Where the Medical Markets Actually Work

So what are you really saying, John? What are those
marvelous supply-side innovations you hint at?

— Uwe Reinhardt, Commenting on “Reforms that Don’t Work

Critics of the U.S. health care system complain that price and quality data are not transparent; care often is fragmented and uncoordinated; best practices often are not followed; time and money are wasted on procedures of questionable value; preventive care and patient education are underutilized; such common communication vehicles as the telephone and e-mail are rarely used; and electronic medical records and error-reducing software are not part of normal practice.

But why are these things happening? Is it the doctors who are at fault? Or is it the third-party payer system (which, ironically, the AMA helped put in place) that is to blame? An NCPA study by Devon Herrick finds that, where patients pay directly for all or most of their care, providers almost always compete on the basis of price and quality. And because they are not trapped in a system that pays for predetermined tasks at predetermined rates, providers are free to repackage and reprice their services — just like vendors in other markets. It is primarily in these direct-pay markets that entrepreneurs are solving the very problems about which the critics complain. In fact, these solutions are usually a necessary part of the entrepreneur’s business model. What follows are some examples.

Kate Capshaw: Anything Goes

Cosmetic Surgery. Cosmetic surgery rarely is covered by insurance. Perhaps for that reason, patients can typically (a) find a package price in advance covering all services and facilities, (b) compare prices prior to surgery, and (c) pay a price that has been falling over time in real terms – despite a huge increase in volume and considerable technical innovation (which is blamed for increasing costs for every other type of surgery). [link]

Lasik Surgery. Competition also is holding prices in check for vision correction surgery, where laser surgeons compete on quality as well. Patients who pay more can expect more accurate correction, faster healing and fewer side effects. [link]

Laboratory and Diagnostic Testing. Patients can order their own blood tests without a doctor’s appointment and compare prices at different diagnostic testing facilities. Prices are 50- to 80- percent lower than identical tests performed in a hospital setting. These services lower the patients’ time costs as well as money costs. In many cases, the results are available on-line within 24 to 48 hours.

Price Competition for Drugs. Walmart became the first nation-wide retailer to aggressively compete for buyers of generic drugs by charging a low, uniform price – $10 for a 90-day supply. Other chain drug stores have responded with their own pricing strategies.

Price Competition for Drugs over the Internet. Rx.com was the first mail-order pharmacy to compete on-line in a national market for drugs, offering lower costs and more convenient service, including free home delivery. They also compete on quality. High-volume mail-order pharmacies have much lower dispensing error rates than conventional pharmacies.

Patient Education for Drug Purchases as a Product. In addition to operating an online mail-order drug delivery service, DestinationRx.com also offers a Web site to help patients identify low-cost therapeutic substitutes for the drugs they currently take. In addition, the firm is partnering with Safeway supermarkets to install drug comparison kiosks in store pharmacies.

Retail Clinics. Walk-in clinics in shopping malls and drug stores compete in the market for primary care by offering low-money costs and low-time costs. In order to ensure a consistent level of quality, nurse practitioners follow computerized protocols; electronic medical records (EMRs) are a natural byproduct of that process. Further, once an EMR system is in place, it is a straightforward next step to prescribe electronically, allowing the use of error-reducing software. A study of MinuteClinics shows that they follow treatment guidelines better than traditional medical practices.

Telephone-Based Practices. TelaDoc now has two million customers – paying for something that is almost impossible to get from a conventional general practitioner:  a telephone consultation. It offers patients access to a doctor at any time of day from any location. And because each on-call physician needs access to patients’ medical histories (and the treatment decisions of previous physicians), personal and portable EMRs are a necessary part of the company’s business model.

Concierge Medical Practices. These physicians tend to relate to their patients in much the same way lawyers, accountants, engineers and other professionals interact with their clients – including phone calls and e-mail consultations. Their primary care services tend to be convenient and accessible; patient education is part of their product line; and they help their patients navigate through the health care system, including negotiating for diagnostic tests and specialist services.

