Why Health Care Has No Wal-Mart

[luckydevil]

http://www.businessweek.com/bwdaily/dnflash/apr2004/nf20040421_2730_db_080.htm

Why Health Care Has No Wal-Mart

Instead of the powerful market forces that drive retail costs down, insurance, inefficiency, and soaring demand create ever-higher prices

In recent years, Americans have enjoyed the glories of falling consumer prices. It's commonly called the Wal-Mart (WMT ) effect: Huge retailers use their buying power to force suppliers to cut costs, then the retailers pass some of those savings on to their customers. Forced to stay competitive, other retailers follow suit. The result: The price of, say, a DVD player, plunges from $1,000 to $50 in just a few years. It is, for consumers at least, the sort of virtuous cycle that economists dream about.

And it has worked for everything from gizmos to food. But it hasn't worked in one corner of the market -- health care, which accounts for 15% of the U.S. economy and is growing. Why don't the same market forces that drive price competition for DVD players keep health costs from rising at double-digit rates?

BALLOONING PAYMENTS. To start, it's important to remember that two very different things are going on in health-care spending. The first has to do with the price of what the health-care industry calls "an individual unit of care" -- that one visit to the doctor's office or that bottle of pills. In 2003, unit-of-care prices rose by more than 3.5% -- twice as much as overall inflation.

The other issue is what's happening to total health-care costs, which rose by about 8% last year. Much of that increase results from more people using more care, not because the cost of each individual procedure is going up. Over the past decade, the amount each American spends on medical care has ballooned from about $3,400 per year to nearly $6,000.

In some cases, more care is used because the treatments are now easier. For instance, the number of cataract surgeries has exploded in the past decade, while the cost of the procedure has been stable. But instead of having major surgery and spending three days recovering in the hospital, you can have cataracts removed and be home in just a few hours. As a result, total spending for cataract surgery has boomed.

WHO'S PAYING? Sometimes, however, Americans use more care because they think it's free, or almost free. And that's one big reason why health care hasn't become Wal-Mart-ized. When you buy that DVD player, you whip out your credit card and pay with your own money. That makes you want to comparison shop for the best deal. But when it comes to buying drugs, consumers have little incentive to shop around. If you have good insurance, you're going to pay the same $10 or $15 whether you need the most expensive drugs or not.

A recent study that looked at drugs used to treat arthritis pain provides some insight. Arthritis sufferers can buy relatively inexpensive over-the-counter treatments, such as Motrin or similar generics, or much more costly prescription medications called cox-2 inhibitors, such as Celebrex or Vioxx. Both kinds provide equal pain relief, but the cox-2 drugs may reduce the chances of stomach bleeding or ulcers.

The study concluded that people with good drug insurance were twice as likely to get the more expensive drugs than those without insurance, whether they were at risk for bleeding or not. If someone else -- the insurance company -- is paying, price doesn't matter.

18TH CENTURY TECH. Another reason why the Wal-Marts of the world can keep retail prices down -- but the government and big companies can't on health care -- is technology. This is a truly strange situation. You'd probably think about a big boxy store as being technologically backward -- just a bunch of stuff piled up in a huge building, right? But in fact, modern retailers use very sophisticated information technology to maintain inventories. And their suppliers use high-tech gear to make the products the retailers sell.

Hospitals may appear to be centers of the slickest technology imaginable. But in the critical links with patients, many hospitals are stuck firmly in the 18th century. Think about it: paper charts hanging from the end of a bed, prescriptions written on scraps of paper that are carried by hand to the hospital pharmacy. Only slowly are doctors using devices such as personal digital assistants.

This unwillingness to adopt advanced IT is hugely expensive, and in some cases leads to unnecessary deaths. The result is huge added expenses that are, sooner or later, built into the price.

THE X FACTOR. That's not all. For example, there's no real link between quality and price in large swaths of health care. There's no mechanism to comparison-shop. Even if you wanted to find the best price, no one would tell you. And don't forget the emotional X factor: Americans equate the best care with the most care, despite the absence of evidence that the two have much of a link. These are all very tough problems to solve.

Modern health care is many wonderful things. But it isn't a market. And until it becomes one, consumers will have little chance to enjoy the same benefits of price competition they get at their local Wal-Mart.

[Ignatius J.]

I think this article is a little bit of BS. Not all BS, but I worry about the implication that health insurance is a sham and we'd all be better off paying for most of our stuff. Health insurance companies are starting to get smarter.

There's a lot of interesting work going on in industrial health care. That is, big companies who pay for thier employees health care are starting to look at the costs and realizing that they aren't incentivizing properly. Many things that are complained about in this article can be fixed WITHOUT ever changing over to a free health market.

