Wednesday, January 07, 2009

Entrepreneurs Can Solve Health Care Problems

From Devon Herrick's (National Center for Policy Analysis) study "Health Care Entrepreneurs: The Changing Nature of Providers:"

The market for medical care does not work like other markets. Providers typically do not disclose prices prior to treatment because they do not compete for patients based on price. Payments are usually not made by patients themselves but by third parties — employers, insurance companies or government (only 12% of medical costs are paid directly by patients, see chart above). And the amounts paid are not really market-clearing prices; they are "reimbursement" rates negotiated with bureaucratic institutions and networks. Furthermore, when providers do not compete on price, they usually do not compete on quality either. In fact, in a very real sense, doctors and hospitals are not competing for patients at all — at least not in the way normal businesses compete in markets.

The lack of competition results in a highly artificial market plagued by problems of high costs, inconsistent quality and poor access, according to Devon Herrick at the National Center for Policy Analysis in his study "
Health Care Entrepreneurs: The Changing Nature of Providers."

But in health care markets where patients pay directly for all or most of their care, providers almost always compete on the basis of price and quality. Examples include:

Cosmetic surgery: Since it is rarely covered by insurance, patients pay out of pocket and are thus sensitive to prices; they can typically compare prices prior to surgery and pay a price that has been falling over time in real terms (see chart below).


Laser eye surgery: Competition is holding prices in check and improving quality in vision correction surgery, including accurate correction, faster healing, fewer side effects and an
expanded range of conditions that can be treated.


Price competition for drugs: Wal-Mart became the first national retailer to aggressively compete for buyers of generic drugs by charging a low, uniform price ($10 for a 90-day supply). Other chain stores have responded with their own pricing strategies.

Walk-in clinics in shopping malls and drug stores compete by offering low money costs and low time costs, and electronic prescribing improves quality using error-reducing software.

Telephone-based practices: TelaDoc, provides telephone consultations to 2 million customers. It allows patients access to a doctor any time of day from any location and also
uses electronic prescribing to reduce errors.

Medical tourism provides cash-paying patients health care outside of the United States in high-quality facilities that rival domestic facilities. Patients can save 30 to 50 percent by going abroad.

Bottom Line: In health care markets where third-party payers do not pay the bills, the behavior of providers and patients is radically different. In these markets, entrepreneurs compete for patients’ business by offering greater convenience, lower prices and innovative services unavailable in traditional clinical settings. What lesson can we learn from these examples of entrepreneurship in health care? The most important is that entrepreneurs can solve many of the health care problems that critics condemn. Public policy should encourage, not discourage, these efforts.

16 Comments:

At 1/07/2009 10:18 AM, Anonymous Anonymous said...

Great post

 
At 1/07/2009 10:53 AM, Blogger DCuz said...

Outstanding post!

I'm really learning a lot from your blog and appreciate all your efforts.

Please keep up the great work!

DCuz
www.RightCuz.com

 
At 1/07/2009 10:55 AM, Blogger Paul said...

I've been looking for a chart detailing cosmetic surgery vs. other variables. This confirms what I have long suspected.

 
At 1/07/2009 10:58 AM, Anonymous Anonymous said...

Most people are over insured when it comes to health care. They should be insuring their wealth, not their health.

The health savings accounts married to catastrophic insurance was, and is, one of the best ideas to come out of the previous Republican congress.

 
At 1/07/2009 1:14 PM, Anonymous Anonymous said...

Great post + Anonymous just above is 100% correct. The HSAs are great (I have had an MSA/HSA for over 8 years) + it puts the medical consumer back in control. I am really bummed now that I am forced to go on Medicare - it will cost me more and I'll get much less value for the dollar.

 
At 1/07/2009 2:02 PM, Anonymous argonaut said...

This goes to one of my core beliefs that to ultimately 'fix' the health care systems we have in place, we need to abolish this 'hidden' pricing/paying system we have.

A hidden pricing system removes the ability of the market to improve, well, much of anything.

 
At 1/07/2009 3:05 PM, Blogger LoneSnark said...

So what can we do? Outlaw insurance?

If the Federal Government passed a law eliminating a state insurance mandates and usurping federal control over the insurance industry, would the results be good or just another national cartel to replace the various state cartels?

 
At 1/07/2009 5:11 PM, Blogger bob wright said...

argonaut +1

 
At 1/07/2009 6:40 PM, Anonymous poor boomer said...

Nobody is going to comp[ete for poor patients.

What's the capitalist solution for that?

 
At 1/07/2009 8:01 PM, Blogger Craig said...

Wegmans to offer free antibiotics

 
At 1/08/2009 12:38 AM, Blogger John Thacker said...

Something similar occurs in Canada, where laser eye surgery and cosmetic surgery is not on the national health care, and hence is widely available (and inexpensive), unlike the perennial shortages in "free" health care.

Of course, to temper this (very good) point, one might respond that cosmetic surgery is elective, and thus the elasticity of demand might be higher than other procedures. That would increase price sensitivity. However, I don't think that would explain the dramatic difference in growth over time.

 
At 1/08/2009 12:50 AM, Anonymous Ken Nelson said...

I love Carpe Diem. Very informative.

Health care competition would mean lower prices and that would make it more accessible to the poor patient. Wal-Mart has made trillions catering to the less well off.

I don't think Mark is advocating eliminating insurance. Obviously it is needed. I'm living testament to that - a major head injury has cost my insurers 6 figures in the last year.

But I would have been fine paying 10 or 20K of that. I can afford it in cash. Others might finance it - a fixed head is worth more than a new SUV.

Dentists operate this way. They compete on price, quality and service. And they finance.

The right answer, I believe, is to require all to purchase catastrophic care. They can optionally purchase the Cadillac plans in place today, or they can fund out of pocket - like car or plumbing repair expenses.

