Surgery price wars in Oklahoma City?

by on July 10, 2013 at 12:40 am in Economics, Medicine | Permalink

I don’t have deep background knowledge on this particular hospital, but here is a new and interesting article:

An Oklahoma City surgery center is offering a new kind of price transparency, posting guaranteed all-inclusive surgery prices online. The move is revolutionizing medical billing in Oklahoma and around the world.

Dr. Keith Smith and Dr. Steven Lantier launched Surgery Center of Oklahoma 15 years ago, founded on the simple principle of price honesty.

“What we’ve discovered is health care really doesn’t cost that much,” Dr. Smith said. “What people are being charged for is another matter altogether.”

Surgery Center of Oklahoma started posting their prices online about four years ago.

Click here to see the online prices at Surgery Center of Oklahoma.

The prices are all-inclusive quotes and they are guaranteed.

“When we first started we thought we were about half the price of the hospitals,” Dr. Lantier remembers. “Then we found out we’re less than half price. Then we find out we’re a sixth to an eighth of what their prices are. I can’t believe the average person can afford health care at these prices.”

Their goal was to start a price war and they did.

Their first out-of-town patients came from Canada; soon everyday Americans caught on.

Here is a bit more:

Dr. Smith said federal Medicare regulation would not allow for their online price menu.

They have avoided government regulation and control in that area by choosing not to accept Medicaid or Medicare payments.

I would like to know more about this example (maybe Cherokee Gothic can go buy something there), but the article is here and some further coverage is here.  For the pointer I thank Jake Seliger and also Craig Fratrik and Timothy Miano.

Travis Ormsby July 10, 2013 at 1:12 am

Anybody know what Medicare regulation prohibits them from posting and guaranteeing prices? The linked article has a line that unnamed “hospital administrators” say that the clinic is simply cherrypicking patients, which made me wonder if that wasn’t the real reason they rejected Medicare and Medicaid. It certainly would be a lot easier to guarantee prices on all-inclusive care if you never treated anybody who was likely to suffer from any complications.

mulp July 10, 2013 at 4:20 am

To control costs, Medicare requires it be charged a certain percent less than anyone else, which would require a discount from the listed prices which would defeat the purpose.

Medicare did not require a discount from standard prices until the 80s and 90s when Congress required it. That was seen as a way to lower prices without regulating providers and their prices which would basically set prices for everyone. While the Federal government pays a high percentage of hospital bills, a big reason is those are people in the hospital for days. The Surgery Center does not keep people in hospital for more than overnight by avoiding those procedures. I found no heart bypass surgery for example.

Aaron July 10, 2013 at 10:35 am

Mulp’s comment is not true. Check out medpac’s payment basics guides to see how Medicare pays hospitals and physicians. They do not factor in an institution’s own prices into their calculation.

More likely is that the hospital just doesn’t want to be paid Medicare’s lower prices than insurer prices.

A good question for the hospital is how many of its patients actually pay the posted prices, and how many have their insurers pay a higher negotiated price. I bet most people have their insurers pay higher prices

Matthew July 11, 2013 at 9:59 am

Medicare pays a fixed rate that does not depend on the rate the provider charges. It is true that this rate is almost always less than what the providers charge to individuals and to private insurers, which is where I think the confusion comes from here, but it is not tied to an individual provider’s prices at all.

orthodoc July 10, 2013 at 1:18 pm

Happy to. It’s the False Claims Act.

Here’s how it works. Let’s say that you provide a medical service for a price which is lower than Medicare’s rate, which is set based on a lot of complicated wrangling of numbers ((Work RVU1 x Work (GPCI)2 + Practice Expense (PE) RVU x PE GPCI + Malpractice (PLI) RVU x PLI GPCI) = Total RVU x Conversion Factor= Medicare Payment). CMS (Center for Medicare and Medicaid Services) sees that, and notes that you have charged the government more than your price. That is now considered fraud. You are liable for treble damages (for every patient seen with Medicare), plus $5-10,000 per claim. Oh, and under PPACA, overpayments under Medicare and Medicaid must be reported and returned within 60 days of discovery, or the date a corresponding hospital report is due.

Much simpler to just not take Medicare or Medicaid, which gives the added bonus of not having to arm-wrestle over the phone with some clerk or doc-in-the-box who’s just arbitrarily decided to withhold reimbursement.

Matthew July 11, 2013 at 10:44 am

This doesn’t seem right. Either Medicare will pay the lower listed price, or it will pay its fixed fee–surely you can’t be blamed under the False Claims Act if Medicare chooses the latter. I think the issue is all about what you do with the remainder–you can’t offer the difference between the listed price and the medicare reimbursement as a kick-back to the medicare patient, because that is against the law. Medicaid doesn’t want you to reduce their co-pays, which are designed to encourage efficient use of medical services. But as long as you aren’t giving kick-backs, I think you are harmless under the False Claims Act.

Also, there’s a lot more arm wrestling with private insurers than there is medicare and medicaid. The government doesn’t pay a lot to providers, but it challenges a much smaller proportion of charges than do typical private insurers (there are even some insurers who, as a matter of policy, initially refuse all charges regardless!).

orthodoc July 11, 2013 at 2:07 pm

“Either Medicare will pay the lower listed price, or it will pay its fixed fee–surely you can’t be blamed under the False Claims Act if Medicare chooses the latter.” That’s my point. You can and will be. The False Claims Act is very specific on this. If your charge for a patient who is not on Medicare is less than your charge for a patient who is on Medicare, then the lower charge is assumed to be your usual and customary fee. And CMS will then prosecute for every Medicare patient who is considered to be overcharged. There are companies called RACs who are allowed to troll through hospital bills for this, and the government is extremely aggressive about prosecution. Kickbacks have nothing to do with this, nor does forgiving the co-pay.

