Markets without Real Prices: How the Left Proposes to Control Health Care Costs

Doctors are the only professionals in our society who are not free to repackage and reprice their services. If demand changes, if technology changes, if new information becomes available, every other professional is free to offer a different bundle of services to the market and charge a different price. It is precisely this freedom that leads accountants, lawyers, engineers, architects — and, yes, even economists — to compete for customers based on price and quality.

In medicine, by contrast, no one ever sees a real price for anything. No patient. No doctor. No employee. No employer. Providers are paid based on rates negotiated in advance. And there can be a different payment rate for every third-party payer. Patients rarely see these rates. But even if they did see them, they are inconsequential to behavior, since the patient isn’t paying them anyway. Doctors, therefore, do not compete for patients based on price. And since they are not competing on price, they do not compete on quality either.

Everyone is left with perverse incentives. The patients’ incentive is to overuse and misuse the system, since they mainly pay for care with time and not money. The providers’ incentive is to maximize against the third party payment formulas. When everyone acts on these incentives, they do things that make costs higher, quality lower and access more difficult than would otherwise be the case.

So what can be done? Enter Zeke Emanuel, Don Berwick, Andy Stern, Uwe Reinhardt, Tom Daschle and other names you might recognize to offer the best thinking two dozen like-minded people the left can come up with in the latest issue of the New England Journal of Medicine (NEJM). Their answer: double down and give us more of the same. That is, doctors would be even less free to compete for patients based on price and quality, patients would be even less likely to ever face a real price for any service, and perverse incentives would become even more perverse than they are now.

Dream, dream, dream
All I ever do is dream

The two most important proposals are: (1) market-wide negotiation leading to all-payer fees (every third party pays the same) and (2) a “global budget” cap on the rate at which these fees can increase over time.

A point that is almost never mentioned in these discussions (except by yours truly) is that whenever a price is negotiated you are in the same act predetermining a largely inflexible bundle of services. A physician encounter with a patient, for example, almost always means a face-to-face meeting in the doctor’s office. Suppose the doctor later discovers it is more convenient, cheaper and better to meet in some other way — say by phone, or e-mail, or text messaging, or Skype, or some other form of telemedicine? That’s too bad. Those items weren’t on the original negotiated list.

Anytime you pay any professional according to a list of tasks, about the only work you are ever going to get is work listed on the fee schedule. Anything you leave off is unlikely to ever get done, unless you are dealing with a professional who is willing to devote a lot of time to non-billable activities.

Just to give one example, Dr. Jeffrey Brenner in Camden, New Jersey, is saving millions of dollars for Medicare and Medicaid, keeping potentially high-spending patients relatively healthy largely through social work activities. But since most “social work” activities aren’t on the list of 7,500 tasks Medicare pays doctors to do, Brenner gets very little payment from the government in return. That’s why there aren’t very many Brenners around. If instead of handing Brenner a fee schedule, the government agreed to pay Brenner, say, 20% of every dollar he saves the system, there would be Brenner lookalikes all over the country.

Rather than following my advice (no, they didn’t invite me to participate), the NEJM crowd would make things even worse. By making the negotiations market-wide and by using them as the basis for controlling costs, the proposal virtually guarantees that no provider is going to experiment, innovate and try to find alternative ways of lowering costs, raising quality and improving access to care. And since the only people who are even remotely capable of doing these things are the providers themselves, this approach is doomed to fail before it’s even tried.

Parenthetically, I have never understood the obsession on the left with suppressing doctor fees. Arbitrary limits on provider fees are an attempt to shift costs from patients and taxpayers to doctors and other providers. But, as every economist knows, shifting costs is not the same thing as controlling costs. Even if the effort were successful, real costs would not be lower and the system would not be more efficient as a result. A better way of achieving the same result would be to tax doctor incomes and use the proceeds to subsidize health insurance premiums. That would achieve the same redistribution without creating even more distortions than are already there.

