Why Prices Matter

The single biggest mistake in all of health policy is the belief that the best way to make health care accessible is to make it free at the point of delivery. As I explained at the Health Affairs blog the other day, this mistake underlies our entire approach to providing health care to low-income families in this country; it is the basis for the organization of the entire health system in most other developed countries; and it is deeply embedded in the Obama administration’s approach to health reform.

In a new book, Priceless: Curing the Healthcare Crisis, I explain why this belief is wrong:

  • The major barrier to care for low-income families is the same in the United States as it is throughout the developed world: the time price of care and other non-price rationing mechanisms are far more important than the money price of care.
  • The burdens of non-price rationing rise as income falls, with the lowest-income families facing the longest waiting times and the largest bureaucratic obstacles to care.
  • The Patient Protection and Affordable Care Act (ObamaCare), by lowering the money price of care for almost everybody while doing nothing to change supply, will intensify non-price rationing and may actually make access to care more difficult for our most vulnerable populations.


Caught up in circles
Confusion is nothing new

Empirical Evidence. Interestingly, a natural experiment forms a test of my critique: the recent recession. As explained in a report from the Center for Studying Health System Change, middle class families are responding to bad economic times by cutting back on their consumption of health care. They are postponing elective surgery, forgoing care of marginal value, and making more cost-conscious choices when they do get care. This reduction in demand is freeing up resources, which are apparently being redirected to meet the needs of people who face price and non-price barriers to care. From 2007 to 2010:

  • The percentage of the population experiencing an unmet health care need actually fell from 7.8 percent to 6.5 percent.
  • The percent of people who say they have delayed care fell from 12.1 percent to 10.7 percent over the same period.

And this is in the middle of one of our worst recessions!

During the recession the money price barrier to care actually rose among the uninsured, although the increase was not statistically significant. The number of uninsured people reporting access problems because they were “worried about cost” rose from 91.5 percent to 95.3 percent. (Translation: virtually everybody who is uninsured worries about cost.) Yet over the same period, the number of people experiencing access problems because of waiting and other non-price barriers was almost cut in half (falling from 40.3 percent to 24.1 percent).

Specifically, the number of people who “could not get an appointment soon enough” fell from 34.6 percent to 24.4 percent; the number who “could not get there when the doctor’s office was open” fell from 28.4 percent to 22.7 percent; “it takes too long to get to the doctor’s office” fell from 17.5 percent to 11.5 percent; and “could not get through on the telephone” fell from 16.1 percent to 10.7 percent.

Here is something even more interesting. Suppose that in an attempt to increase access to care, we add one more doctor, one more nurse or one more clinic. Who is likely to benefit? The study implies that the higher your income, the greater the likelihood you will gain. During the recession, for example, the percent of people experiencing an unmet need with income at 400 percent of the poverty level ($43,000 for an individual or $89,000 for a family of four) or above was more than cut in half. Yet, among those with income below 200 percent of poverty ($22,000 and $45,000, respectively), the percent of those with unmet needs actually rose.

Think (metaphorically) of a waiting line for care. The lowest-income families are at the end of that line. The longer the line, the longer they will have to wait. If you do something to shorten the line, you will be mainly benefitting higher-income people who are at the front.

Why is that? I believe that many of the skills that allow people to do well in the market are the same skills that allow them to do well in non-market settings. High-income, highly educated people, for example, will find a way to get to the head of the waiting line, whether the thing being rationed is quality education, health care or any other good or service. Low-income, poorly educated individuals will generally be at the rear of those lines.

Another study suggests that even low-income patients are more deterred by non-price barriers than by price.

Although most states try to limit Medicaid expenses by restricting patients to a one-month supply of drugs, North Carolina for a period of time allowed patients to have a three-month supply. Then the state reduced the allowable one-stop supply from 100 days of medication to 34 days and at the same time raised the copayment on some drugs from $1 to $3. Think of the first change as raising the time price of care (the number of required pharmacy visits tripled) and the second as raising the money price of care (which also tripled).

In a study of this episode (gated with abstract), researchers discovered that a tripling of the time price of care led to a much greater reduction in needed drugs obtained by chronically ill patients than a tripling of the money price, all other things remaining equal.

