Wide agreement exists that the growth rate of U.S. medical costs must be reduced. One approach often suggested is to introduce more private enterprise into medicine. Hospitals and doctors should be encouraged to disclose their charges upfront, so patients can shop for the lowest cost providers. Health insurance policies should have high deductibles (linked to a health savings account), so patients bear the financial responsibility for their care and have an incentive to look for better deals. Employees and Medicare enrollees should be given vouchers so they can purchase health insurance better tailored to their needs and budgets. Competition among firms in markets normally produces high quality products at reasonable prices. Why not let the market work its magic to solve our medical cost crisis?
I support all of the above ideas. More transparency would spotlight the unreasonably high costs of many medical procedures and the wide variation in the charges of different hospitals and doctors. High deductible insurance would discourage unnecessary doctor visits. As anyone who’s looked at this blog knows, I’m a supporter of vouchers. However, as I’ll explain below, I don’t believe these changes are sufficient to rein in health care costs.
The market for health care is different from almost all other markets in a key way. To quote from my recent OWC chairman’s column:
The way we purchase medical care differs fundamentally from the way most other goods are purchased. Normally, when we go shopping, we start with a clear idea of what we want. When we go to our doctor, we usually don’t know what medical care we need and our doctor’s first job is diagnosing our problem. We learn from our doctor what treatment we should purchase. Doctors have a unique dual role in both recommending and providing treatment. Market competition doesn’t do its normal job of holding down costs when sellers determine the amount of services they provide.
I can illustrate this from personal experience. When I was 60 years old, the lab work during my yearly physical showed an abnormally high PSA reading and I was referred to an urologist. He determined I had early stage prostate cancer. I had no symptoms and prostate cancer had never crossed my mind. I had a $5,000 deductible health insurance policy, but I never considered the cost of treatment or shopping for doctors. I wanted my doctor to recommend the most effective treatment and guide me through the options. He insisted I carefully consider both surgery and radiation and I did. However in the end, it was his knowledge and experience that I relied on.
For serious (and expensive) medical conditions, we should rely on the expertise of our doctors and follow their treatment advice. The tests and treatments ordered by doctors account for as much as 75% of all medical costs. The best way to reduce these costs is to change doctors’ incentives so they recommend only what clearly has value for their patients. Doctors, not patients, need to be better shoppers.
Interestingly, for elective procedures, when patients know the medical treatment they want and don’t need a diagnosis from a doctor, market competition works well to hold down costs. The real cost of elective procedures such as cosmetic or laser eye surgery has been declining.
With improvements in computerized diagnostic systems and more medical information on the Internet, patients in the future may be able to diagnose more of their ailments without consulting a doctor. I’m always amazed at how much my wife can learn if I give her a medical question and an hour to surf the Internet. If we ever get to the point that doctors’ main role is providing treatments, medicine will become more like other products and market competition will be more effective in holding down costs.