“Also, there’s a lot more arm wrestling with private insurers than there is medicare and medicaid.” All I can say is that you live a charmed life if this is your situation. Medicaid, in particular, is notorious for denying claims after the fact, at least in my state of Washington.

revver July 10, 2013 at 1:20 am

“Their first out-of-town patients came from Canada; soon everyday Americans caught on.”
Not at all surprising, the high waiting times show no sign of receding:

http://www.montrealgazette.com/health/progress+wait+times+health+care+Canada+report/8509242/story.html

derek July 10, 2013 at 2:03 am

Looking at knee and shoulder operation pricing I know a few guys who waited a very very long time to get theirs done up here. They easily could have paid a few thousand for the procedure, a bit for travel expenses, and then get physio at home, which they have to pay a portion of as it is. And be back to work in short order. Free health care as long as you are willing to wait for it. And wait.

mulp July 10, 2013 at 4:45 am

If you have no better option than working a Wal-Mart or other low wage jobs, how long do you wait in the US for a knee or shoulder operation?

Watch Bill Moyers on “Two American Families” on Frontline on PBS and explain how they are so much better off than Canadians are when it comes to health care.
http://billmoyers.com/episode/full-show-surviving-the-new-american-economy/
and
http://www.pbs.org/wgbh/pages/frontline/two-american-families/

Also, I recall back when the US insurers were responding to studies saying women should leave hospitals sooner after giving birth, and lawmakers everywhere were passing laws requiring insurers to pay for extra days, a couple of friends found themselves in Canada giving birth. She was afraid of the insurers not paying all the bill when they kept her longer than the insurers were paying in the US, but the bill in Canada was lower than the shorter stay would have been in the US. Canada delays elective surgery because they are willing to pay half as much as we pay in the US, but they cover everyone the same, while in the US, the average wait is at least as long as in Canada: four patients waiting a week, and one patient waiting until age 65, or until declared disabled for Social Security and able to get Medicare.

Chip July 10, 2013 at 6:58 am

Someone shows lengthening wait lists (ie, data) and you refer to two families on the Bill Moyers show and a ‘couple of friends.’

Yannai July 10, 2013 at 10:45 am

Repeat personal experience of this Canadian suggests that new mothers/babies are kept is hospital 1 day (or less!) when there are no complications.

NeedleFactory July 10, 2013 at 1:23 am

My best friend is NOT on Medicare and makes a point of saying he pays cash. He says he gets his medical care (operations, MRIs) at half price for that reason. Also, he sometimes avoids having tests done that his doctors say are not needed — but apparently common under Medicare.

sort_of_knowledgable July 10, 2013 at 3:27 am

Your mileage may vary. I once had an infected finger and called one doctor’s office asking for the cash price for a visit. I was told it was a $200 deposit but couldn’t get a price quote.

Jan July 10, 2013 at 6:04 am

That is interesting. Most reports of health care prices — hospitals in particular — find that people get charged much more when they pay themselves. Usually the insurer negotiates a much better rate than the individual can. That is good for him, but I do wonder if he is saving money overall. Since you mention Medicare, does that mean your friend is eligible and just hasn’t enrolled? Assuming so, his premium would already be heavily subsidized. Also, negotiating an affordable rate after the fact for a catastrophic event that puts him in the hospital for a few days would be pretty tough.

Andrew' July 10, 2013 at 6:36 am

“but I do wonder if he is saving money overall. ”
You can safely stop wondering.

Jan July 10, 2013 at 7:58 am

You think he’ll save money by not enrolling in Medicare between now and when he dies, and “smart shopping” instead?

Jay July 10, 2013 at 1:10 pm

I don’t know about hospitals, but I know personally of folks who are on HDHP/HSA plans, and have had marvelous results at diagnostic labs, essentially paying half the listed price for, say, an MRI than the hospital would have charge since they are what amounts to a cash customer. Buy here, pay here.

Matthew July 11, 2013 at 10:15 am

Perhaps you have missed the whole discussion of providers’ list prices? In general, no one ever pays the list price. List prices are always way, way higher than the true charges for the procedures, because they are the provider’s initial bargaining position–each insurer then tries to negotiate the charge down from the list price, which in turn allows hospitals to pay different prices to different insurers, depending on their varying degrees of market power.

It seems your friend has found providers that were kind enough to charge the actual cost even though he lacked the insurance company negotiating on his behalf. But since there’s no way to really know what the providers actually charge to insurance companies, it is quite possible they are still gouging him quite a lot.

Also, I think Jan’s main point is that Medicare is a “free” benefit in the sense that your friend has already paid for it, regardless of whether he allows it to pay his medical bills. My understanding is that Medicare enrollment is automatic once he turns 65, unless, of course, he is not eligible due to not having enough credits (you have to pay payroll taxes for 10 years to be eligible, if Im not mistaken).

Albigensian July 10, 2013 at 9:59 am

The problem with paying cash is, there’s a huge asymmetry in information because you really have no way of knowing what anyone else is paying (i.e., market prices).

If you just ask for a price quote, you’ll often get the list price- which is absurdly high. It’s true that practically no one pays list, but it sets a price peg and even negotiating an 80% discount for cash is often a poor deal as you may still be paying over twice as much as a private insurer would (and government pays even less).

