Consumers seeking organic produce have, in the past, had few options. Many communities had at most one purveyor of such products, and those stores could charge a premium. (Hence the common nickname “Whole Paycheck” for Whole Foods.) As more stores, including even Walmart, began to carry organic products, shoppers had choices and prices moderated. Score one point for free market competition.
Many policy makers have argued that American health care needs a similar dose of market medicine. More providers will lead to competition for patients, leading to increased quality and decreased costs. While insurers and business leaders have tended to support such efforts, based on their experience in other industries, is health care different? Empirical evidence is mixed. Some studies have shown that in areas with more providers, prices tend to be lower. Others, however, find higher costs associated with more duplication of services. There are similarly contradictory findings on quality of care (though the studies that do claim to show higher quality have largely focused on things like wait times for appointments and patient satisfaction; safety and clinical outcomes actually appear to suffer from competition).
With regard to financial outcomes, it is very important to distinguish between price and cost. Price (or charge), is the amount of money a provider of a product or service demands from the payer. The cost to the purchaser, however, is a factor not only of the price, but also any negotiated discount, as well as the number of services consumed. Let’s use the example of a car. The car has a sticker price, but the cost to me depends on whether I can negotiate a better deal, and on whether I purchase any extras.
Hence the paradox of more competition leading to higher costs. In health care, competition among providers tends to drive down the prices, and it also allows insurers to negotiate better discounts. However, the total cost can still go up, if people are using more of those services. And that is where health care is different from groceries. Consumerism only works if the consumers know the price, but also have information on quality, and can control the amount that is consumed. In health care, even if prices were transparent, quality data are much more rudimentary. More importantly, the consumer (patient) has very little real control. If someone with chest pain is told by their doctor they need a nuclear stress test and a cardiac MRI they are unlikely to argue. Decisions by physicians drive up to 80% of all spending; it has been said that the most expensive piece of medical equipment is the doctor’s pen. (Or in the era of the electronic health record, her mouse.)
So while prices can go down, costs can go up. There is evidence that when the price per unit cost of a health care service drops, providers may simply do more to make up the difference. Similarly, when there are multiple hospitals in an area with duplication of expensive equipment and other infrastructure, the use of that equipment increases as the hospitals try to bring in enough revenue to pay for the investment. The Institute of Medicine has estimated that 30% of medical spending – over $1 trillion per year in 2014 – is waste, much of it from medically unnecessary services.
The excess utilization doesn’t even need to be due to overt greed. Physicians who are under more time pressure may feel a need to get more specialty consultation rather than spending more time themselves evaluating a patient. Providers with lower levels of expertise – for example, a general emergency physician versus a pediatric emergency physician – may order additional tests or treatments due to a greater degree of uncertainty. (Being a good pediatric specialist is as much about knowing what not to do as what to do.)
When it comes to groceries, competition can lower both prices and costs. But when Walmart comes to town and Whole Foods lowers the price of organic rutabagas and tofu, if they get to fill my cart with whatever they want, I’m going to shell out at least as much money. And as with medical care, more isn’t necessarily better.
Starting With Curious 