Real health care pricing will happen in a free market — revised

Recently, our friends at Think New Mexico came out with a proposal that they believe will help bring medical prices under control by making them more transparent.

We again welcome the folks at Think New Mexico for moving (again) towards the Rio Grande Foundation’s critique of government as the problem, not the solution, in many sectors of our economy. Health care is one such area.

Rather than focus on the root of the problem, Think New Mexico emphasizes “transparency.” Transparency sounds great and anything that attempts to bring health care prices under control and make them more logical is a good thing, right? It is hard to say.

The reason health care is not transparent or logical in the first place is because the consumers of health care don’t pay for their care directly. As the chart below shows, out-of-pocket expenditures are only 11% of total health care spending:

For some thoughts on how the Think New Mexico proposal would have on health care pricing in New Mexico, I contacted one of the nation’s top health care experts, Michael Cannon of the Cato Institute.

Said Cannon:

Price transparency is not a problem for the people who control the money. The government knows the prices it’s paying. Employers and insurers know the prices they’re paying. Until you return the money to the consumer – all of it, including the money that employers or Medicare are spending on their behalf – consumers will not get price transparency. And if you mandate price transparency in advance of that, consumers won’t use the prices because it’s not their money on the line. All you’re going to get is a lot of wrangling and rent-seeking over a new form of regulation. And we will have done nothing to fix the underlying problem.

Price discrimination is made worse by the same thing (third-party payment) that creates price opacity. Give consumers the money, and you’ll tame both problems.

For an even more detailed critique of what might be called “back-end” transparency in health care, check out this recent column from Dr. Deane Waldman.

Transparency is great and it is worth pursuing when it comes to health care. We strongly believe that the best way to solve the issue is to restore some semblance of market forces in health care. It’s hard to say whether the Think New Mexico proposal represents a step in the right direction or is simply a misguided effort to give meaning to meaningless prices.

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10 Replies to “Real health care pricing will happen in a free market — revised”

    1. It is an ugly report. One unique aspect of the American system is that there is no one to say “no” or “that costs too much.” While we at RGF oppose the rationing associated with single-payer systems, they do have this feature. We believe that moving health care towards something resembling a free market we can improve outcomes, relying to a great extent on personal choices and preferences, while also reducing costs.

    1. Allen, I’d generally agree with you, but those prices have to be real, not just created out of thin air in order to comply with a government edict.

  1. We appreciate the Rio Grande Foundation’s covering this important topic. One point we would like to underscore is that patients are actually paying quite a bit out of pocket because we are seeing an increasing trend toward high-deductible insurance policies. (The 11% shown in the chart above is a national average, and we suspect that the number would be higher in New Mexico given our high numbers of uninsured and underinsured patients.) As you correctly point out, the more patients pay out of pocket, the more incentive they have to shop around. When patients have both the incentive and the tools to comparison shop, the evidence shows that prices will come down. For example, a study published in the Journal of the American Medical Association earlier this month found that patients who had access to pricing information were able to save around 13% on lab tests and medical imaging procedures (see http://www.thinknewmexico.org/pdfs/JAMAUweReinhardt10-14.pdf)

    @Allen, we agree that the Surgery Center of Oklahoma is a fantastic example of how transparency can help keep prices in check, and we profiled them in our report. New Mexico’s hospitals should be similarly transparent.

  2. I think that it has been interesting that Think New Mexico’s proposals have been messaged as free market friendly. While the transparency recommendation has gotten a lot of play, several of their other recommendations involve prohibiting insurance carriers from individually negotiating with hospitals. Instead, Think New Mexico proposed that all insurance carriers have to negotiate as a group and get the same rate. While this means it probably helps the carriers that negotiated a bad rate, it hurts the carriers that negotiated the good rates. What this results in is a drive to the middle, which some might describe as the drive toward mediocrity (we don’t want someone to do bad, so we bring down the individuals who are doing well). This also limits choices among consumers, as insurance carriers would also not be able to compete based on negotiated prices anymore. Which is important if you policy happens to be driven by a coinsurance rate. If this was a true free market reform shouldn’t the recommendations encourage competition not stifle it.

    1. Yes, they chose a business model that defies the traditional hospital way of doing business. They are the exception that proves the rule.

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