Soviet-Styled Healthcare Pricing

John Goodman of Southern Methodist University is the leading US analyst of what is commonly called healthcare, which employs one and ten American workers.¹ He asks us to imagine for a moment a grocery store run along healthcare industry lines.² In this case, he notes:

·         Product prices will not be posted.

·         The price will vary even within the same store, depending on who is buying and paying.

·         You won’t be able to shop evenings or weekends.

·         If you need something, it probably won’t be there in the store. You may be told to come back days or weeks later.

·         Even if you find the item, you may have a long wait to be able to buy it.

·         If you want to charge your purchase, it won’t be at an automated machine; the transaction may be rejected; the necessary records may be missing; someone from outside the store will have to approve the amount of the purchase.  Since this all takes time, you may not be able to charge at all.

·         You won’t have the right to return anything. Even defective merchandise will not be reimbursed. As a result there will be no incentive to maintain product quality.

·         Your degree of satisfaction will not matter much to the store. What will count is the satisfaction of third party payers, and the store will focus on how to get the most from their formula. Of the third party payer formula says you may not buy cherry pie and ice cream on the same day, you may grumble, but most likely you will have to return to get what you want.

·         There will be very few brands to guide you in your selection. Labels and quantities will be all over the map, so direct comparison shopping will be impossible.

·         Your chief protection against injury or death from what you buy will be hiring a lawyer to sue. The suits will in turn greatly increase the cost of the food you buy.

·         The purchase of many food items will require permission from a licensed professional. The professional, fearing a suit, will require you to buy items you do not need or want.

We could go on and on in this vein, but the point is clear. The grocery industry somehow manages to organize thousands of products, many coming from thousands of miles away, and have them on the shelves whenever you want them, at prices that in total represent a small proportion of national income. There is also tremendous consumer choice. Yes, many grocery and drug stores seem to be primarily junk food stores, but this is the consumer’s choice, and there are health food stores as well.

By contrast, the healthcare industry is a mess.  Costs keep rising, consuming more and more of national income; quality of service keeps declining; and outcomes are surprisingly poor.  It is not widely known, but research in respected medical journals suggests that healthcare mistakes are the leading cause of death in the US, ahead even of cancer and heart disease.³ John Goodman points out that the free price system (he calls it the market system) delivers efficiency, the elimination of waste and unnecessary work, falling prices, and increasing quality. So why have we taken prices, much less free prices, out of healthcare? Why has “every developed nation… so completely suppressed normal market forces in healthcare that no one ever sees a real price for anything?”⁴ And why is this happening at the very same time that 30 countries have partly or fully privatized their retirement pension systems, having concluded that government control is a bad idea, that it has just led to unsustainable Ponzi schemes like the US Social Security system?⁵

Of course, many people believe that healthcare prices are inappropriate because service of this kind should be free. The word free in this context is misleading, since taxes (or government borrowing) would pay for it, but free at least in the sense that government provides it to the consumer at no incremental cost.  Even this formulation turns out to be wrong. There would be many costs to the consumer, costs that go far beyond taxes.

As is often pointed out, if healthcare is free, demand will surely rise. And if supply (doctors, hospitals, etc.) does not rise too, costs will soar. This is one of the reasons that government, once it starts subsidizing, usually subsidizes more and more.  As demand steadily rises without a commensurate rise in supply, government responds with further subsidies, with the same result again, in a vicious circle.

The only reliable way to bring costs down in any sector of the economy is to increase supply. And it must be the right kind of supply.  There is no way that the government can discover what supply is needed, or even define supply. Only free prices can be expected to solve the problem of what is needed where in order to meet consumer demand in a rational way.

John Goodman notes:

The problem of the Soviet economy writ large is exactly the same problem we have in our healthcare system. Should we train one more doctor? Or would our money be better spent training a nurse or two? If we choose the doctor, should she be a primary care physician? Or an internist? Or some other specialist? How on earth would anybody ever know? No one in healthcare ever sees a real price. No patient. No doctor. No employee. No employer. In absence of real prices, we have no way of knowing the marginal value of one more doctor, one more nurse one more technician, or one more anything.⁶

Not only are free prices needed to sort out the number of doctors and nurses. We also need a free price system to sort out their respective roles. At present, the American Medical Association, a physician’s group, leans on government to restrict severely the things that nurses are allowed to do, and thus creates an artificial, government-enforced monopoly for its member physicians. This is only one example of how government controls thwart efficiency. To experience the full Alice-in-Wonderland quality of government-controlled medicine, one need only take a look at the bizarre Medicare payment system:

·         Medicare sets a payment schedule for 7,500 separate tasks, varied by location and other factors. As John Goodman points out, this translates into the government controlling about 6 billion medical price transactions at any one time, none of which make any economic sense.⁷