Trying to control costs by squeezing doctors’ fees over time will put even more pressure on them to maximize against payment formulas in every way they can. They will reduce the time they spend with each patient, reduce optional services, avoid seeing sicker, harder-to-treat patients, underprovide to sicker patients, etc. It is worth noting that in Canada — which largely follows the NEJM prescription — patients see primary care doctors more than Americans do, but they get fewer services. Indeed, uninsured Americans get as many or more screenings (mammograms, Pap smear tests, PSA tests, colonoscopies, etc.) as insured Canadians do! This method of controlling costs also virtually guarantees that the amenities surrounding care will diminish and rationing by waiting will become more pronounced over time.

There’s more. The authors propose to use economic carrots and sticks to try to tell doctors how to practice medicine. They endorse bundled payments — with the bundling being done not by doctors who have the most information, knowledge and experience, but by the third-party payer bureaucracies, whose primary interest will always be to provide less, not more. They also endorse pay-for-performance and incentives to practice evidence-based medicine — even going so far as to endorse Peter Orszag’s proposal to give doctors a safe harbor against malpractice lawsuits if they practice medicine in that way.

Three successive Congressional Budget Office studies have found that bundling, pay-for-performance and similar techniques are not working in the federal government’s demonstration and pilot programs. But the two dozen best left-of-center minds in all of health policy are not deterred. Ignoring the conventional definition of insanity, they want us to keep doing everything we have been doing and hope for a different result. Silly as this sounds, there is a logical reason for it. Once you have decided that patients and doctors should never face real prices, there just really isn’t anything else you can do.

What will we be left with? Cookbook medicine. Tell doctors that if they follow a protocol no one can sue them and odds are most of them will follow the protocol. Yet this is the opposite of the individualized medicine that patients are going to want — at least some of the time. I was in a MinuteClinic the other day and for the first 15 minutes of my 20 minute visit the nurse never looked at me. She was facing a computer screen, typing in my answers to her questions and following a computerized protocol. I didn’t mind. My problem was relatively minor, and I did not want to pay for a more sophisticated level of care.

But suppose you have a serious medical problem. Then you’d better hope your case is “average.” If you are several standard deviations away from the mean, you could be in serious trouble.

So what should we do? I wish someone would send all two dozen left-of-center health policy wonks a copy of my new book, Priceless. As the title implies, our health care system is priceless. So are the NEJM proposals. And that’s not a compliment.

Comments (18)

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  1. Vicki says:

    Perfect song.

  2. Ken says:

    On sending your book, you can lead a horse to water, but you can’t make him drink.

  3. david says:

    I wouldn’t have thought it would take you this many paragrahps to figure out why the left doesn’t like your ideas. I bet I can do it in one.

    Healthcare is, as you say, priceless. That means if you put a price on it, people won’t want it any less, and consumption will not go down. The left considers healthcare a right. So, if you put a price on healthcare, you will deny healthcare to people who can’t afford it. Put another way, the left believes the desirable quantity of healthcare to produce is higher than what the market would produce naturally. Your system will cut costs by reducing quanity demanded, which you try to say means people will get less of what they don’t need and more of what they do. In reality, however, costs would only go down because the demand curve shifts left, representing millions of people dying because they can’t afford healthcare.

    That’s why you weren’t invited–they’re MDs who pledge an oath to prevent that sort of thing.

  4. Larry says:

    A few points:
    1) Your premise of paying 20% of everything saved, is likely to create an even bigger morass of fraud and abuse. What bureacracy might we have to create to administer this nightmare? I hope you were just playing with us here…

    2) I think there is a middle ground between your proposals and that of the authors you cited. In my view it is akin to truth in advertising, food labeling, and the like.

    With consumers paying a greater and greater portion of their health care bills, they are paying greater and greater attention.

    3) I would start with regulations (part of the middle ground) that require all providers to publish their actual prices – what they actually get paid for a service. I know it is complicated, but consumers will help providers sort this out by the questions they ask and the issues they raise when they are billed. It will drive providers to simplicity if they want to run an efficient business.

