Do Markets Work?

Perhaps you have heard that health markets work reasonably well when patients pay with their own money. LASIK surgery and cosmetic surgery are two examples. Yet, the authors of a new study dispute this claim.

The article is called “Self-Pay Markets in Health Care: Consumer Nirvana or Caveat Emptor?” It was funded by the Center for Studying Health Systems Change (an RJR outfit) and appears at the Health Affairs web site. The authors (both non-economists) focus mainly on LASIK surgery, but also include in vitro fertilization, cosmetic rhinoplasty and dental crowns. They do not find nirvana.

But first things first. Buried in the middle of the article, in the middle of a paragraph, with no bold heading and no mention in the Abstract, as though it were only of passing interest, is this amazing factoid: over the past decade, the real price of LASIK surgery has decline by 30 percent. Equally buried, is another startler: The satisfaction rate among patients is 93 percent. And we can all be thankful the editor’s shears did not expunge this tidbit: unlike every other kind of surgery, in LASIK surgery higher quality service routinely commands premium fees.

Is there some relationship between falling prices, high patient satisfaction, higher pay for superior quality and the fact that patients are paying out of pocket? The authors never ask this question.

Given that the rest of the world is apoplectic over rising health care costs and people everywhere are telling pollsters how much they dislike their third-party payer systems, you have to wonder. Either a) the authors are remarkably uncurious, or b) their world view is several standard deviations away from the mean.

The authors did find many blemishes, however, causing them to conclude that self-pay markets don’t work, or don’t work very well. Although they never talked to any actual patients, interviews with people on the supply side revealed a market with inconsistent pricing and inconsistent bundling. (Some quoted prices include initial screening and follow up procedures; others do not). Worst of all: the primary source of patient information is word of mouth! Alas.

Here’s a personal confession. Before I go to the supermarket I do not know the price of bread. Nor do I know the bundles (is the sales price per loaf? Or is it buy one, get one free?) I would not be surprised to learn that most shoppers are just like me. But prices are not determined by what most buyers do.

They are determined by the buyers at the margin.

It’s economics 101.

Comments (6)

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  1. Interesting article in Health Affairs on Self Pay Markets and John Goodman’s response above

    It is possible that the largest self-pay medical services are for Complementary and Alternative Medicine and that neither the Health Affairs article or John Goodman reference?

    Also-I may be wrong but patients who seek LASIK, IVF, Rhinoplasty and Dental Crowns are a middle class and upper middle class,rich and super-rich cohort?

    The poor and disenfranchised are much too worried about basic health care, job security and their children’s tuition than getting their justifiably “bent out of shape” noses fixed with out of pocket hard earned $

    Dr. Rick Lippin

  2. Cynthia Blasses says:

    Thanks for passing this on. Although I spent very little time perusing this piece, I have some comments. The article seems to focus on prices paid, and assymetric information. I would have liked to have seen a little more on consumer behavior as it relates to medical care. For instance, 1. Whether or not demand for the procedures are income driven. Are these procedures normal goods or inferior goods? 2. What about available substitutes to these procedures? 3. And of course the discussion of patient compliance. Persons w/ insurance don't always seek medical care that is covered by insurance. . . . so why would they purchase it privately? Just thought I'd pass these thoughts on. . . Cynthia Blasses

  3. Mike says:

    Entertaining and insightful, as I have grown to expect. Thanks John. -Mike

  4. J. Winter says:

    In order for markets to work, price transparency is essential. The health care cost confusion seems even worse than implied by the study, "Health Insurance Costs," and the information about "What Some Doctors Charge for Procedures" (p. 35-) likely is highly misleading data about billed list prices, not discounted prices actually paid. In many, perhaps most, cases, a patient visits a provider who bills an insurance company (or Medicare/Medicaid) under a scheme where there are substantial negotiated discounts from list prices. (Anyone not taking advantage of such systematic discounting, will be grossly overpaying, often by as much as 350-500%.) In such cases, the provider generally does not know the cost which varies by insurer and is listed only in a proprietary database operated by each insurer. In response to the billing, the insurer notifies the patient and provider (but not the ordering physician if different from the provider) with an explanation of benefits stating the approved amount. This approved amount which is the actual cost is unknown to the physician, patient, and provider at the time that service is provided, and is never reported to an ordering physician. In such circumstances when the provider is asked the cost in advance, they typically will be unable to answer or will give misinformation. How can health savings accounts work effectively to create price competition when the price cannot be determined in advance, and an insurer negotiated discount seems a necessity to avoid gross overcharges? Similarly, without price transparency, how can health savings accounts reduce administrative overhead when all claims, even those paid entirely by the insured, must be billed to insurance just to determine the price and whether the high deductible has been met? Price transparency and a nationwide market for health insurance would be highly desirable health care reforms.

  5. Def agree with nothing being worse than putting two pieces of glass in your eye every single morning….the part of each and every morning I dread

  6. Jane says:

    This is very usefull.