This study pertained to certain drugs and certain medical conditions. But suppose the findings are more general. Suppose that for most poor people and most health care, time is a bigger deterrent than money. What then?

If the study findings apply to a broad array of health services, it appears that the orthodox approach to getting health services to poor people is as wrong as it can be. It implies that everything we have been doing in health policy to make health care accessible for low-income patients for the past 60 years is misguided.

A third study found that enrolling children in the Children’s Health Insurance Program (CHIP) does not result in their receiving more medical care. But when CHIP pays higher fees to doctors, the children do get more care. Suppose the state is strapped for money and can’t afford to pay higher fees? A common sense answer is to let the parents add to the CHIP reimbursement rate and pay a higher price. There is an obstacle to common sense, however — it’s illegal for parents to do this.

Think about that for a moment. We encourage families to enroll their children in CHIP, by making the coverage free. Many apparently drop their private coverage to take advantage of the opportunity. Then, when access to doctors declines and the time doctors spend with these patients declines as well, we make sure they have no other options by making it illegal for the family to pay the market rate for their care!

When we expand a government insurance plan for low-income patients, we are spending billions of dollars in a way that doesn’t increase access to care. At the same time, we forbid the enrollees to do the one thing that would expand access to care.

Lessons from the Food Stamp Program. Contrast what we do in health care with the Food Stamp program (SNAP), which has about 60 million participants (most of whom are probably also Medicaid enrollees). Low-income shoppers can enter any supermarket in America and buy almost anything the facility has to offer by adding cash to the “voucher” the government gives them. They can buy anything you and I can buy because they pay the same price you and I pay. But we forbid them to do the same thing in the medical marketplace.

Take a look at the table below. It compares the prices charged by MinuteClinic to the rates Medicaid pays in Dallas. In general, Medicaid pays less than half. That’s why MinuteClinics usually won’t accept Medicaid. If low-income families were allowed to add from $30 to $50 of their own money to the Medicaid rate, however, in one fell swoop we could make high-quality, very accessible primary care available to millions of people.

Sources: MinuteClinic Medicare & Medicaid Fee Schedule 2012 and Texas Health and Human Services Commission.

Encouraging the Emergence of Market Prices. Many important sectors of our health care system came into existence in order to cater to people paying with their own money. Telephone and email consultation services (such as Teladoc of Dallas) and mail order pharmacies (such as RX.com) are examples. Walk-in clinics, surgi-centers, free-standing emergency care clinics and other retail medical care outlets also qualify. Wherever the third party payers are not the main buyers of care, providers complete on price and often on quality as well, there is transparency and the prices patients face are usually real market prices. (See a survey here.) In all of these instances, the case for allowing Medicare, Medicaid and CHIP patients to pay the market price is strong.

But we could do more than that. In a previous Health Affairs blog post, Tom Saving and I argued for more experimentation. Let some doctors balance bill. Let the government pay some of the cost of concierge care. Let some doctors have the freedom to repackage and re-price their services — again, with patients paying out of pocket for any “extra” charges. In each of these cases, the test us this: will patients pay something out-of-pocket for prompter service, better service or different service. If the answer is “yes,” then expand the experiment and allow more doctors and facilities to compete in what might develop into a real market for medical care.

Public Policy Implications. Several public policy changes follow from this analysis.

First, wherever possible, we should encourage real markets in health care — with prices determined by supply and demand rather than by third-party payment formulas.

Second, where real market prices exist, we should allow patients in public insurance programs (Medicare, Medicaid, CHIP, etc.) to pay those prices, even if it means paying a substantial amount from their own resources.

Third, the role of insurance is to make health care affordable, not to make health care free. In an ideal world, patients should pay the marginal cost for care — even for expensive procedures.

Fourth, one way to empower patients in a real medical marketplace is to encourage completely flexible Health Savings Accounts that can wrap around any third-party health insurance plan.

Finally, we need not worry that rationing by price will result in unreasonable denial of care. The current system of rationing by waiting is never going to go completely away. It will always be there as a backstop.


Comments (22)

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  1. Cindy says:

    Very informative! Distinguishing the various barriers to care is so important in interpreting data on individuals receiving unsatisfactory care. It seems likely that price is overdetermined as the cause in many cases. I will be passing this info along!