    3) Along with pricing they should be required to publish basic and standard quality metrics around volume, outcomes, patient satisfaction, time to appointment, etc. Again, consumers will help them sort this out by the questions they ask and their behavior – do they come back for another visit!

    Rather than creating all sorts of payment models, let the consumer become the arbiter.

  5. Alieta Eck, MD says:

    The left seems to always want to shift payments from physicians to bureaucrats who make it their job to assure that the physicians do not commit fraud, try to over-bill or otherwise game the “system.” In NJ, a physician who sees a Medicaid patient must bill the program, wait, and then receive a check for $23. This is less than what the free market pays for a haircut. Thus only 40% of doctors in NJ are enrolled in Medicaid.

    THAT is why physicians are willing to solve the problem themselves. They would agree to see poor patients for FREE in non-government free clinics(NGFCs). It is just the right thing to do. They would like to leave the well-compensated bureaucrats and insurance company administrators out of the transaction, relieving the over-burdened taxpayers from continuing to be fleeced.

    Our only request is to be protected from the current onerous medical malpractice system. If physicians who teach and learn in the state medical schools can have coverage from the state, why not extend that coverage to the private practices of the good doctors who volunteer 4 hours per week in or through a 501(c)3 non-government charity clinic? Don’t pay them, just protect them. No billing at all.

    The volunteering physicians are already covered by the federal government for the work actually done at the NGFCs. So we are simply combining two programs that seem to work well. We are simply making a huge government Medicaid bureaucracy less necessary.

    Dr. Brenner is doing a great job with some of the toughest patients. Many more will help him if this plan is enacted in NJ. Make charity real charity, not a government “entitlement.” Just protect those who are willing to provide such care.

  6. Uwe Reinhardt says:

    I agree with Vicky, John: perfect song — describing the world of which you are dreaming.

    Sop someone has a heart attack and sojourns to the nearest Minute-Clinic to find a price for treating a heart attack, but each such clinic is free to decide what is and is not covered by the posted price for “treating heart attack.”


  7. david says:

    @Uwe, keep up the good work.

    @Alieta, let me get this straight: you want the government to create a free market where people pay the appropriate price and then leave it to the kindness of doctors to cover people left out in the snow.

    Yet you ALSO want government protectionism for doctors? So whereas the left wants government mandates for doctors to cover people in normal clinics, you want government protections for doctors who provide services in free clinics? That’s not very free-market of you, but I guess, in the words of Noam Chomsky, that’s what people really mean when they say free-market: government helping the people who need it least.

  8. Don Levit says:

    I understand that Colorado recently passed a law compelling hospitals to charge the uninsured their lowest negotiated rate.
    Why not extend that deal to the insured, and get rid of all the time and money it takes for individual insurers trying to “gain” over the competition?
    Don Levit

  9. Aaron Cohn MD says:

    As a physician, my reflex would be to say something like, “you can’t possibly understand healthcare economics, you’ve never actually practiced medicien. no blood under your fingernails.”

    99+% of the time that reaction would be 101% correct. In this case, it would be incorrect. I’ve read & re-read this article, and I think the author understands at least a good part of the problem & has at least a partial solution that is workable and will help.

    Nicely done.

  10. Jim Morrison says:

    Why, John, do you (apparently) think it’s a good thing for Americans to receive so many screenings? Perhaps Canadians have discovered that many of these tests are unnecessary, unhelpful, and , in some cases, harmful.

  11. Brian says:

    Perverse is certainly the word, John. Although not really expecting much different than was published by the “Gang of Two Dozen”, I keep holding out a futile hope that economic reality will someday seep into their minds. Alas, you song selection says it all.

    Without adjustment of two basic tenets I fear the goal will remain ever elusive.