There’s a reason why new cars have a price sticker on the window- government mandates it. Before then, dealers used to just put any old price on the car and in that information-poor world, retail buyers often had no clue. (Yes, I know: the stickers could vanish tomorrow and buyers could still find dealer cost on the Internet. But while that works for cars, it doesn’t work so well for medical procedures (except perhaps a few commonly performed ones.)

And then there’s that obscene form you must sign in order obtain hospital services- the one that says you agree to pay whatever they wish to charge for whatever they may provide. And if you don’t sign it, they’ll just keep you alive until you can be transferred somewhere else.

Summary:
1. Price competition requires some transparency; there’s so little in medical pricing that it’s actually newsworthy when it’s seen.

2. Negotiating in the face of severe information asymmetry is like playing cards with a marked deck.

bokn kyboa July 10, 2013 at 10:49 am

well said.

Silas Barta July 10, 2013 at 1:06 pm

If you just ask for a price quote, you’ll often get the list price- which is absurdly high. It’s true that practically no one pays list, but it sets a price peg and even negotiating an 80% discount for cash is often a poor deal as you may still be paying over twice as much as a private insurer would (and government pays even less).

Then you didn’t really get a price list, did you?

Dan Weber July 10, 2013 at 1:35 pm

Pricing in medical care can be difficult. This doesn’t mean we just throw the entire concept out the window.

Morph2020 July 15, 2013 at 5:58 pm

I was never asked to sign an “obscene” form about medical payments. It sounds like an unenforceable contract to me, one that you would be able to challenge successfully in court.

How big does a bill have to be before it becomes sexually arousing? (obscene)

anon July 10, 2013 at 2:21 am

As long as the insurance model is the dominant payment model in healthcare, we won’t see much of this. Our government subsidizes employer-provided health insurance, so the insurance model is here to stay.

The doctors are able to offer low prices because they don’t have to process claims and deal with insurance BS. Physicians just love cash money payments, much less headache.

Michael July 10, 2013 at 10:35 am

The problem isn’t the “insurance model”, the problem is the bizarre fourth-party pre-payment scheme the passes for “insurance” here in the US.

Get rid of the employer-insurance tax subsidies, allow real HSAs, and shift Medicare/Medicaid to voucher-type systems, and I think people would be amazed at the shifts in the market that would result.

John July 10, 2013 at 12:12 pm

From the article, “Surgery Center of Oklahoma does accept private insurance, but the center does not accept Medicaid or Medicare.” I’m only a little familiar with private insurance billing, and not familiar at all with Medicare and Medicaid, but I consider it unlikely that Medicare and Medicaid billing is that much worse than the mess that private insurance billing is.

doctor's office staff July 10, 2013 at 6:19 pm

IMO insurance companies and Medicaid are messier in terms of than Medicare. We would rather see Medicare patients than deal with some of the stingier companies/cheaper policies.

prior_approval July 10, 2013 at 2:23 am

‘The move is revolutionizing medical billing in Oklahoma and around the world.’

Is that the same ‘world’ covered by the ‘World’ Series? Or Lindy’s ‘world famous cheesecake’?

And the reality is, they are choosing their customers to ensure their margins – otherwise, they would no longer be in business.

In other words, many of the patients needing medical procedures have an infinite waiting time when using the Surgery Center of Oklahoma. Which tends to demonstrate the basic problem in a dedicated for profit health care system – those that are not profitable are not cared for. Which tends to bother people used to essentially universal health care systems, found in all other industrial nations. In contrast, Americans seem to have no problem with tens of million people have no real access to health care at all, except in the most dire (and often, the most costly) circumstances.

Jody July 10, 2013 at 8:00 am

It’s a clear market failure when the donut shop doesn’t sell the filet mignon I like.

prior_approval July 10, 2013 at 9:04 am

Sure – if your measurement about the quality of a health care system is the waiting time for filet mignon at the donut shop.

In other words, how many people does the Surgery Center of Oklahoma refuse to treat since they cannot be reasonably accomodated under the fixed fee system, and why are those people excluded from the metric of how many people are unable to have a procedure performed?

Cream skimming (as UPS has most convincingly demonstrated for decades) is a profitable business model – there is a reason why it is not considered the best model for health care, however.

And here is a personal example – my family enjoyed going to one of the best dentists in the DC area, as measured by other dentists, according to the Washingtonian magazine. He also did professional services on my mother, when she was completely dependent on a respirator, and needed to have her lungs sucked out regularly (don’t ask – and yes, I was certified by Roberts Oxygen). He also did not charge more for her teeth cleaning than anyone else’s.

Do you honestly think that the Surgery Center of Oklahoma accepts patients completely dependent on a respirator for their low price work, or do they simply not provide services to such a patient?

This is an honest question, by the way – facts about how patients are accepted for fixed fee work are welcome.

However, the fact that other, already mandated (and apparently over-priced, according to the Center) fee schedules are not accepted would seem to suggest that the Center is choosing its patients carefully. Much the same way that UPS carefully chooses who it delivers to.

Paul Zrimsek July 10, 2013 at 10:42 am

It might have been better to wait for an answer to your honest question before declaring the assertion of one of the center’s competitors to be “the reality”. (I don’t happen to have an answer to the question. I don’t have any trouble believing that the fixed-price model wouldn’t work for everyone. But having it available for the people it does work for still seems like a clear win.)

prior_approval July 10, 2013 at 11:59 am

‘But having it available for the people it does work for still seems like a clear win.’

Except that those people, like my mother, who clearly would not agree that it is a clear win.

And that is the point, isn’t it?