  2. Alieta Eck, MD says:

    Why are we fixed on buying some type of insurance for those who cannot afford care or coverage?

    Here is why I think that is a mistake.

    –The purpose of insurance is to protect assets, not to make medical care more affordable.
    –The poor presumably have no assets to protect.
    –Insurance has been made too expensive due to government interference– no pre-X, community rating, coverage mandates.
    –Handing $20,000 taxpayer money to an insurance company on behalf of a poor family of 4 when statistically that family is healthy and will not need any medical care in a given year, is a boon to the insurance company and a significant drain on the taxpayers.
    –Equally, handing cash in the form of a medical savings account to people with no means to pay takes money from the workers and hands it to the non-workers. When will the workers catch on and just quit?
    –The poor need medical care when they need medical care.
    –Whenever the government infuses money into any sector, it leads to inflation in that sector, commonly called a “bubble.”

    We suggest setting up many non-government free clinics where physicians donate their time and the taxpayers are only involved in protecting those physicians. There is no other financial involvement for the taxpayers. Volunteers take on the yeomans’ task of caring for the poor and helping to lift them out of poverty.

    The downside for physicians would be that they are competing with their own private practices by donating services in one location and charging in another. But this needs to be handled locally, letting people know that they are expected to leave the free clinic once they are back on their feet. But this has always been the case.

    Let charity be charity and make the role of the government very minimal.

  3. Imrana Iqbal says:

    The tension between price and non-price barriers to healthcare is interesting to note. This is an instructive example of unintended, unpredicted, and multi-directional impacts that economic regulations often cause, particularly if the policy-makers myopically fail to distinguish between low price and high value and seek to achieve the former as if it is also the latter.

  4. Devon Herrick says:

    Public health advocates that fixate too much on barriers to access caused by price rationing ignore some of the benefits of rationing using prices. Prices are the perfect mechanism to encourage competitions in both price and quality. Price competition allows firms to differentiate their service in customer-pleasing ways.

    We can easily see the result of a health care system where prices are suppressed: medical inflation is three times the consumer price index. Customer service in medicine is abysmal. Medical care is inconvenient and expensive. Patients without third-party payers (i.e. insurance) find it difficult to discover the price they will be charged and the prices bear no resemblance to actual costs. These all relate to the lack of competition using (real) market-clearing prices.

  5. Alieta Eck, MD says:

    Devon, I think we are saying the same thing. Inflation in medical services began in 1965 when the government infused billions into the system in Medicare and Medicaid. The best way to restore the free market is to get the government out of the equation.

  6. Buster says:

    Devon Herrick forgot one of the most important points of markets where prices are not used to ration services…

    If services are not rationed using prices, then services must be rationed by some other means. In health care, the most common method is rationing by waiting. One of the reasons medical care is so inconvenient is that third-party payers have little incentive to make it easy to consume their resources. This is why telemedicine and online physician visits have been slow to take hold. The telephone has been used in all other industries for 100 years. Every doctor’s office has a telephone. Indeed, every doctor’s office has numerous telephone lines, cell phones, fax lines and internet connections. But patients cannot discuss their medical conditions with a doctor online because insurers have been slow to reimburse for physician visits that do not take place face-to-face. Insurers were afraid enrollees would abuse the privilege and contact doctors more than needed. Now that research has shown that telemedicine consultations are replacements for in-office visits, more insurers are agreeing to pay for them.

  7. Tom H. says:


  8. Alexis says:

    I really enjoyed the comparison to the food stamp program. Great analysis and very interesting ideas on how to solve this growing problem.

    @Alieta “The best way to restore the free market is to get the government out of the equation.” Exactly!!! I just hope our lawmakers in D.C. can figure this out as well.

  9. Eric says:

    Interesting post John. Ironically, many conservatives complain about how the food stamps program gives poor people the choice to buy what they want with their assistance. Apparently “liberty” is only important if you are of means.

  10. Alex says:

    Many of the limitations on Medicaid and the like seem to do more to cause problems then solve them. Great post John!

  11. Ralph @ MediBid says:

    Our data and evidence shows consistently that during recessionary times medical and disability claims INCREASE, not decrease. The disability one is obvious, while the medical and dental claims is due to people having more time to get unmet needs taken care of.