    First a philosophy shift: Everyone must come to accept that medical care is a limited resource. As such, it is not a “right” and will always reflect quantity, quality and geographic distribution variability. What is not rationed by money will ultimately be rationed by time.

    Second, a pragmatic reality: the distortion of third-party payers (primarily government and employers) in the system insulate the ultimate consumer of the product from both the information and incentives needed to create a true market.

    We have prevented an entire generation from these realities, and until society can come to terms with those concepts I do not believe we’ll see any progress in either cost or outcomes . . . but we will see and hear more entitlement rot like the Gang has promoted.

  12. Dr Bob Kramer says:


    Doctors are not free to compete on price or quality as long as the insurance companies determine reimbursement doctors will NEVER be able to equate price and quality. The latter means that you ignore fear and greed which in our misplaced sense of value honors money saving efficiencies with quality.

  13. Alieta Eck, MD says:

    David– all I am suggesting is that the physicians have an agreement with the taxpayers. Instead of funding a huge bureaucracy that barely pays those who actually see patients, simply protect physicians that agree to donate 4 hours a week.

    This minimizes the taxpayer’s exposure (less than $300 million compared to $5 billion in acute care Medicaid) The physicians will take on the care and just ask for protection. As you might know, today physicians are being held to an impossible standard– fulfill all the expectations of every patient or face a lawsuit. Physicians are being sued for bad outcome, not necessarily medical malpractice.

    Not every physician would agree to volunteer, but enough would and we would get the job done.

    This IS the free market. We would be competing against our own practices where we charge patients. Charity ought to be a component of the free market, where physician CHOOSE to donate to those who are identified by the community as needy. This is what we did before the BIG programs began to fleece the taxpayers.

  14. david says:

    @Brian, can you name a single thing that would not qualify for the definition of “limited resource”? Access to courts is a limited resource, but we don’t deny it to poor people. There’s limited space on the sidewalk in front of the White House to protest, but we don’t charge rent on it. It costs more to have safe working conditions; should we let lower-skilled workers work in unsafe conditions? Voting requires a lot of resources to count and report, should we charge people to vote? Should police only protect those who can pay their salary?

    “Rights” are not some principally axiomatic system which liberals just ignore to the great detriment of all of society, so let’s not pretend like there is some easy line to draw. We believe people are entitled to certain things whether or not they can afford to pay for their costs. Whether you agree that healthcare is one of those things is irrelevant, and certainly not based on some superior sense of logic.

  15. david says:

    The free market means competing with yourself, @Aileta? That sounds more like communism to me.

    I only said the protection from lawsuits isn’t a free market policy. It may be that we want to protect doctors in free clinics from malpractice lawsuits, but let’s not pretend as if that policy is somehow more “free” than requiring insurance companies to cover people or requiring doctors to treat people.

    Also, how many of these free clinics treat cancer? Perform surgeries? All the free clinics I know of do a great job for checkups and basic anti-biotic level care, but that’s not exactly a high standard.

  16. Alieta Eck, MD says:

    Having operated a free clinic for 9 years, I know where the limitations are. We see patients with a torn rotator cuff, but have trouble finding an orthopedic surgeon to fix it. He would not only be treating the patient for free, but would incur full liability. Thus, all these patients get referred to the medical schools where liability is covered by the state.
    Babies are born with spina bifida and need a pediatric neurosurgeon. They must be transferred to a university hospital many miles away simply because no one is willing to take on full liability and receive no compensation. Doctors are not being greedy, just smart. We could fix that.

    Uninsured cancer patients get treatment– and actually have better outcomes than those on Medicaid. They somehow get absorbed into the cancer centers, especially when they are referred by someone the oncologists know. God bless them.

    High risk specialties are the toughest. Young obstetricians in NJ, unable to afford the liability insurance, are bringing patients up to 8 months, then telling them to go to the hospital when they go into labor so that whoever is in the university system can deliver them. It is a very dysfunctional system. We can do much better.