Cream skimming is always a profitable model – but health care is not about profits, at least in all other industrial countries than the U.S., which has by far the highest health care costs (an easy 50% higher compared to the next most expensive model), while not even providing health care to tens of millions of people.

Paul Zrimsek July 10, 2013 at 12:45 pm

Even assuming that your mother is the one person in the family capable of offering a more convincing argument than “we don’t do it that way at home”, I can’t regard getting her to agree as the point.

Price competition is known to produce good results in other markets. Even if it can’t be applied to the entire health-care market, shouldn’t we be happy to learn that there are sub-markets where we can enjoy its benefits– barring some specific reason to believe that it makes people who don’t fit in those sub-markets worse off than they were before?

prior_approval July 10, 2013 at 12:55 pm

‘barring some specific reason to believe that it makes people who don’t fit in those sub-markets worse off than they were before’

And here I was, thinking that providing a specific example of how the Center likely chooses the most profitable patients, using a counter example, was sufficient.

Or do you think that people reliant on respirators (my mother has been dead for more than 10 years at this point) are a rarity?

Paul Zrimsek July 10, 2013 at 1:22 pm

“Sufficient”… only to show that those who fall outside the fixed-price submarket do not benefit from it– a point I have already granted for the sake of argument. Showing that they are made worse off by it is something else again.

Dan Weber July 10, 2013 at 1:45 pm

It’s the same reason Google’s bus for its workers is evil: because there is someone who has been left out.

Floccina July 10, 2013 at 3:21 pm

How often is someone in that bad shape a good candidate for surgery? How often is the net result of surgery on someone already very sick likely to improve their health? I am just asking. Recently a friend’s 89 year old mother was brought in for a biopsy to see if she had cancer. They had to take her off cumadin and she promptly had strike.

rockefller July 10, 2013 at 6:26 pm

Imagine if health care providers competed with each other for cash customers on a price basis. Do you think prices might come down?

Keith July 10, 2013 at 11:05 am

By the way, the ‘World Series’ is not an expression of American arrogance, it is simply the name of the newspaper that sponsored the first baseball series between baseball leagues. I think it was the New York World newspaper.

Rich Berger July 10, 2013 at 5:49 am

Tyler-

Shouldn’t this post have had a “Markets in Everything” tag? Some callous doctors have put a price on healthcare which really should be as free as the air we breathe.

Jan July 10, 2013 at 6:12 am

Please see any of the hundreds of papers, books, blog posts, etc. on how health care is totally incompatible with market principles. Thanks.

Rich Berger July 10, 2013 at 7:13 am

Hundreds, you say? How about one specific book, John Goodman’s “Priceless”, for the cost of ignoring market principles. You know they tried this in the USSR, for all goods and services. How did that work out?

Jan July 10, 2013 at 8:06 am

How about an economics textbook? Stiglitz’s text goes into great detail on the topic: http://www.amazon.com/Economics-Public-Sector-Third-Edition/dp/0393966518

Your USSR example (scary socialism alert! again…) is a total red herring. Because a planned economy failed, doesn’t mean that there isn’t a natural market failure for one particular type of good.

Rich Berger July 10, 2013 at 8:57 am

Goodman estimates that Medicare is setting roughly 6 billion prices at any one time in the US. This is based on a list of approximately 7,500 tasks that it pays doctors to perform. There are regional variations and approximately 800,000 practicing physicians whose prices can be so set. This is not market failure – it is failure to let a market operate.

Your dismissal of the failure of socialism is just hand-waving. Medical care is a big chunk of our economy and HHS is going be its commissar. Based on the reported problems with implementing Obamacare even before it really is activated, only a fool would have confidence in its successful implementation.

Jan July 10, 2013 at 9:47 am

Your assertion that Medicare also distorts the market, which is true, does not address the fact that health care cannot operate as a free market good. That is true whether you start from a clean slate or begin from the status quo. A perfect market cannot exist for health care.

Hand waving? Based on the information provided, your assertion is: Socialism, the USSR in particular, failed = health care operates perfectly under free market principles.

Paul Zrimsek July 10, 2013 at 10:38 am

You do realize that “a perfect market cannot exist for health care” and “health care is totally incompatible with market principles” are not two ways of saying the same thing, yes?

Jan July 10, 2013 at 12:04 pm

Both are true and both support my general thesis.

Frank Somatra July 10, 2013 at 9:04 am

Austin Frakt kind of tore that one to pieces: http://theincidentaleconomist.com/wordpress/tag/priceless/

The Anti-Gnostic July 10, 2013 at 10:03 am

I don’t see that Frakt did. And like most partisans he furiously insists that going to a doctor keeps you healthy. It doesn’t; going to a doctor keeps people with chronic pathologies alive.

Rich Berger July 10, 2013 at 10:31 am

Frakt and Goodman disagree on many things, but he did agree to read Goodman’s book and critique it. I think that was being a pretty good sport.

I don’t think the market provides perfect outcomes, just ones acceptable to the parties to a transaction. As long as we live in a world of scarce resources, not every need can be met. The “market” is not some beast, but the net effect of many individuals seeking mututal benefit. Critics of markets assume that government correction of supposed “market failure” is guaranteed to be better I think that we have seen the opposite with respect to healthcare, starting with the unintentional fostering of an employer-based system to a system largely consisting of third-party payers and heavy intervention.

In the end, even the wealthiest person on earth can not put off death and many other conditions cannot be cured by medicine.

The Anti-Gnostic July 10, 2013 at 8:07 am

You can talk all the “justice” and “fairness” you want but it doesn’t change the fact that medical care is a finite resource subject to the supply-demand curve like every other finite resource.

