What Do You Think About American Health Care Markets? Well, That Would Be Nice


Physician Jeffrey Singer–who wrote a great May piece for Reason about how government interference makes the practice of medicine less and less attractive to many doctors–is in the Wall Street Journal today with a useful article about how a medical market that actually had prices that were both known and meaningful to the consumer might function. 

CmdrCord / Foter / CC BY-NC-SA

Singer writes of a patient who learns the very valuable lesson–if you are tenacious and don't use insurance, you can potentially get a reasonable price from a doctor:

Hospitals and other providers make their "list" prices as high as possible when negotiating contracts with health plans and Medicare regulators. No one is ever expected to pay the list price. Anybody who has seen an "Explanation of Benefits" statement from a health plan will note a very high charge from the provider, and an "adjusted charge" based upon the contracted fee schedule, which usually leaves the patient with little or nothing in out-of-pocket expenses.

This process taught us a few things. First, most people these days don't have health "insurance." They have prepaid health plans. They pay premiums to take advantage of a pre-negotiated fee schedule arranged for and administered by a third party. My patient, on the other hand, had insurance.

Second, even with the markdown for upfront "cash-pay" patients, none of the providers was losing money on my patient. Otherwise they wouldn't have agreed to the prices. With the third-party payer taken out of the picture, we got a better idea of the market prices for the services. It is the third-party payment system that interferes with true price competition, so "market clearing prices" can't develop.

Take the examples of Lasik eye surgery or cosmetic surgery. These services are not covered by insurance. Providers compete on the basis of quality, outcomes and price. And prices have continually dropped as quality an…d services have improved—unlike the rest of health care….the only way to make health care more affordable is to diminish the role of third-party payers. Let consumers and providers interact through market forces to drive down prices and drive up quality, like we do when we buy groceries, clothing, cars, computers, etc….

I have had many hospital experiences in which, contra this experience with the good Dr. Singer, even after asking very emphatically, they refused to give me the slightest clue as to what a service they were expecting me to agree to pay for cost. (These negotiations were generally with clerks rather than directly with physicians, but many of the costs of hospitalization don't directly have to do with the physician, like for example the $6,000, though they don't tell you that, decision to rest in a bed covered with a crinkly paper sheet for a half hour after a procedure.) This has applied to both customer portions while insured or just "the real price." That this is even legal always strikes me as curious under any respectable system of consumer law. But the almost constant fact of price opacity in the medical market makes any discussion of "free market failures" in it a a bitter joke. If consumers don't have to care and/or can't know prices, there is no market in an effective sense.

In the time-dimmed beginnings of this century, I bitched about health care systems at

NEXT: Wobbly Economy and Obamacare Push Employers To Hire Part-Time Workers

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. OT: CVS goes all in on DEA’s side against its own customers:…..6C10975693

  2. I’m sorry, but Nobel Laureate Paul Krugman insists that there’s no reason to believe that a free market in health care would drive lower prices. QED.

    1. The Nobel winning economist used the “magic of the marketplace” slur in that column, didn’t he? What a despicable man.

    2. You should be sorry.

  3. Let consumers and providers interact through market forces to drive down prices and drive up quality, like we do when we buy groceries, clothing, cars, computers, etc….

    That’s a nice thought for you rugged-individualist glibbertarians, but medical care is not like food, clothing, shelter or other things we buy on the market. Medical care is a necessity. You can’t live without it. That’s why it has to be heavily controlled and rationed by the government.

    1. Bonus points that said government then can control all that money and make life and death decisions for you. Not that unaccountable bureaucrats would ever abuse that power and do far worse than the evil private sector providers that now do healthcare for profit…

    2. Putting aside the obvious snark, the price issue ultimately boils down to two issues:

      * Emergency Care
      * Critical Care

      In both cases, the general public simply refuses to assume the responsibility of having to make a choice.

      1. * Emergency Care
        * Critical Care

        In both cases, the general public simply refuses to assume the responsibility of having to make a choice.

        Can you explain a bit more on this?

        1. “OMG he’s bleeding to death/had a heart attack/is in anaphylaxis shock! What do you mean ‘How much will this cost.’?!?”


          “OMG, she’s got cancer! What do you mean she can’t get the drugs?!?”

          And part of this is reasonable. People, even those not directly affected, are very insensitive to costs
          in a life or death situation. That doesn’t mean that they should be sensitive. But it tends to generally complicate the price issue.

          The price issue is much easier to argue when dealing with elective/preventative/maintenance related health issues.

          1. How about we just let doctors and hospitals write-off indigent care against their average realized rates? Seems like everyone would win if doctors and hospitals who wanted to pay zero dollars in effective tax did 30% (or whatever the actual calculation is) of their work pro bono.