  17. david says:

    I’m not saying we shouldn’t see what we could do about medical malpractice. My point was that it isn’t a free market policy to do so.

    Also, I’m not going to buy the argument that the reason doctors don’t treat patients for free isn’t the costs they would incur but the risks they would bear. I also don’t think we should make doctors exempt from malpractice just because they aren’t being paid. That would be like I-Hop getting an exemption from health codes on national pancake day.

  18. wanda j. jones says:

    John and Friends:

    Retail pricing is a worthy goal, as the present system does have perverse incentives. But many correctives proposed are not feasible because of the deep interlacing of law and contracts between health plans and providers. Providers are forbidden by their contracts with health plans to disclose the negotiated rates offered to one plan to their competing plans, as the health plan would lose market advantage. Governments are supposed to honor contracts, not abrogate them. Either we have a competitive system, or we accept that we have a government-run system, achieved through regulation, ignoring business principles and dynamic changes in the market environment. Insurance companies have some anchors to the past that are hard to modernize, especially how they pay providers; their claims processing software is geared toward fee for service billing. Its internal logic checks fees against a fee schedule and a trend line for each provider.

    To have retail pricing for each provider would mean tossing all this out and having a wholly re-written claims algorithm, not for all providers but for the sub-set that was prepared to accept a single payment level for all health plans. Not going to happen without the heavy fist of Federal or State laws setting up a rate commission, that tried and terrible refuge of the liberal who doesn’t like market variations.

    Just as we worry about what the ACA is doing to providers, we should notice the disappearance of private health plans. When a plan is not able to make its own underwriting decisions, its own contracting decisions, and its own budgeting decisions, it is not an independent business and has increased its risks without seeing a route to stability. This fragility of private health plans is ignored by the Berwick/Emmanuel/Reinhart gang who anticipate having single payer anyway.

    Everything liberals hate about healthcare economics they should recognize is a condition brought about by a liberal idea, such as “First Dollar Coverage” which encourages over-consumption, and paying providers by a schedule of approved rates, which encourages fudging on the definition of the patient’s problem.

    Protocols are not a good basis for pricing, as it assumes that it costs the same to produce each kit of services on the part of each provider that offers them.
    You want the best care? Go to the Cleveland Clinic or MD Anderson. If you want the cheapest care, go to a 50-bed hospital in rural Iowa. Provider costs, legitimate costs, vary widely, and only they should be the ones to determine the price level they should set. One reason prices are so high is that providers are attempting to produce a cushion against post-service denial of claims, unilateral discounting, “claw-backs” from post-service auditing, and unilateral fines for perceived mis-defining of the patient’s condition. Providers would be foolish, indeed, to trust the government to set a fair payment level and stick to it.

    Of all the re-framing likely to bear good fruit regarding pricing one, timidly offered, is to have the patient notify the health plan of the procedure he is expecting to have, and have the insurer give the patient a voucher/draft for the amount that the insurer determines the patient’s plan calls for. Then the provider will again attempt to offer services for that amount and a little bit over, or with a post-service payment schedule for the patient. Providers look to health plans for their financial livelihood when they should be looking to patients.

    I’m both a health professional and a Medicare patient and I am appalled at the billing advices I received as I can see that the provider has billed for multiple DRGs for one procedure in order to maximize revenue. I have refused recommended services that I believe to be redundant, and have even removed my own sutures to save on an extra office visit.

    The main scary thing about discussing health policy with the Berwick gang is that they believe they should be making decisions for the public. Collectively, they do not reflect an awareness of the realities of operating a healthcare system for 50 states, 360 million people and a roiling scientific cloud of unknowing.

    John–you are a voice in the wilderness. I sincerely hope you will allow yourself to become a commentator on the various shows that attempt to wrestle with health policy, as these give face time to Uwe, Paul and other health economists who never met an entitlement they could not justify. These shows even give face time to David Axelrod.

    Wanda J. Jones
    New Century Healthcare Institute
    San Francisco