Also, can we stop using this flaccid term “health care?” People care for their health by limiting sugars and starches, not smoking, exercising and avoiding promiscuous sex and intoxicants. Caring for your health is about as free as it’s possible for things to get. DON’T buy sugary, starchy crap. DON’T buy cigarettes and booze. DON’T sleep around with half the neighborhood. WALK. WASH. “Medical care” is what you get when you’re sick.

prior_approval July 10, 2013 at 9:08 am

‘People care for their health by limiting sugars and starches, not smoking, exercising and avoiding promiscuous sex and intoxicants’

And by going to the dentist regularly, ehjoying pre-natal care before a child is born, having infant vaccinations be free – more examples, such as having doctors in walking distance, are example. But then, people who actually live in countries with essentially universal health care systems know what they look like, while Americans who have not travelled extensively or lived outside of their country don’t.

The Anti-Gnostic July 10, 2013 at 9:47 am

We’ve got all that, and lots of high birthweight babies and people living into their 70’s, 80’s and 90’s to show for it. I don’t know how we managed without a bunch of insular Germans from the Prussian anthill to show us how, but we’ve done it.

I’m really saddened to hear your country’s citizens are so poor they had to socialize the costs of getting their teeth cleaned and pre-natal vitamin tablets, and those precious cc’s of vaccine fluid. We produce it by the ton over here. Do you need some?

The Anti-Gnostic July 10, 2013 at 9:55 am

Also, LOL at that “having doctors in walking distance.” Every morning, heartless, provincial Americans drive over the corpses of people who died in the street making that long, grim journey to the doctor’s office.

Urso July 10, 2013 at 10:13 am

p_a is clearly, at this point, more German than American, and nowhere is this reflected more clearly than in his bizarre concept of what America is like – a land with literally *no* social safety net. Where the poor receive no money for health care, no money for food, no money for anything. No public schools, no libraries, crumbling public roads everywhere you turn. A land one step short of a Mad Max anarchy, all thanks to Grover Norquist and the Tea Party, who have successfully shut down government spending in its entirety.

This is a bizarrely common misconception among Europeans. And we can honestly disagree on whether America should be spending more on its social safety net, it’s certainly not true that America isn’t spending anything at all.

prior:_approval July 10, 2013 at 12:08 pm

‘a land with literally *no* social safety net’

Of course the U.S. has a health care safety net – as a matter of fact, the last time I drove by Fredericksburg on 95, it was a billboard advertising ermergency room waiting times (my memory is around 27 minutes, in the late afternoon in December, going north towards DC – I’m pretty sure that Fairfax Hospital doesn’t advertise its waiting times on either 495 or 66). They don’t such signs off the autobahn in Germany – Baden being such a Prussian anthill.

And the idea of advertising emergency room waiting times fits perfectly into this post, doesn’t it?

As if people should drive around comparing waiting times. You are right, though – this recent American innovation was completely alien to me.

Jim D. July 10, 2013 at 10:32 am

Yes, though Police & Fire protection is a finite resource as well. However, we recognize that, as a society, a certain amount of Police & Fire protection should be available to all. Sure, you can pay for more– very common in the form of private security firms or home security systems etc., but you get fairly comprehensive coverage by default as well.

So, the mere fact of non-infinite supply does not mean that market forces should prevail in determining access & availability of a resource: There are already exceptions to this in our society.

John Smith July 10, 2013 at 11:02 am

Oh Jim D. Do you really think that everybody in the US has equal protection from fire and crime? I invite you to move to the South Side of Chicago. There’s a lovely school there nestled in the enclave of Hyde Park. I recommend you live somewhere South of 63rd street. If you make it to classes alive, the school will hopefully be able to educate you as to why your life and property are at risk every day, living in the reality of very uneven and expensive coverage of the public services you hold up so loftily.

Jim D. July 10, 2013 at 11:39 am

@John Smith I didn’t say Equal Protection. That’s your own straw man on your part. Nor did I portray our current implementation as lofty– it’s messy and uneven.

I held up the example of Fire & Police for comparison: the fact that a minority of the country has only the minimum of such services does not negate the majority situation of decent though uneven service of this sort. Are you arguing that the South Side Chicago scenario demonstrates the need for us to move to a market-driven model of financing fire & safety services? I have family that serve in the fire departments of the Newark & Trenton area of NJ– they put out fires even in the worse spots of those places, run educational workshops & demonstrations on fire safety & prevention etc. Places where the residents therefore often have more Fire protection than they do health care.

And I am not blindly advocating for Universal Healthcare, I am trying to engage in a reasonable exploration of the thesis: We live in a society that recognizes that certain services, e.g., fire, protection, legal/judicial, etc, should not rest primarily in the flux of market forces, though individual actors with substantial resources can expend their resources to bolster these services with private offerings, eg., private security, excellent lawyers, etc. Other services, e.g., leisure & entertainment, are for the private sector & market forces to provide & regulate pricing. On other services we as a nation, have been more ambivalent– motor vehicles/DMV services are a good example where some states retain this as their own to provide, others release it in part to the private sector in public/private partnerships etc.

So, given that society already sees fit to remove some services from the market, an argument that Health Care can’t or shouldn’t be removed from the market as it exists now cannot be complete without addressing how or why Health Care should be treated any differently than those services that society has already recognized as belonging substantially outside of the private, market-driven sector. The fact that Health Care has a limited supply is not sufficient to this task, as other society-provided services do as well.

So what is different about Health Care from Fire & Safety?

