Does Medical Care Cost Too Much in the United States? Posner

A New York Times article of June 1 called “Paying Till It Hurts,” www.nytimes.com/2013/06/02/health/colonoscopies-explain-why-us-leads-the-world-in-health-expenditures.html?pagewanted=all&_r=0, by Elisabeth Rosenthal, presents disturbing data concerning prices of medical procedures in the United States relative to the prices in other wealthy countries. The article reports that the average price of an angiogram is $914 in the United States and $35 in Canada, of a colonoscopy $1185 in the United States and $655 in Switzerland, of an MRI scan $1121 in the United States and $319 in the Netherlands, of a hip replacement $40,364 in the United States and $7731 in Spain, and of Lipitor (probably 90 mg., although the article doesn’t state the quantity) $124 in the United States and only $6 in New Zealand—a greater than 20 to 1 difference.

 

This is not actually the correct way to compare U.S. and foreign prices: picking a different nation to compare the United States with for each procedure. For what if (for example) in Canada though the average price of an angiogram is very low the average price for a colonoscopy is very high? Nevertheless the comparisons are illuminating, and are consistent with the fact that the United States devotes some 18 percent of GDP to health care, twice that of most other countries. (The second most expensive nation for health care is Switzerland, which spends 12 percent of its GDP on health care.) The significance of the article is that it plausibly assigns much of the cost differences to higher prices for standard medical procedures and excessive use of those procedures, rather than to demographic differences, such as greater inquality of income in the United States than in the other wealthy nations of the world, let alone to higher quality of U.S. medical care. 

According to the article, the difference in cost between the U.S. and the foreign medical procedures is unrelated to quality but has a lot to do with the fact that the foreign countries regulate the price of medical procedures and the United States does not. The difference is between a regulated and a free market, and the free market does not show up well in the comparison. It is not just the bottom line—the relative costs—that illuminates the difference, but the competitive practices that the article describes that, together with absence of price regulation, may explain the difference. 

Free-market competition is supposed to optimize quality and price; if quality is the same, price should be lower under competition than under regulation. Quality includes availability. A traditional and well-documented complaint about price ceilings is that they create shortages, resulting, in the medical sphere, in long and potentially dangerous delays in treatment. But at least if the Times article is to be believed, the longer delays in foreign countries (if they are longer, which the article doesn’t discuss) do not result in poorer medical outcomes.

The evidence of market failure in our medical care system is reinforced by data presented in the article of large price differences for identical procedures in the same U.S. states, and even in parts of the same state, southern California for example, where according to the article a colonoscopy costs on average $2041 in San Diego and $5559 in Los Angeles.

It appears that in a market in which buyers have poor information, in part because the products and services sold in the market are highly technical and the market itself is pervaded by uncertainty and its products and services are constantly changing and being reevaluated and discarded or improved, and in which extensive private and public insurance obscures prices, and in which on top of everything the consumption decision is often blurred by pain and fear, a private, unregulated market does not operate efficiently. Of course there is government regulation of the U.S. health system, but it is nothing like the public-utility type health regulation found in most other countries. There is in the U.S. regulation in the form for example of malpractice liability, but malpractice liability doesn’t deal with overpricing or (with rare exceptions) unnecessary procedures. Medicaid sets tight payment limits, but Medicare, for most medical procedures, does not—for fear that too many physicians will stop taking Medicare patients. 

There is an approach to inefficiently competitive markets that is in between regulation or nationalization (as pioneered by the British national health service), on the one hand, and free-market competition on the other. It is the professional model of providing services, about which Becker and I blogged on December 10 of last year, as distinct from the competitive, or business, model. In the professional model, which is the traditional model in which health services like legal services used to be provided, which persists to some degree, but which is rapidly giving way to the competitive model, the physician or lawyer in effect trades the very high incomes earned by those who succeed in business for a reduction in financial risk, brought about by legal or ethical restrictions on competition. With lower rewards for engaging in sharp practices, those practices, involving exploitation of consumers in markets pervaded by consumer incompetence, can be expected to be less frequent.

The professional model can thus, in principle anyway, enhance market efficiency. For example, in a medical system governed by the professional model, physicians’ incentive to establish “surgical centers” in their offices in which to perform colonoscopies for which they can charge much higher prices, though there is no need for such centers, is weakened, because physicians imbued with the professional model do not think of themselves, or behave, as profit maximizers. 

