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.