Tuesday, February 23, 2010

Healthcare competition

The Atlantic magazine ran an article by David Goldhill who gives an impassioned plea for more competition in health care to address the problem of the lack of price shopping on the part of consumers of health care. I'm more sanguine on the ability of the free market to completely solve this problem.

1. Goldhill claims that more price shopping on the part of consumers will drive down health care costs. This may work but then again, (on the other hand) it may not. I would characterize the market for college education as being pretty competitive yet this had failed to stem the rising costs of tuition.

2. Competition will lead to transparency in prices of medical procedures thus making price comparison possible. Again, on the other hand, it might not. An example where there is a lot of competition is the trades i.e. plumbing, home repairs, electrical etc. Yet prices are hardly transparent. Getting a quote on making repairs necessitates soliciting bids - a time consuming process. Trades people whom I've dealth with never give a quote over the phone (unless it's an hourly rate). Making major renovations or repairs requires the consumer to provide detailed specifications on such things as fixture brands etc. in order to compare bids. Cost over runs are a common occurence despite "competitive bidding".

Now imagine this situation in health care. If a contractor is unwilling to give a quote over the phone because the cost of a renovation or repair is complicated by particular situations of the homeowner, imagine the position the surgeon or doctor is in. What if he quotes a price on a routine appendectomy and then some complications occur?

To be fair, I would definitely like to see a laundry list of prices for all procedures (with no complications) but I would find this difficult to compile. As in the construction industry, the "average" cost of a home remodeling project can vary a lot and thus so can health care. My sense is that the best we can hope for is to use such a list as a yard stick and nothing more. This does not prevent health care providers from "padding" the "estimate" with additional recommended items such as after-surgery care, or even some thing such as an extended warranty. True, most of these costs will fall on the consumer and thus make him more price conscious but health care is not a true consumer good.

It lacks the characteristics of some consumer goods such as repeat purchase - if we don't like something from one merchant we move on to another. But we can only have one appendectomy. Likewise we also lack the requisite knowledge to make an informed purchase. Even with the power of the Internet the dispersion of opinions in the quality of a certain procedure will reflect the dispersion in the prices.

The article cites a good example of Lasik which is not covered by insurance and hence consumers tend to shop around when opting for this surgery. If only all medical care were like Lasik.

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