The Anti-Gnostic July 10, 2013 at 12:16 pm

Market forces always prevail. There is no way around this. We may be morally obligated at some level to provide two double-lung transplants to strangers who can’t afford them but that is a different argument. Given that market forces enable even hourly wage earners to get boob jobs and cell phones, I’m not ready to declare medicine off limits to the market. And watching Europe go broke trying to do this even under a US defense umbrella confirms my suspicions.

Jim July 10, 2013 at 1:03 pm

@Anti Gnostic Except that the US government in the form of Medicare & Medicaid alone represents a higher per-capita PPP (about $4500) than most other countries, UK and most of Europe included. But the UK at least (I’m not familiar enough with other countries to say) manage to allow those with more resources to choose to spend their money privately for better health care while still offering everyone better health care than many people have in the US. If Europe is going broke as a result of Health Care, they are therfore doing it while still paying less than the US government does. This points to some sort of massive inefficiency in how the market is driving health care in the US. My honest question: Is there a fundamental/systemic flaw in US health care preventing a better/more efficient market driven scenario to arise? What is currently stopping market forces from driving a better outcome in US healthcare?

AC July 10, 2013 at 7:01 am

Here’s an interview with Keith Smith: http://www.youtube.com/watch?v=LTfKDzFx9Jk

bob July 10, 2013 at 8:20 am

There remain some decent people in america, mgbp

tjmiano July 10, 2013 at 9:08 am

At common law, price is a material term for contract formation. The equitable doctrine of “undue influence” makes contracts for medical services voidable if a doctor improperly uses their position of power to impact contract formation (e.g., additional services or higher prices — aka, Q2 and P2). https://en.wikipedia.org/wiki/Undue_influence. Unusually, the burden of proof here shifts to the doctor to prove no undue influence.

If a hospital *could* publish generalized prices information ex ante and chooses not to…
If you can show empirically that when prices are published ex ante prices go down, then…
If you can show large swings in price between hospitals for identical services…

Wouldn’t it be nice if state case law wasn’t locked behind online pay walls! Sounds like a job for some enterprising 2L who needs to write a law review article!

Urso July 10, 2013 at 10:08 am

scholar.google.com

Click legal documents. Search away.

tjmiano July 10, 2013 at 10:37 am

This is limited to the highest courts of appeal — a good step 1, no doubt, but nothing like what you’d get out of Lexis/Westlaw. Especially since step 3 would be to check all the journals.

Smash July 10, 2013 at 9:12 am

Prices for the ACL procedures are higher than the mean costs given by this 2010 paper: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2853669/

ACL Repair: $6990 (Surgery Center of OK) vs. $4872 (paper)
ACL Repair w/ Allograft: $9990 (Surgery Center of OK) vs. $5465 (paper)

RC July 10, 2013 at 9:38 am

You are mixing your perspectives. Cost to patients (i.e., charges) is not the same as cost to the surgery center.

PLW July 10, 2013 at 10:04 am

Also, from the abstract of the article, “Surgeon and anesthesiologist fees were not included in the analysis.”

healthcarethinktank July 10, 2013 at 9:13 am

Ambulatory surgery centers have been innovative in many regards over the past two decades.

This price model works for some surgeons in some specialties (particularly plastic surgery) but not for most. Orthopedic centers, for example, need Medicare and workers comp patients.

ASCs in general have lower prices and better patient satisfaction than hospitals. To be fair to hospitals, they do have to overcharge for some services to cover for indigent care and bad debts.

PLW July 10, 2013 at 10:05 am

idk about that. The cited clinic seems to do orthopedics. At least, they list prices for ACL repairs.

Jay July 10, 2013 at 9:18 am

IANAE (I am not an economist), but some of the commentary on here seems to me too clever by half. Two enterprising doctors decided to opt out of the health insurance shell game, and they seem to be doing ok. If by “cherry picking” their customers, we really mean “offering straight prices irrespective of customer ability to pay” then I guess they are guilty. If you think medical care and services should be treated fundamentally different from say, buying watermelons for $5 each from a roadside stand, then make that argument, but it’s a moral/ethical one it seems to me, not an economic one.

RC July 10, 2013 at 9:48 am

That’s a false dichotomy. An economic evaluation should inform a moral/ethical opinion.

Unless, that is, you just want to signal to others that you’re a caring person.

RC July 10, 2013 at 9:52 am

I believe I misread your last sentence. We are saying the same thing.

Jay July 10, 2013 at 1:05 pm

I think so, too. I’m just always curious how people seem to think economics (or physics, sometimes) applies in fundamentally different ways to certain products, or markets, or whatever. I may be a novice as an economist, but math is math, no? (That’s my Unfrozen Caveman Lawyer argument, anyway)

As to the moral/ethical question of whether health care “should” be free to all, too may folks seem to ignore the “unseen” side of the equation, which is the actual practitioner. What’s my motivation to practice internal medicine if it eventually doesn’t pay as well as say, IT network engineering?

Jay July 10, 2013 at 1:07 pm

In the interests of full disclosure, I have interacted with Dr. Lantier in the past and found him to be very responsive and an overall swell guy.

Rich Berger July 10, 2013 at 10:57 am

Of course, you are assuming that you can treat the American voters as adults. Given the debased nature of public education and the constant drumbeat of “Unfair!”, there is a large segment which is resistant to straight thinking.

Albigensian July 10, 2013 at 10:31 am

Since healthcare is a limited resource, it’s going to be rationed in one way or another.

