three doses of a pain killer called fentanyl citrate, which altogether cost the hospital about $1.50.”

New developments in retail medicine are almost always the product of entrepreneurial thinking. Sometimes the entrepreneurs are medical doctors. Sometimes they are business types with a strong interest in eliminating the many inefficiencies in traditional health care.

Changing the traditional third-party payer model for health insurance may take a lot of convincing for some, but it begs the question: what do we have to lose? Current projections for health spending are not promising and we know how competition has helped other industries flourish. 

Jordan Roberts / Health Policy Analyst

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. He analyzes state and national health policy issues with an eye toward removing governm...

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