            1. Because you can’t do write-offs without enforcement. And you can’t do enforcement without the IRS. And you can’t have the IRS without regulations. And you can’t have regulations without politics. And then we’re back where we started.

              1. You mean, we’re relying on circular reasoning built on a single unsupported assertion?

          2. Emergency and critical care (at least where they are expensive) are precisely the right situations for insurance. And they make up a small fraction of overall medical spending, so the cost of such insurance should be pretty low.

  4. Where did you find the picture of Warty’s bedroom?

  5. Take the examples of Lasik eye surgery or cosmetic surgery. These services are not covered by insurance. Providers compete on the basis of quality, outcomes and price. And prices have continually dropped as quality an…d services have improved?unlike the rest of health care

    AMEN, sing it brother!

    You mean when the free market is allowed to operate unimpeded, costs come down? UNPOSSIBLE!

  6. What Do You Think About American Health Care Markets?

    Hahahahaha! Pretty funny using the term markets in the same sentence with American health care.

  7. This begs the question, why don’t the insurance companies care? It is their money. They have every reason not to let hospitals rip them off. And indeed, they have a lot more leverage than an individual buyer. Yet, the hospitals seem to be ripping them off. Why is that?

    Maybe it is because they just pass the costs on in the form of premiums. But if that is the case, there must be some of cartel that prevents other companies to compete with the price. I doubt that is the case since cartels never last. Someone always cheats. Perhaps it is that state regulation of insurance rates prevents rate competition and thus allows insurance companies to pass on any cost and thus not care about what they pay hospitals?

    I am at a loss to explain this.

    1. John| 8.22.13 @ 1:02PM |#
      “This begs the question, why don’t the insurance companies care? It is their money. They have every reason not to let hospitals rip them off.”

      Nope. So long as they can continue to raise premiums, they have every incentive to pay higher rates.
      X% of $100 is more than X% of $10.

      1. But they can’t just raise premiums anymore than any other business can. All it takes is one competitor to charge lower prices and the gig is up.

        If they can just endlessly raise premiums, that is because the government is using the force of law to enable them to. They could not do that in a normal market.

    2. It’s about margins. When your margins are thin, it doesn’t really matter if you can pass through costs.

      1. Sure you can pass through costs. But you can’t pass through infinite costs. There is a limit to that. And even if you can pass the costs through, you still have an incentive to hold costs down. It is good to pay a cost and pass it through. But it is better to not have the cost and still raise your premiums anyway. So even if insurance companies had unlimited pricing power, they still would have an incentive to hold their costs down. Every dime they don’t pay in costs is another dime in profit.

        1. still have an incentive to hold costs down

          Not necessarily. As long as the pass through limit is high (we haven’t reached it yet, but I suspect it’s close), the actual cost of holding costs down may exceed the benefit. There have been historically few costs to jacking up rates and passing blame to providers.

          1. That is true. It may cost more to hold the costs down than what you save. But, if that is the case, then there are isn’t that much money to be saved. The cost of auditing and challenging individual costs, while not zero, is not that high. It is certainly not so high that they wouldn’t be justified if they reduced overall costs by half or even a quarter.

    3. It’s even more complicated than that. Insurance companies are at odds with the drug companies as well. Insurance companies invented a thing called “the copay” which is intended to send a price signal (madness!) the user so they’ll use the generic instead of the more expensive name brand.

      Drug companies then send the consumer a ‘coupon’ to cover the cost of the copay so the patient will then request the namebrand at twice the cost.

      The whole system and its cost structure is fucked, and its fucked because progressives fucked it up, and the progressives are up on the podium assuring us that they’re the only ones who can fix it.

      And Americans believe them.

    4. I would rather say that it raises the question.

    5. “And indeed, they have a lot more leverage than an individual buyer.”

      I don’t think insurance companies actually do have much leverage compared to what individuals would have. Being a bulk buyer doesn’t necessarily imply leverage.

      First, most areas have at least one really large medical group/hospital that insurers can’t leave out of their plans for fear they won’t be able to sell them to employers. Individuals faced with a choice on where to go would look at the price and the importance of the particular procedure. Insurers because of the all-or-nothing and group-nature of their plans can’t do that.

      Second, insurers don’t have a lot of ways to monitor the need for particular services. They try things like prior authorizations, co-pays, etc. to deter overuse, but the doctor is at a huge advantage vis-a-vis the insurance company when ordering tests/procedures, etc. and its really hard for an insurance to say no and pretty much impossible for it to make a trade-off decision (i.e. this drug is $10,000, but only slightly better than this $500 drug for my particular ailment, is it worth the extra $9500?). An individual spending his own money is still at a knowledge disadvantage vis-a-vis the doctor, but he can ask about and make trade-offs.