But First, I would object to the idea that the fact that the amount that americans are paying on health care is balooning means that the health care industry is bloated. BS. People are spending more money on health care because health care today is better than it has ever been. You can get more procedures done faster. People are spending this money because the market is attractive to them.

Now are there imperfections? absolutely.

1) The prescription vs. over the counter reverse incentive. This must be fixed. Prescription drug plans don't cover tylenol. they should. The example given in the text of the article is perfect. When the over the counter drug which is not subsidized costs as much as the prescription people get the prescription. Give a couple of bucks off tylenol and the insurance companies walk away saving $40 if not more.

2.) Incentivize obesity fighting programs - If you are paying for health insurance and you are not obese you should pay less than someone who is. This of course will never fly, BUT, if someone can prove they go to the gym for hours or maintain a certain body weight they should get cash back. The amount of money that goes into fighting obesity related diseases is astounding. My girlfreind's father did a study on this for his work and found that BMI is highly correlated to costs paid by the health insurance. If insurance fixes this incentive program we all get cheaper prices.

3) Better preventative care - the way health insurance or HMO's work right now tends to be: wait till the problem costs a lot of money to fix then fix it. This is not optimal.

I think these three issues are what's ailing health care right now, and all of them can be fixed by passing along some of the savings to people who earn them. This can be done without going to a free health market as the article advises.

-DB

[Ghost of]

Anything that government gets significantly involved in subsidizing and direct funding and regulating usually sees an out of proportion escalation in prices--be it health, education or housing.

DB

I like your post, but I don't get the somewhat irrational fear of a free market.

[Johnny Punani2]

This article is BS....

[Ignatius J.]

I think that a free market system for health care is a dangerous idea. I might be sold on the idea of free market health insurance, but even that makes me a bit worried.

Basically I want to be sure that any american can say, hey, I want to work, but I can't work because of so and so. I think it would be better for america if these guys worked. In a free market system someone who is unemployed because of a health problem is kind of screwed. I am especially thinking of things like depression and anxiety which can destroy someone's ability to work.

I don't think the free market fixes that.

-DB

[chomerics]

Originally posted by DrunkenBoxer

1) The prescription vs. over the counter reverse incentive. This must be fixed. Prescription drug plans don't cover tylenol. they should. The example given in the text of the article is perfect. When the over the counter drug which is not subsidized costs as much as the prescription people get the prescription. Give a couple of bucks off tylenol and the insurance companies walk away saving $40 if not more.

DB- good post.

One of the major problems with the health care system in durg companies. There is too much incentive for doctors to switch their patients over to a "new" drug when the old drug's patent runs out. As I'm writing this, a nexium commercial just came on TV, so I will use it as an example and it's a good one.

I think it's Astra Zeneca that owns the partent rights for nexium. Well, nexium is the follow up drug to the very profitable prilosec. The problem was, the patent ran out on prilosec, and Astra was going to loose billions of dollars from thier patients being able to get prilosec over the counter, you see now it's on the free market so the prices are competitive. So what are they to do? Put on a massive marketing campaign telling people they need nexium instead of prilosec. Give doctors incentives and bonus' based on the number of patients they switch from prilosec to nexium. Prilosec cost over $100 a month until the patent ran out. Now, you can purchase it over the counter at any drug store and it's $19.99. The problem is that everyone that was on prilosec, is now on nexium. They're still paying the drug companies their $100 month via their health care plan.

To top it off, it's cheaper to buy drugs, which are manufactured here, from other countries. Our lovely health care bill had a provision put in it so the government wouldn't be allowed to negotiate a fair price with the drug companies.

If you want to look at how to fix our health care system, look at the top.

[Ancalagon the Black]

DB, some great posts there.

Any insurance system--even a purely free-market one--will be plagued by the moral hazard and adverse selection problems that the article's author outlines. Indeed, it can be shown that given perfectly competitive microeconomic conditions, every insurance company will fail in a free-market system.

[Ghost of]

Don't forget the higher cost of medication in this country because of

1) price controls in other nations, which jack up the ceiling on prices for the same thing in this country to reach profitability

2) Maybe most importantly, the years of delays and testing which even Europe does not engage in, which cost lives and--again, jack up research and development costs.

No one wants to see another thalidomide problem, but I don't think Europe has had too many difficulties with a more streamlined testing process.

And yes, Ancal, moral hazard exists regardless of system. Nothing is going to stop that from being a dominant force in the realm of insurance(and some other areas.)