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Health Care Prices: Ignored Once Again?

October 25th, 2010

The United States spends far more on health care than other industrialized countries, yet Americans visit the doctor less and spend fewer days in the hospital than our counterparts abroad. Why do we get less for more? Because we pay far higher prices, four Health Affairs authors declared in a seminal 2003 article, “It’s The Prices, Stupid: Why The United States Is So Different From Other Countries.” This was largely because “the highly fragmented buy side of the U.S. health system is weak by international standards,” wrote Gerald Anderson, Uwe Reinhardt, Peter Hussey, and Varduhi Petrosyan.

The message of Anderson and coauthors was downplayed or ignored by the Obama administration and other reform proponents during the debate over the Affordable Care Act, Washington Post reporter Alec MacGillis argues in an article published on Sunday. MacGillis attributes this to a desire to avoid a confrontation with physicians, hospitals, and other providers, which would have made an already difficult political slog even harder, or maybe impossible. As a result, MacGillis says, the Affordable Care Act includes neither a strong public health insurance option nor other provisions that might have controlled health care prices and “bent the cost curve.”

“It’s The Prices, Stupid” was not the first study to call attention to the higher prices and market imbalances that characterize the American health care system, and it has certainly not been the last. For example, in the September-October 2009 issue of Health Affairs, Bruce Vladeck and Thomas Rice highlighted the fact that Americans pay more without getting more care or better care. Vladeck and Rice continued:

Health services are characterized by a fundamental imbalance in power between buyers and sellers. Every other industrial nation has sought to redress this imbalance through a variety of governmental or quasi-governmental regulatory mechanisms designed to improve purchasers’ market power. In the United States we have actively fled from such a posture. The significant difference in real health care spending per capita between the United States and other wealthy nations is consumed largely by monopoly profits generated by providers.

Vladeck and Rice argued that ideology contributed to the lack of emphasis on high prices and provider market power during policy debates:

In contemporary parlance, “ideology” generally refers to a system of thought or beliefs carried into the political system; “pragmatism” might be a good antonym. In nineteenth-century European discourse, however, where the term largely originated, it had a more specific and politically laden meaning: “ideology” referred to a system of thought or beliefs that served the interests of a particular group or class by concealing underlying power relationships. In those simpler times, the assumed antonym was “science” or “truth.”

We believe that much of the contemporary discussion of health spending is indeed ideological, in both senses of the term. People come to any public policy discussion, of course, with their own perspectives and preconceptions, but in the discussion of health spending, focusing on issues of consumer demand, production efficiency, prevention, epidemiology, and quality specifically serves the interests of those who most benefit from the current status quo, because it deflects attention from the real issue: who has economic power in the system, and who doesn’t.

During his presentation at a Health Affairs event releasing the September-October 2009 issue, Vladeck wryly observed that the 2003 article by Anderson and coauthors “created a lot of buzz, everyone was talking about it … for about 90 days or so, and then everybody went back to talking about the same old stuff, as though nothing that they had said in that article had any influence or any impact.” When in subsequent years, the authors published updates of their data, “everyone looked at the updated data and said, ‘That’s absolutely correct,’ and then proceeded to ignore it,” Said Vladeck.

A growing imbalance between payers and providers. As MacGillis notes, the market imbalance between payers and providers may be getting worse due to increasing provider market and consolidation, a phenomenon that has been discussed by other Health Affairs authors. For example, in an April 2010 Health Affairs article focusing on market conditions in California, Robert Berenson, Paul Ginsburg, and Nicole Kemper wrote that “providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room’ that is rarely mentioned.” The authors warned that, unless precautions are taken, the Affordable Care Act’s push toward “accountable care organizations” and other integrated care models could increase prices:

If accountable care organizations lead to more integrated provider groups that are able to exert market power in negotiations—both by encouraging providers to join organizations and by expanding the proportion of patients for whom provider groups can negotiate rates—private insurers could wind up paying more, even if care is delivered more efficiently.

Republicans, who seem poised to make big gains in next week’s elections, have argued for shifting more power in health care decision making, and more risk, to consumers. That would “only make the fundamental imbalance of information, power, and expertise” in favor of providers even worse, Vladeck said in his presentation at the Health Affairs event.