Medical Tourism. Increasingly, cash-paying patients are traveling outside the United States for surgery. [link] Facilities that cater to such medical tourists typically offer:  (1) package prices that cover all treatment costs, including physician and hospital fees, and sometimes airfare and lodging as well; (2) electronic medical records; (3) low prices that are often one-fifth to one-third the cost in the United States; and (4) high-quality care in facilities (and by physicians) that meet American standards. Moreover, a new company, Healthplace America, has been formed to facilitate medical travel within the United States. It offers price and quality transparency for a network of 15 hospitals. Savings are typically 30 percent to 50 percent.

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 cite. Public policy should encourage, not discourage, these efforts.

Comments (14)

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  1. Joe S. says:

    Great answer to Uwe. And a fascinating overview to show that the supply side of the market can respond quite well to the needs of patients if it is not completely tied down by the demand side of the market.

  2. Tom says:

    A refreshing post. Especially in light of all the doctor bashing one reads about almost everywhere these days.

  3. Larry C. says:

    Good post, John. Doctors need to be liberated, not subject to more bureaucratic controls.

  4. Bret says:

    The irony is that physicians are trapped in a system they helped create. To liberate them and allow them to serve the needs of patients the way other professionals meet the needs of their clients, that dysfucntional third party payer system has to be dismantled.

  5. Daren says:

    John, I enjoyed your response to Uwe. You are correct, the supply-side innovations can definately deliver change in the market but they will continue to face stiff blockages by the BUCA’s. As for medical tourism, the numbers reported a totally misrepresented. I can guarantee that 500k did not travel abroad in 2005. As for those that did, they were primary uninsured and/or primarliy looking for cosmetic procedures. How realistic is it that someone needing a knee replacement is going to get on an airplane, travel for 20+ hours when they are in such discomfort to India or Singapore? By the time you include the cost of 2 business class airline tickets, 21 days of accomodations (at a minimum) plus food, etc that $9,000 knee in Singapore is at least $24,000. This still represents a huge savings compared to what American’s and plan sponsors are being charged through United, Anthem, etc but rarely does anyone present the entire picture.

    John, this is not meant to be a plug, but if you would like to discuss Healthplace America, feel free to hit me back. As always, we appreciate the positive approach you are taking to health care reform.

  6. Jim Waun, MD, MA, RPh says:

    FREE ENTERPRISE MEDICINE AND SOCIALIZED HEALTH CARE

    Yes, both must be preserved, and three principles should govern health care reform: (1) Health care providers should profit from good practice, innovation and efficiency. (2) Patients should have free access to health services. And (3), everyone should help pay for health services.

    The fairest, simplest method for financing health care is through the existing tax-collection system, combining a flat payroll tax and a national retail sales tax on goods and services.

    A Federal Health Preserve, modeled after the Federal Reserve System, should manage health services and establish fiscal and professional accountability in health care. The Federal Health Preserve would be an apolitical, independent governmental agency staffed by health and health-care professionals. It would set national health policy and goals, monitor and regulate health services and clinical research, establish peer-developed national health-care standards, set health services that everyone is eligible to receive, and determine payments for services. The agency would report to Congress and negotiate an annual budget to pay for necessary health services.

    By itself, Congress cannot reform health care. Its approach is typically piecemeal and subject to crippling compromises. A nonpartisan commission should be established to develop a vision for health-care reform, enabling legislation, and an implementation plan.

  7. Jim Waun, MD, MA, RPh says:

    FREE ENTERPRISE MEDICINE AND SOCIALIZED HEALTH CARE

    Yes, both can and must be preserved, provided three principles govern health care reform: (1) Health care providers should profit from good practice, innovation and efficiency. (2) Patients should have free access to health services. And (3), everyone should help pay for health services.

    The fairest, simplest method for financing health care is through the existing tax-collection system, combining a flat payroll tax and a national retail sales tax on goods and services.

    A Federal Health Preserve, modeled after the Federal Reserve System, should manage health services and establish fiscal and professional accountability in health care. The Federal Health Preserve would be an apolitical, independent governmental agency staffed by health and health-care professionals. It would set national health policy and goals, monitor and regulate health services and clinical research, establish peer-developed national health-care standards, set health services that everyone is eligible to receive, and determine payments for services. The agency would report to Congress and negotiate an annual budget to pay for necessary health services.