The professional model remains dominant in career government service, where employees are salaried and have secure tenure, thus trading the possibility of a much higher income for job security and the benefits, which are not merely financial, that come with it, such as not having to compromise ethical standards to succeed. In contrast, free-market competition is Darwinian: the presence of rapacious and unprincipled competitors will often limit the ethical options of the other firms in the market, and of their employees. 

The outstanding example of the professional model of medical care in American government appears to be the provision of medical care to veterans, in VA hospitals and medical centers. VA physicians are salaried government employees. A number of studies, including a study by the RAND Corporation, have found that the medical care provided by the Veterans Administration is superior to private health care and costs less. See Arthur L. Kellerman, “’Socialized’ or Not, We Can Learn from the VA,” The RAND Blog, Aug. 8, 2012, www.rand.org/blog/2012/08/socialized-or-not-we-can-learn-from-the-va.html. Although there is no reason in principle why the professional model should be limited to government employees—and traditionally it was not—it may be that the competitive model has made such inroads in medicine that the professional model cannot survive in the market. It may be worth considering whether the VA model can be extended as part of an effort to improve health care in the United States and at the same time reduce its cost.

Comments

[Eric Rasmusen]

The simplest explanation for the difference in health care procedure costs between countries is that the newspaper got it wrong. After all, we've got a newspaper reporting on a study by "health care plan industry leaders," which I suppose means Obamacare advocates reporting on numbers from an insurance lobbying group.

It does look as if the measurement is of actual prices paid rather than list prices, though--"Prices for the United States are calculated from a database with over 100 million paid claims that reflect
prices negotiated between thousands of providers and almost a hundred health plans." http://www.ifhp.com/documents/2012iFHPPriceReportFINALMarch25.pdf

I don't see why an insurance company would be willing to pay unnecessarily high prices for procedures, however. A colonoscopy is a good example. It is unpleasant for the patient, so I doubt there is any great demand for it, unless state regulations compel it to be covered (which is quite possible). Indeed, I've wondered whether it would be cost-effective if the cost-benefit included the time cost to the patient. But insurance companies must think it's worth it, or why would they cover it? And since it is pre-scheduled and not something patients are likely to want a particular doctor for, couldn't the insurance companies easily exclude expensive doctors from their networks?

[Eric Rasmusen]

I'm confused as to how we should measure the real cost and benefit of health care if it has price ceilings, if we're interested in wealth maximization. See http://wp.me/pNETr-lH . If anyone wants to enlighten me, please do. It surely has been thought about.

[Biggy82]

The interesting question is to how implement this professional model and how it could be enforced, even if via self-enforcement. How can incentives be allocated in this model?

[Ken Schulz]

"This is not actually the correct way to compare U.S. and foreign prices: picking a different nation to compare the United States with for each procedure."
It is exactly the correct way, if one is interested in process improvement: one always benchmarks against the best-in-class performer. The market-basket comparison is only appropriate if you suppose that nations are in competition for 'customers' who are looking to minimize their lifetime costs for a desired level of quality - not a very realistic view, I would think.
Once one has identified best-in-class performance, one compares in detail to learn what elements in one's own process can be improved, or eliminated. I believe this will only happen when medical-care providers are willing to team with engineering disciplines who have expertise in process efficiency and safety assurance. This approach is independent of the choice of professional or competitive models.

[jim kirby]

The high prices in Amerika would tend to the level of the lowest price for every procedure if Obamacare, Medicare and other insured care dollars could be spent in other countries like Canada, Mexico, Czech Republic, Hungary, India, Cuba and Thailand.

Indeed, the reason we have Part D coverage is directly attributable to the fact that Amerikans had been buying their drugs at great prices from Canada! Part D was a Bush gift to Amerikan drug companies and not founded in any concern for the Amerikan patient.

[David Glenn]

Isn't it because the U.S. offers more health activities than any other countries? Or isn't it because
doctors suggest operations which are not that necessary?

[Thomas Rekdal]

With all due respect, I think both Becker and Posner are dealing with trivialities. Not a word from either on PRISM, the NSA surveillance scheme, the legal implications of Snowden's actions, the Supreme Court's gutting of the Voting Rights Act, the undermining of state initiatives through the standing rules outlined in Hollingsworth v. Perry, or the political and legal implications of the DOMA decision.

Yes, as a federal judge, I am sure Judge Posner is under certain restrictions upon what he can and cannot saw about contemporary decisions. But are these restrictions not dependent upon a context in which the Supreme Court rarely and reluctantly reaches constitutional questions? Why should we not have the benefit of Posner's thought in a world where all sorts of political agendas are openly on display?