It may be rationed by price, of course, using one of many different models (e.g., fee-for-service, HMO, etc.). But when the price to the consumer is set below market rate, then demand inevitably exceeds supply. And what then?

One form of rationing is to use QALYs- Quality Adjusted Life-Years. If you don’t have so many QALYs left then we (“we” = government) don’t want to spend too much on you. At some point all you get is palliative care (and perhaps Physician Assisted Suicide?). It’s not that it can’t happen, it’s that it must happen- because without price rationing, someone must say “no.”

Markets (usually) work just fine to ration goods and services. But once one gets away from market price mechanism to match demand with supply (because it’s “unfair”), other mechanisms will be used. If it’s government, then who gets and who doesn’t (and who pays, of course) will inevitably be political (because everything government does in a democracy is political).

Should “we” lavishly fund autism therapy (even though much of it may not be effective) even if it means denying some treatments for cancer patients (especially for those with low QALYs)? While this may (will) be presented as a moral question, its resolution will actually depend on raw politics- who has the most effective lobby? The one sure outcome is, everyone will get less than they want, and at least some will feel grevous injustices has been done.

lxm July 10, 2013 at 12:44 pm

I agree. There must be limits, as tough a conversation as that would be. If you want more than, for example, end of life palliative care than pay for it out of your own pocket. If this type of rational rationing is to be called a ‘death panel’ so be it.

Al July 10, 2013 at 12:55 pm

“A new provision buried in Obamacare effectively prohibits doctors from starting their own hospitals or expanding the hospitals they already own, which has been widely interpreted as a give-away to the American Hospital Association.”

“The Surgery Center is exempt from this statue, since it’s technically not a hospital and it doesn’t accept Medicaid or Medicare. So Smith and Lantier are considering expanding to accommodate their growing clientele. ”

From this article: http://reason.com/archives/2012/11/15/the-obamacare-revolt-oklahoma-doctors-fi

Jay July 10, 2013 at 1:17 pm

It’s the “going Galt” of medicine.

Boonton July 10, 2013 at 1:24 pm

Perusing the comments I think we can sum this up as follows:

Pros:

1. A totally self-contained procedure that is clearly defined and usually does not present much complication beyond the procedure itself can be highly ‘automated’ and produced at dramatic cost savings by facilities that dedicate themselves to specializing in it.

2. The open pricing model let’s anyone tap this, not just negotiators for big insurance companies.

Cons:

1. Cream skimming. More general hospitals take care of difficult cases as a type of ‘loss leader’ and use the profits from operations like these to offset their losses. Take these away and you’re simply shifting some portion of health costs back onto the sick. Granted that might be positive since it will help us see something closer to the true cost of chronic, complicated health problems.

2. The underlying assumption here is a cartoon villian of the evil profiteering hospital/doctor/health care group. This is implied in the statement:

“When we first started we thought we were about half the price of the hospitals,” Dr. Lantier remembers. “Then we found out we’re less than half price. Then we find out we’re a sixth to an eighth of what their prices are. I can’t believe the average person can afford health care at these prices.”

If that was the case where does 50%+ of the money go? Into buying yachts and luxury cars for lucky doctors? Certainly economists should know better. If that was the case the supply of doctors would increase and competition would drive down costs.

The fact is more likely that our category of ‘health care’ is far too broad. A lot of routine stuff in health care is actually very inexpensive and we are very productive at it. Imagine a doctor evaluating patients with minor issues like sore throats. It doesn’t take much time, blood and other diagnostic tests let the doctor improve his ability to diagnose quickly, and medical assistants and IT let the doctor see a lot of such patients in an hour. That’s probably not a cost driver, but a cost reducer.

Cost drivers are probably people with multiple chronic conditions that are difficult to diagnose and require multiple specialists to confer on a treatment plan (for example, heart disease with diabetes, autoimmune diseases with heptitis or HIV, etc.). These are not so easy to meld into an ‘assembly line’ type operation. There’s probably no magic bullets here except either incremental improvements or a sudden stunning breakthru that takes a whole category of problem off the table (for example a cure for diabetes).

Alan H. July 11, 2013 at 2:18 am

Booton, your statement that “if that was the case the supply of doctors would increase and competition would drive down costs” is remarkable. HHS has battled (behind the scenes) with the AMA for decades about the various techniques the profession uses to squelch or delay the expansion of the supply of physicians and specialists. Let interested physicians subject only to reasonable quality standards train new and immigrant physicians without the BS AMA moat, and indeed physician supply in the US would rapidly grow, prices fall.

Boonton July 11, 2013 at 6:37 am

Except if 50% or more of our health care dollar was really just pure rents to physicians and specialists they would be living much better off than they are now. Don’t get me wrong, doctors do have above average incomes and do very well for themselves, even compared to doctors in other countries. But this is no longer the golden age of the doctor, even though health care spending is higher than it has ever been.

Boonton July 11, 2013 at 9:06 am

Also your theory doesn’t square with the increase in health care costs over the last two decades or so. While the libertarian idea of abolishing physician licenses hasn’t been implemented, the hold on supply has been weakened. Non-doctors like NP or psychologists have been given greater freedom to prescribe certain medications thereby bypassing the need to rely on a licensed physician for even the most simple medical advice and procedures. Urgent care centers have put doctors on standard salary lowering the cost of a standard physician visit. Consumers have ceased viewing the doctor as a ‘god’ and now use the internet to rate, compare and conduct their own research before blindly following whatever their doctor advises.

If supply restriction is the driving factor in health care costs then the acceleration should have been happening half a century to century ago and reversed in the last generation as restrictions have been loosened.