·         Hospitals are paid as much as three times more for many procedures than private physicians. For example, Dr. Thomas Lewandowski, a Wisconsin cardiologist, found he received $150 for an echocardiogram versus $400 if done by a hospital employee; $60 for a stress test versus $180; and $10 for an electrocardiogram versus more than $25. Eventually, he, like many other physicians, gave up and sold his practice to a hospital. When he did, he also agreed to follow hospital guidelines for treatment that limited his independence and also agreed to see more patients per day.⁸

·         The Medicare coverage and price schedule is so complex that if you call Medicare for instruction, and ask different personnel, you will get widely varying answers, as documented by a number of studies. But is a physician makes a mistake and bills for something not covered, he or she has committed fraud, punishable by jail. Moreover, one cannot rely on advice from Medicare personal as a legal defense.  It is not surprising that a significant number of doctors, estimated at 15%⁹ but much higher is some areas, refuse to treat Medicare patients, and the number is likely to grow rapidly.

·         Medicare does not pay for phone calls, email, or showing patients how to do things for themselves. So these tools, which have revolutionized other service professionals, are rarely used.

·         Medicare also refuses to pay for blood tests not connected to a specific illness. The use of blood tests to identify health problems before they emerge has the potential to revolutionize medicine, but Medicare says no.

·         Doctors and patients can also benefit from computer and cell phone applications “apps” such as those which monitor blood pressure and send the information to the doctor. Will Medicare pay for them? No, unless the “app” has been taken through the FDA approval process at vast cost. Meanwhile the FDA says it is concerned about the proliferation of medical software for cell phones, and may crack down on anyone selling it without approval. The same applies electronic sensors. And what about genetic testing? With few exceptions, Medicare will not pay for that either, even if it has been taken through the FDA. In this way, American healthcare is essentially frozen in time, unable to take advantage of any new technology whose owner has not paid millions, or hundreds of millions, to get government approval, on in some cases, even after such approval.

·         If an elderly patient comes to a doctor with more than one problem, Medicare will not pay the doctor for treating more than one problem at a time. So if the patient has high blood pressure and also diabetes, there must be two appointments. Of course it is not quite that simple. A specialist may be given half pay for treating a second problem at the same time, unlike a family doctor who gets nothing. Who makes these strange rules? So specialists have more lobbyists in Washington?

·         During the campaign to pass the Affordable Care Act (ACA), the Obama administration ran ads trumpeting the right of seniors under Medicare to a “free medical checkup” and encouraging them to make an appointment. In actuality, this “checkup” is a “wellness exam” on which the doctor’s office measures the patient’s height, weight, body mass, and blood pressure. The doctor may also listen to the heart with a stethoscope through clothing. That’s it. What a wonderful use of patients’ and medical office time!¹⁰

Those arguing for government run healthcare, despite its inability to control costs or improve quality or even to tell that truth, often insist that healthcare is a unique case, unlike other industries. If you cannot afford a fancy house, they say, you can live more modestly. But if you cannot afford an operation, you may die, and no just society will allow people to die for lack of money.

This argument does not hold up to close inspection. Food, clothing, shelter, even transportation are all more, not less, essential than healthcare. We recognize this:  the government gives out free food stamps in an effort to ensure that no one starves.  The food stamp program is far from perfect. There appears to be a good deal of fraud. The government subsidy may be used to buy junk food or even cigarettes or liquor. But at least recipients of food stamps are herded into special food-aid or food-care programs run like Medicaid or Medicare. They are instead given cards which function as cash in regular stores, and there is no legal prohibition against the customer adding his or her cash to complete the transaction, as there is in Medicaid and Medicare.

Here’s another, related question:  given that we generally need food more urgently than healthcare, why does the government encourage employers, through tax deductions, to pay for healthcare but not food? Why is it that businesses failing to offer free food are not accused of “starving” their workers? The answer is part of American history. During WWII, wage and price controls prevented employers from raising worker’s wages. Workers being scare, big employers persuaded government to give them an advantage over small businesses by allowing them to offer tax deductible health coverage as a recruitment tool. Small businesses and sole proprietors, which could not usually afford to offer this benefit, thus had to compete on a less than level playing field. And unemployed or retired people lost health deduction for healthcare completely. Does this make any sense?

Peter Orszag, President Obama’s first Budget Director, offers another reason why, in his opinion, healthcare is a unique industry, not actually comparable to food, shelter, clothing, transportation, and other necessities. Although some people eat more food than others, the difference in not that great, and free market prices can effectively discipline our choices. But in healthcare, only 5% of customers take half of all the services. Half the customers use only 3% of the services.¹¹ This being so, how can giving consumers choices among free prices both improve quality and bring down prices?

This argument may sound convincing. Perhaps healthcare really is unique and not subject to market solutions? But let’s inquire a little further. The 5% of customers who use 50% of medical services are not the same people every year. They are, by and large, different people. And since these costs could hit almost anyone, there is no real argument for government take-over of healthcare, just an argument for a sensible private insurance program which will cover only unexpected and unpredictable catastrophic events, not unlike the fire insurance that most people take out on homes, without covering the more predictable features of home ownership such as routine heating/cooling maintenance or periodic repainting.