  12. Liz says:

    Really enjoyed the bit about the Food Stamps program! How astonishing that some Americans aren’t allowed to use their own money to buy such an essential good.

  13. Janice Michaud says:

    Excellent post and support documentation. Thanks John.
    Especially significant to me. I interviewed a small business owner yesterday, he was looking for coverage for a low wage workers because each doctor visit for the employee or child cost a days work. That’s an exponential cost for medical care.
    This cost is invisible to central planners. Thanks for creating context and visibility.

  14. L. Brody, M. D. says:

    If I can get care free, why would I want to pay for it. Entitlement

    I would just go to Emergency Department

    If I am short on money I would just ask the govt for more.

  15. Linda Gorman says:


    My experience with conservatives is that they use the food stamp program as an example of how subsidies should be structured. They realize that liberty exercised through free markets produces better results. The generally agreed upon constraints are things like food stamps should not be good for cigarettes and booze.

    The people who seem to be trying to limit food stamp use are the nanny state progressives. Among other things, they want force people who already have difficult lives to eat according to rule, prohibiting the use of food stamps for snack foods and everything else that the latest fad claims contributes to obseity.

    Perhaps you could direct me to statements by the prominent conservatives that you are thinking of?

  16. Patrick says:

    There are 60 million people on Medicaid. States are paying 20% more for Medicaid this year, and had an increase of 23% in 2011, now paying more for Medicaid than education.
    Medicaid covers dental needs, including Orthodontia.

  17. Bruce Malone says:

    This very intelligent and analytic piece gives further support for Congressman Tom Price’s Private contracting bill for Medicare. In a few years without significant reform Access to Medicare will plummet. This bill will allow seniors to have more choice and control as it does in Australia and other countries with a baseline government insurance program.

  18. The Fat Man says:

    How many poor people did you interview for the book?

    You would have had to interview exactly one person on Medicaid in order to understand that no one is going to pay “a substantial amount from their own resources” if they have access to free health care when they need it in most emergency departments in the country.

    The absence of letters behind a name does not a stupid person make.

  19. Dr Bob Kramer says:


    The worst thing you can do is to provide free health care, which then removes any true appreciation of the service it provides. It is a right but not a free right, because free care is worth exactly what you you pay. This is a disincentive for the doctor, negates his value, makes it impossible to figure who truly deserves the free care because of their social or economic status.There is nothing more distressing to me than to see someone walk into an office, speaking on her cell phone, and smoking a cigarette. Selection of who really deserves free care is probably more difficult than just handing it out, because of the cheating and greed that these programs provide for a corrupt population. The insurance companies pander to this oversight, or lak of it, by sending a physician list that states that these are our doctors, pick anyone, they are all the same which ignores the parameters of how to define a mediocre from a good from an excellent doctor. Until there is recognition of who truly is the top of the list, we will be mired in mediocrity which means that we should start at the bottom and work up rather than starting at the top to provide a benchmark for delivery of care. My department chair when I started my training stated…”anything less than an optimal effort is unacceptable”. Can we ever return to such a mandate? Not until the PCP is provided the incentives that will truly make his value appreciated, reward with greater financial return, and not have people saying “he’s just a family doctor, I want the specialist”.

    More later.

    Dr Bob Kramer

  20. Alieta Eck, MD says:

    I would qualify that, Dr. Kramer. The worst thing the government could do is set up a program offering free health care. This enslaves the caregiver and gives a false sense of entitlement to the recipient. The government is giving away services that it has no right or capability of giving.

    True charity, on the other hand, ennobles both the giver and receiver. There are those who have fallen onto hard times, through their own bad choices or through circumstances beyond their control. And like the Good Samaritan in the Bible, it is a good thing to help someone who cannot pay anything. Hopefully it can occur in a venue where other volunteers can help to identify the root causes of poverty and help the patient move in the right direction.

    But when the recipient of kindness knows that it is real charity, he is more likely to be grateful.

    It has been said that bad charity drives out good charity. Government charity IS bad charity. The Medicaid system is the worst type of “charity” imaginable.

    Alieta Eck, MD

  21. Donald Devine says:

    Brilliant. You never cease to make just the right points. This will appear in our 7/25 edition.

    Donald Devine
    Editor Conservative Battleline Online

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