Unfortunately, like much of capitalism, it works great, but counter intuitively and it is easily pilloried by politicians and exploiters more interested in power than public good.

Ultimately, I think the old people with certain health care costs is the biggest problem. How can you insure known expenses. It just doesn't work.

That will play out politically with the numerous old voters once again voting themselves money from the young and healthy (living and future).

 
At 1/08/2009 3:54 AM, Blogger 1 said...

"Nobody is going to comp[ete for poor patients.

What's the capitalist solution for that?
"...

Quit being a drag on society poor boomer by getting a job that pays...

 
At 1/08/2009 12:06 PM, Anonymous poor boomer said...

1 (the Blogger without a blog) said:

"Quit being a drag on society poor boomer by getting a job that pays..."

Ah, but the employees at my workplace are highly productive. We earned approx $400K last year yet produced sufficient profit for our employer to enjoy $3M net income.

Not only that, but by being underpaid, we generated much more tax revenue than if we had been paid higher wages: that $3M profit was taxed at the top marginal rate, while our pathetic wages were taxed at the 10 percent marginal rate.

While our jobs don't pay for us, they sure do pay for government, to the tune of $1M tax revenue!

Besides, as an older worker with no career-related experience who has no money and cannot get financial aid to return to school, how on earth would I get a job that pays?

 
At 1/09/2009 5:49 PM, Anonymous Deane Waldman said...

010909
Mr. Perry and Commenters:
Good to see discussion about these important issues. I have been trying to foment such dialogue with my blog Medical Malprocess. Until we have that national discussion and come to a consensus on certain key issues, healthcare will not and cannot be cured. We are all practicing bad medicine on Healthcare the Patient because we treat symptoms not causes.

Please see related blogposts (all 2008) at (www.thesystemmd.com) and Comment: Price-based costing (1/8); Don’t blame the insurance companies (1/9); Reducing cost does not reduce cost (1/28); Show me the money (2/16 & 4/13); Universal health care saves money by… (5/1); and Accept No substitutes (10/31; 11/14; 11/24).

The examples given here are, forgive me, the low-hanging fruit. They are procedures that CAN be made efficient; elective and thus economically elastic; not burdened with the huge weight of regulations and their attendant cost-generating inefficiencies; not mandated and therefore not commonly provided “for free” (no reimbursement). Lessons learned from laser eye or cosmetic surgery; telephone-based practice; and drug price competition cannot be extrapolated to heart surgery; cancer therapy; trauma care; and strokes – big ticket items where the care is provided or…the patient dies. No price elasticity whatsoever.

To begin curing, not palliating, Healthcare, we must first recognize the two fundamental reasons (causes) why healthcare financing does not work.
1) All markets work by the direct financial connection of consumer with supplier. YOU feel hunger. YOU buy and consume the hamburger. YOU pay for it. YOU decide if you got value. Cost driver = consumer = payer = evaluator. Healthcare has what I call micro-economic disconnection. The patient is consumer. Doctor is cost-driver. Government or insurance company is payer, and…no one is evaluator, well the patient sort of. No “market” can work under those conditions.
2) Healthcare is viewed as an expense item, a cost or outlay that you try to minimize. It should be viewed as an investment in our future, since [see blogpost “If you were CEO of corporation USA” (12/28/08)] the people are our nation’s primary asset.

I welcome anyone’s thoughts on these issues here or on my blog at www.thesystemmd.com. LET’S TALK!
Deane Waldman, MD MBA
Professor of Pediatrics, Pathology and Healthcare Strategy

 
At 1/09/2009 5:50 PM, Anonymous Anonymous said...

010909
Mr. Perry and Commenters:
Good to see discussion about these important issues. I have been trying to foment such dialogue with my blog Medical Malprocess. Until we have that national discussion and come to a consensus on certain key issues, healthcare will not and cannot be cured. We are practicing bad medicine on Healthcare the Patient because we treat symptoms not causes.

Please see these related blogposts (all 2008) at (www.thesystemmd.com) and Comment: Price-based costing (1/8); Don’t blame the insurance companies (1/9); Reducing cost does not reduce cost (1/28); Show me the money (2/16 & 4/13); Universal health care saves money by… (5/1); and Accept No substitutes (10/31; 11/14; 11/24).

The examples given here are, forgive me, the low-hanging fruit. They are procedures that CAN be made efficient; elective and thus economically elastic; not burdened with the huge weight of regulations and their attendant cost-generating inefficiencies; not mandated and therefore not commonly provided “for free” (no reimbursement). Lessons learned from laser eye or cosmetic surgery; telephone-based practice; and drug price competition cannot be extrapolated to heart surgery; cancer therapy; trauma care; and strokes – big ticket items where the care is provided or…the patient dies. No price elasticity whatsoever.

To begin curing, not palliating, Healthcare, we must first recognize the two fundamental reasons (causes) why healthcare financing does not work.
1) All markets work by the direct financial connection of consumer with supplier. YOU feel hunger. YOU buy and consume the hamburger. YOU pay for it. YOU decide if you got value. Cost driver = consumer = payer = evaluator. Healthcare has what I call micro-economic disconnection. The patient is consumer. Doctor is cost-driver. Government or insurance company is payer, and…no one is evaluator, well the patient sort of. No “market” can work under those conditions.
2) Healthcare is viewed as an expense item, a cost or outlay that you try to minimize. It should be viewed as an investment in our future, since [see blogpost “If you were CEO of corporation USA” (12/28/08)] the people are our nation’s primary asset.

I welcome anyone’s thoughts on these issues here or on my blog at www.thesystemmd.com. LET’S TALK!
Deane Waldman, MD MBA
Professor of Pediatrics, Pathology and Healthcare Strategy

 

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