There is another, even more fundamental reason to reject any argument that healthcare is too unique to be provided, like other goods and services, by a free price system. The reason is that, at any given time, nobody really knows what healthcare is or should be. Markets do not just provide goods or services. Before they do that, they first define what these goods and services will be. Then, having arrived at some definition of them, they must keep changing the definition in response to consumer preferences and signals. In a market system, consumers over time have the final say about how to define and continually redefine the product through their purchase decisions.

Alex Marshall has written a Bloomberg View editorial entitled “Healthcare Will Become a Right Just Like Water?” He notes that government provides free water, at least in cities. Why should healthcare be any different? We have already noted that water (or anything else from the government) is not really free.  But let’s not worry about that. The real problem with Marshall’s idea is that water is water (most of the time) while healthcare has to be defined by someone.

Healthcare isn’t brought up from a well. It is an idea that has to be fleshed out to become an actual service. Then someone needs to deliver that service.

Automobiles do not come out of the ground either. Consumers decide what they will look like and how they will operate by buying or refusing to buy specific models. The same is true about computers. If the government provided automobiles or computers for free, this would all change. Then the government would decide what an automobile or computer is.

If government decided what an automobile or computer is, you can be sure that big companies making these products would lobby government very actively to get the answer they want. These companies would command a lot of money to put into the political process. In the case of automobiles, the labor unions would also have a considerable say.

How much influence would the consumer have? Not much. And how much influence would new or small companies with innovative new ideas have? Most likely zero. In any case, a product provided free by government would be heavily regulated, and regulators don’t much like change, so there would not be any point to further innovation.

What if government provides health insurance? It is the same. Government-provided health insurance means government defined health insurance which means government defined healthcare. And government defined healthcare becomes politicized, stagnant, with even major errors hard to change. Above all, it becomes subject to importuning by special interests whose main concern is profit, not health.

So, when Marshall concludes by saying “The arc of history suggests that eventually Americans will accept the right to healthcare,” we can only respond by asking: What healthcare? Whose idea of healthcare? Influenced by whom? – because healthcare is not at all like water.

We see more or less the same flaw in another Peter Orszag proposal: that doctors should be exempted from the crushing cost of liability insurance so long as they follow “evidence-based medicine.”¹² Is Orszag even familiar with the technical definition of “evidence-based medicine?” It means treatments that are supported by numerous double blind placebo controlled human trials. By that definition, as little as 5% of medicine is “evidence-based.”

Moreover, even human trials, when they can be used at all, often prove to be wrong. Or, more subtly, they turn out to be right for some people with certain genetic makeup and wrong for others with different genetic makeup, or right for one age or gender and wrong for another. People differ, and one-sized-fits-all is not good medicine.

“Evidence-based medicine” sounds like something everyone would want. But in practice, it would all be defined by the government. This is the same government that, being a bureaucracy, is notoriously averse to change, the same government that, being free of the carrot and stick of profit and loss, has little reason to change or accept change, or listen to consumer preferences.

Democratic elections are fine things, but they usually turn on a handful of issues, or on judgments of personality or character. They are not fit instruments for disciplining government in its choice of what is medically “evidence-based” and what is not. It is much better to let ideas of what is “evidence-based” and what is not compete in a marketplace of opinions and services, not to centralize and thus freeze them.

Here is a simple example. Mammograms are supposed to catch breast cancer while it is still treatable. Several politicians, most notably Hillary Clinton, have campaigned in favor of mammography as a fundamental female right. But mammograms involve radiation, and the extra radiation may eventually cause breast cancer. In addition, there are many false positive readings, which even if not false may lead to surgery or radiation of small tumors that would have disappeared on their own. The radiation may also damage the heart, which cannot be shielded when radiating the breast.

Given all these factors, should mammography be a political decision, much less a political campaign issue or political right? And what about the manufactures of the equipment, which is very expensive, or the doctors making large incomes from the procedure? Will they not influence what has become a political process? If mammography proves to be more harmful than helpful, how will we ever replace it with thermography or other techniques, so long as vested interests stand in the way and the consumer has little voice?

¹John Goodman, http://healthblog.ncpa.org (December 17, 2012).

²Goodman, http://healthblog.ncpa.org (September 19, 2012); (March 31, 2012).

³Gary Null, Death by Medicine (Mt. Jackson, VA: Praktikos Books, 2011).

⁴Goodman, http://healthblog.ncpa.org (January 7, 2013).
⁵Ibid.
⁶Goodman, http://healthblog.ncpa.org (September 5, 2012).
⁷Ibid., (January 22, 2012)
⁸Pettypeice, http://www.businessweek.com (November 21, 2012).
⁹http://www.emedicaresupplements.com (2012).

¹⁰Goodman, http://healthblog.ncpa.org (August 27, 2012).

¹¹Ibid, citing Aaron Carroll (August 15, 2012).

¹²Peter Orszag, Foreign Affairs (July/August 2011), 45-46.