    By itself, Congress cannot reform health care. Its approach is typically piecemeal and subject to crippling compromises. A nonpartisan commission should be established to develop a vision for health-care reform, enabling legislation, and an implementation plan.

    j.waun@comcast.net

  8. Uwe Reinhardt says:

    The crucial sentence in John's interesting post is: "Devon Herrick finds that, where patients pay directly for all or most of their care, providers almost always compete on the basis of price and quality."

    If we were willing to ration all health care by price and the patient's ability to pay, without the benefit of health insurance, then price (and possibly quality) would undoubtedly play a greater role in the health care market than it does now. I would never deny that. So that is what you are proposing, John. I ask it because some years back, in a debate in D.C., you denied that you were an advocate of high deductibles. You said you merely advocated the provision on price and quality to consumers so that they could participate more intelligently in their own care, and I agreed with that goal.

    Here, too, of course, one might wonder exactly what role prices and quality might play, especially in view of the financial services markets where prices and "quality" have been being reported widely and yet so much mischief occurs. Or are we still believing that the market has worked well in that arena?

    Now, exactly how, John, would doctors and hospitals present their prices (let alone quality) to patients for other than fairly simple procedures, like lasik or plastic surgery?

    I have actually worried about this and made what I think is a constructive proposal (click here). Has anyone at the NCPA or the Galen Institute ever bestirred him- or herself to make a contribution towards this difficult problem, other than talking about it?

    And, once again, should we ration all health care by price and the patient's ability to pay, like plastic surgery or Coca Cola?

    Uwe

  9. Greg Scandlen says:

    Uwe,

    I’m not sure what you have in mind by “other than talking about it.” Quite a few members of Consumers for Health Care Choices are entrepreneurs who are actually investing their time and money in companies that provide services like these.

    More to your point, though, is that you ask, “If we were willing to ration all health care by price and the patient’s ability to pay, without the benefit of health insurance.” Please keep in mind two things -

    1. “Insurance” is not the same thing as “Third-Party Payment.”One of our members, the late Dr. Jim Pendleton, write an excellent paper on how an indemnity policy could be structured to reward shopping for most in-patient services.

    2. People with extraordinary needs can be subsidized n a number of ways. One is to subsidize their insurance premiums, but another would be to subsidize their OOP spending. This could be done with a fully-funded HSA, for instance.

    The question then becomes, what is the most efficient way to pay for health care services? Through an insurance mechanism with all of the administrative load? Or directly with cash at the time of service? I would opt for the latter.

    Greg Scandlen

  10. Nancy says:

    John, you really should consider getting a study funded that looks at the current insurance products (both employer-sponsored and state insurance) and evaluate what the deductibles are – you will find, I suspect, that it is getting close to the HSA levels. Thank you for sending out these Health Alerts – I appreciate it.

  11. Vic Wood says:

    Good response John. I suspect that Uwe likes to “Cherry Pick” data that seems to support his left leaning views. Uwe, I challenge you to take an objective look at the data regarding the accessibility of healthcare now compared to pre-1970′s when the insurance industry had little control over primary care. When I was a kid I went on house calls with my father. It was rewarding both emotionally and financially. I don’t recall patients having a tough time affording his services.

  12. Ayse Tezcan, MPH says:

    I just posted a comment on your “Reform that don’t Work.” It would also suit this post. None of these ideas you site here are new; just the recirculation of older ones with new touch such as internet, phone, new drugs, diagnostic tools, etc. Do you think we arrived to this point of health care practices just by feeling like it? Certain circumstances created new ways of doing business. Now you are suggesting we go back to beginning of times where there were no AMA, no regulations, no insurance, no government. 100 years later, we end up here again and start all over again… While at it, we should let anyone who aspires to be a doctor, find an apprenticeship and be a doctor. We don’t need to regulate their training, too because the market forces would force the bad doctors dissipate.

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