    6. That’s because it’s a misdiagnosis of the problem with US Health Care. Insurance companies keep costs low for exactly the reasons you state. If you want to know what’s wrong with US Health Care, all you have to do is cut through the progressive sophistry….

      It’s a startling graph.

      Assembled by Carnegie Mellon University professor Paul Fischbeck, the chart shows that per capita health care spending in the United States is pretty similar to that in Germany, the United Kingdom, Sweden and Japan — until about age 60.

      Then, the line for the United States takes off like a rocket booster, soaring far above spending in the other nations.…..z2citZeVg8

      Get that? Elderly spending…aka Medicare. The reason US health spending is higher than other countries is because their socialized systems ration care, while the socialized portion of our system does not.

      1. (continued)…

        It has absolutely nothing to do with the private portion of the market (which is only about 35% anyway).

        Yet if you try and ration our socialized system the same way other countries do (see Paul Ryan), progressives run TV ads showing grandma being pushed off a cliff. Our system is fucked up for the same reason all of our problems exist…because of emotional idiot “empaths” that can’t think logically about issues squeal like stock pigs whenever you tell them the truth about anything. That’s Democrats on most issues (like this one), but Republicans on some others.

  8. When my mother passed away, we found in her effects a hospital bill from 1927. Her father had had an operation. The bill was a single sheet, with the price of the operation, a daily charge for 3 days in the hospital, and few minor incidentals. Attached to the bill was the cancelled check that her mother had written to pay the bill.

    It’s just stunning to think how we traversed from that to the convoluted, maddeningly opaque situation we suffer from today.

    1. The argument then, as it is now, is that your mother was ‘rich’ as she was able to pay for her own healthcare, leaving kajillions of poor people without healthcare. So the first grain of sand on the heap was to demand that your mother pay a premium on her healthcare to cover those poor people.

      At some point, all of those premiums made healthcare too expensive even for your dear old Mom to pay for (no disrespect intended) and so then SHE needed government assistance. Remember, that’s the final solution: Get everyone on government assistance.

      1. Paul:

        To clarify, it was my grandmother who paid that bill. And what’s really amazing is how far from “rich” she was. My grandfather was just a factory worker, and in fact died from his health issues when my mother was a little girl. So grandma raised three kids on a seamstress’s wages. Never owned a house, never owned a car. I guess that’s another thing that’s changed, the perspective of what it means to be poor.

    2. I had to have my shoulder rebuilt in March. I am still waiting to find out how much my out of pocket payments will be. And I really can’t even guess.

      1. They have the technology…

      2. By the way, do you wear a tracksuit now that the shoulder is done?

      3. IN all serialness, my daughter had some minor outpatient surgery a few years ago to remove a skin lesion. I believe the final bill came to $30,000. It may have been $50,000, but I don’t remember… because it was free.

  9. The point that you seem to be missing, Mr. Doherty, is that if you shield patients from their costs, the healthcare is free.

    It’s not very free if I see the amount of my healthcare deducted from my bank account.

  10. Of course free markets in medical care and health insurance would reduce costs and improve service. Like with most everything else. In fact, this is one case where the libertarian solution is a no-brainer. Except that government and its cronies stand to lose in that scenario, both from the cash flow and control perspectives, and they’re able to convince at least some voters that the market is magically bad here, despite working in most other areas not mangled by government intervention.

    1. Healthcare isn’t like other markets.

      1. Yes, I know, but that’s bullshit.

        1. Of course it’s bullshit, but the “smartest people” in our land believe it, and so the high-speed free healthcare train continues on.

          1. You’re not smart if you’re stupid.

            1. But what if everyone calls you smart, crowns you smart, and categorizes you as ‘smart’ while you actually believe that hiding the cost of a thing makes it cheaper. I mean, not ‘me’ of course, no one ever categorizes me as ‘smart’. I’m talking about all the medical ethicists and healthcare experts to have successfully dragged us ever closer to single-payer, dragging us closer, harder and faster with each failure…

              Fuck… it’s rhetorical questions all the way down…

              1. Reality doesn’t care what you think or what other people think. It just is.

                1. Reality doesn’t care what you think or what other people think. It just is.

                  This is basically the exact basis of my argument in one of the other threads today.

                  1. 57. Refutation of Bishop Berkeley

                    After we came out of the church, we stood talking for some time together of Bishop Berkeley’s ingenious sophistry to prove the nonexistence of matter, and that every thing in the universe is merely ideal. I observed, that though we are satisfied his doctrine is not true, it is impossible to refute it. I never shall forget the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it — “I refute it thus.”