Berenson, Ginsburg, and Kemper concluded: “Unless market mechanisms can be found to discipline providers’ use of their growing market power, it seems inevitable that policy makers will need to turn to regulatory approaches, such as putting price caps on negotiated private-sector rates and adopting all-payer rate setting.” In the September-October 2009 Health Affairs issue, Robert Murray, executive director of the Maryland Health Services Cost Review Commission, wrote that had the state’s all-payer rate-setting system for hospitals been adopted nationwide, it might have saved $1.8 trillion over three decades.

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3 Responses to “Health Care Prices: Ignored Once Again?”

  1. R Lande Says:

    Milton Recht’s response is interesting but I don’t think there is much evidence to support the idea that US healthcare is more efficient. According to Commonwealth Fund reports, Canadians have to wait for non-emergency surgery but several other countries such as Germany and the Netherlands have no wait times at all. Considering the enormous administrative overhead US healthcare providers have to deal with in terms of variable insurance coverage and rules, efficiency just doesn’t seem like the correct word.

    Are US workers more willing to pay more, or have they had no choice?

  2. SteveBeller Says:

    The only rational sustainable solution to the price issue, I submit, is to pay a higher rate to those providers (individual clinicians and organizations) and suppliers (e.g., pharmaceutical and equipment) who deliver higher-value care to a patient/consumer. And, conversely, to pay a lower rate for lesser value care.

    By higher value care, I mean providing more effectiveness procedures, medications and medical devices, and at lower costs (i.e., cost-effectiveness).

    The formulas for computing a rational pay rate (price) based on value should yield a net savings for the patient and payer, while giving high-value providers and suppliers a net increase in income/profit.

    As such, our country ought to be focusing in on defining a rational pay rate formula, as well as developing ever-evolving guidelines that promote high-value care. Only then would price reflect true value. The challenges include determining (a) what constitutes high-value /cost-effective care, (b) how to measure in a meaningful way, and (c) ways in which to help providers and suppliers become increasingly cost-effective.

    The winners under this transformative process would be providers and suppliers delivering more cost-effective care, their patients, payers and society; and vice versa.

    None of this is easy to do, but all is absolutely essential if we want to fix healthcare in America in a sensible and sustainable manner!

  3. Milton Recht Says:

    It is the prices stupid, but if researchers only look at the cost of the medical service, as the authors mentioned above do, they miss the total economic price that a patient pays.

    Opportunity costs to patients have to be included. Opportunity costs help explain the value of medical services to patients and why prices for US medical services appear to be high. As long as the price of a medical service has a positive marginal value to the patient, the patient will be willing to pay the higher price.

    The US has very high productivity and high GDP per worker. A lost day’s work has a very high opportunity cost to an American worker. Even if the worker receives sick pay, a day’s absence from work often means for many a backlog of work when they return. An extra few day’s work missed by going to the doctor more often for treatment or staying in the hospital longer is very expensive to an American worker. It is also not just the number of visits, but also the lost productivity due to the time it takes a patient to get better. For example, imagine a patient with a bad knee who can get knee surgery in a couple of weeks versus one who has to wait a few months for the surgery. The longer waiting time surgery might be cheaper, but the opportunity cost of the lost worker productivity until the surgery has to be included in the comparative cost. Medical costs studies as a rule do not include these opportunity costs to the patient and the employer.

    American workers are willing to pay more for medical services because US medicine is more efficient and reduces the number of days of wait until treatment, of missed work due to doctor visits, uncured illness and hospital stays. This is why we visit the doctor less and have fewer days of hospital stay.

    Opportunity costs extend to relatives of the patients. Often a parent is taking a child to the doctor or staying home with the child until the child gets well. Likewise, adult children often assist with the care of their elderly or sick parents.

    I would say that the reason these studies were ignored is that they presented an interesting fact but also an incomplete story. Show me a comparative study that analyzes medical prices that includes patient (or caregiver) opportunity costs.

    My gut feeling is that prices of medical services in the US are at a level where the marginal value to patients equals the marginal costs, including opportunity costs, to patients.

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