Topper Dykstra July 10, 2013 at 2:44 pm

Suppose the state required every hospital to publish its final negotiated costs per procedure on everything it does. What effects?

(Maybe this question is just a litmus for whether you like transparency more than you hate state action, and thus of limited usefulness.)

(NB: The medical field offers enormous expenses, some of the largest in a person’s life, without pricing transparency. Many prices are even negotiable, but many purchasers are unaware of this. Sounds a lot like Ian Ayres’ work on car dealerships.)

steve July 10, 2013 at 2:48 pm

1) Know the difference between charges and true price. They are comparing their price to hospital charges. Not a valid comparison.

2) They accept private insurance, which generally pays 20% more, at least, than Medicare and more than that if Medicaid. Docs doing only private insurance cases are making a ton of money.

3) If someone wanted to commit an act of journalism, or an economist wanted to know what is really going on, they should look at the salaries of the physicians working at this Surgicenter. I suspect they are much higher than the local average. (They probably pay a bit less than average for nursing staff as people will take less to not have to take call or do shift work.)

4) Their prices arent that good. My surgicenters can match or beat their listed ones on most items. They also take Medicare and Medicaid so dont have the built in subsidy of just private insurance.

5) These guys are good at marketing. I steer my family away from these kinds of guys. YMMV.

Steve

tim July 10, 2013 at 3:31 pm

“What we’ve discovered is health care really doesn’t cost that much,” Dr. Smith said. “What people are being charged for is another matter altogether.”

He’s referring to rent-seeking here, right?

When Dr. Smith says that “health care really doesn’t cost that much”, presumably he’s referring to the fact that the prices for the kinds of surgeries he supplies are much higher than the costs for him to supply those surgeries. That is there are significant excess returns, or rents, above the cost of supplying the service.

In Econ 101, you learn that this isn’t supposed to happen in competitive markets. In competitive markets, there is downward pressure on the price of the good or service towards the cost of supplying the good or service.

By posting prices and increasing the amount of information for consumers in the market, he is making the market more competitive and initiating a price war that puts downward pressure on price.

It looks the prohibition on price menus is a way of establishing a cartel where each surgery provider charges excess prices.

Richard July 11, 2013 at 9:17 am

In the Netherlands we have universal healthcare which is payed through taxes and an additional fee per household per year. If you can’t afford that fee, the government will give you the money.

Here is the link to the rates the government pays. (in Dutch)

http://www.nza.nl/98174/149057/Tarieventabel-DBC-zorgproducten-en-overige-producten_-_per_1_juli_2013.xls

Example: fixing a broken leg (plaster, no surgery, no stay in hospital) costs the taxpayer 7694 euro, app 10.000 USD. (see line 3310 in the xls file) The hospital in Oklahoma charges $1925, about 5 times cheaper.

The OECD calculated that Dutch medical specialists are the best payed specialists in the world. Even better than the US. Here is the link, jump to page 21:

http://www.oecd.org/health/health-systems/41925333.pdf

Total money spend on healthcare in 2012: 93 billion euro (link to government stats: http://statline.cbs.nl/StatWeb/publication/?DM=SLNL&PA=81893ned&D1=0&D2=0&D3=0&D4=a&HDR=T,G2&STB=G1,G3&VW=T) which is somewhere around $17.000 per fulltime job.

Boonton July 11, 2013 at 1:52 pm

http://www.oecd.org/netherlands/BriefingNoteNETHERLANDS2012.pdf Per capital health spending in the US is around $8K while in the Netherlands it’s about $5K. Are broken legs not being set in the Netherlands? Probably not. Instead what I think is more likely is that while some individual procedures are being billed far above cost, others are probably billed at or even below cost. In other words the doctor makes a killing when he bills the Dutch gov’t for a simple, no-complication brken leg. He makes much less, though, when he bills for other types of cases.

If we cherry pick out the easiest operations sure we can achieve savings there, but then that will raise the price of the more complicated procedures whose costs are masked by ‘overcharging’ elsewhere.

Put it another way, this is like ‘discovering’ McDonalds is making a killing on selling soda but makes a lot less margin on the hamburgers and makes a loss on the apple pie and ice cream. Suppose you not only forced McDonalds to break out the soda from their meal, but also allowed other fast food outlets to directly bid against McDonald’s soda price even inside the store! You’d no doubt see a huge reduction in the price of getting a cup of soda at McDonalds. But you probably wouldn’t see much reduction in the cost of a meal. By taking away the high margin good, you’ll cause them to attack via the other goods.

Tootis July 12, 2013 at 6:31 am

McDonalds makes a loss on their Ice Cream, really?

Boonton July 13, 2013 at 8:52 am

Possibly, it seems to me they don’t sell a lot of it so you have to consider the fixed cost of having the machine, running it when no one is buying etc. It’s possible that it’s a loss leader, not profitable in itself but if it boosts sales of drinks, burgers and other items it makes sense to keep it.

Point is do you really think every item on the McDonald’s menu is priced to a uniform profit margin? Transparent prices does not mean you automatically drive down the prices of items with the largest markups.

BTW, http://message.snopes.com/showthread.php?t=73663 indicates that the double cheeseburger on the $ menu is pretty close to a loss leader…making maybe only $0.06 per unit but fries and soda (and coffee I’d imagine) offset with larger margins.

So imagine if ‘cross the street from McDonald’s you set up ‘McSides’ offering coffee for $0.50 or soda for $0.25, fries for $0.90 and encouraged people to get their burgers from McDonald’s and walk over to get their drinks and fries.

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