                2. This sort of relates to my theory of why some people with giant IQs and gold plated academic resumes are dumb as dirt.

                  It’s that we’ve allowed academics to define what intelligence is and they’ve (of course) defined it as someone who is good at academics.

        2. It is not bullshit. Healthcare is not like other markets in that it is impossible to calculate costs at the individual level. I wouldn’t want to have a system where I paid for all of my own health costs out of pocket because I have no idea what those costs will be and thus can’t plan for them. Unless I am just so wealthy the costs won’t matter, I have to have some form of insurance so I can fix my costs and be able to plan.

          So that makes it different than other markets. And it makes it act in quirky ways.

          1. You could always just accept the risk.

            Or (assuming that the current system wasn’t in place to fuck everything up), you could get a high deductible plan so if you get any unanticipated catastrophe it is covered and you plan for your regular expenses, which you can predict.

            1. Sure I could. But most people are very risk adverse and since the risk is to my health and possibly my life, few people will do that. So saying “people should just accept the risk” is not an answer. That is not the rational choice for anyone but those very few who are in no way risk adverse.

          2. To be sure, it hasn’t been even remotely untouched by government for decades. And no one is suggesting that insurance go away. That’s kind of the point.

            But market-based pricing would make a lot of what we pay for on a regular basis affordable without coverage. That’s the big problem here. I mean, the prices are insane.

            1. See the thread below where Brett L points out that the government requires insurance companies to spend 85% of their revenue on medical costs. The problem is not insurance. The problem is that the government has prevented insurance companies from having any incentive to reduce costs and in fact have created the incentive for them to overpay. That one law is the root of a bunch of the rise in costs in health care.

              1. But that law just took effect in 2010.

    2. Ever notice that the only products that don’t come down in price over time, are those most heavily regulated/subsidized?

      Why have flat screens only come down in price, while automobiles continuously gone up?

      Could it be that the government dictates where their R&D money is spent? Instead of spending it on ways to bring their prices down so they can beat their competition, they are forced to spend it meeting unreasonable emission standards.

      1. It’s amazing how much better cars are now than they were 20 years ago. If it were legally possible to build shitty cars with the old technology now, I wonder how cheap they’d be.

        1. I think the Tata (built in India) is about like a 70s Dodge Gremlin in size and power and can be profitably built and sold for $1200.

      2. That is just it. Insurance companies are not acting like you would expect a rational company to act. The only reason I can think that they are not is because the government is doing something to prevent them. It makes no sense that a company would pay unduly high costs and never use its leverage to lower them. The question is, what government regulation or set of regulations is preventing insurance companies from acting like normal consumers.

  11. When I had LASIK, the most striking thing was how much they gave a shit about me, and how comfortable and painless everything was. Except for the utter horror of having my eyes cut with a cigar cutter, pulled open with a suction cup, and burned with radiation, of course.

    1. you needed LASIK?
      Here I thought you had superior genes.

      1. Superior jeans. You should see how fantastic my ass looks right now.

    2. Funny how a free market tends to incentivize quality, ain’t it?

      How come no one noticed this before?


  12. It is the third-party payment system that interferes with true price competition, so “market clearing prices” can’t develop.

    John’s gonna be pissed.

    1. Too late.

    2. I am not pissed. I am asking for a rational explanation why insurance companies don’t care about giving their money away. I have yet to hear one. If you have one, I would like to hear it. And don’t tell me it is because they can just pass on the costs. Sure they can pass on costs. But isn’t it better to not have the costs and raise the premiums anyway?

      You guys seem to believe in rational actors and companies maximizing profits and maximizing savings right up until we get to health insurance. I would like to know why they don’t function like every other company in the world.

      1. Because hospitals control the regulatory system. Insurance companies are just along for the ride.

        1. Okay. As I said above government regulation may be preventing them from acting rationally. But which regulations? And how is this being accomplished?

          The problem almost certainly is government regulation. But the problem isn’t insurance or that it is given through employment. There is no reason why such a system should result in artificially high prices. That means either the prices are not artificially high or the government is doing something that keeps the normal process of supply and demand and pricing from occurring.

          1. Supply is definitely regulated. And administrative costs are definitely high.

            1. Yes. The fact that we don’t let nurses and pharmacists do a lot of things they are qualified to do and that we artificially restrict the supply of doctors is a big part of the problem.

      2. But isn’t it better to not have the costs and raise the premiums anyway?

        Maybe they have cut costs as much as feasibly possible.

        This is from 2009, but it shows that health care insurers had a profit margin of 2.2%.…..anies.html

        1. The low profit margin indicates they either haven’t cut costs as much as possible or they can’t pass through their costs as easily as some think.

          1. or they can’t pass through their costs as easily as some think.

            I think this may be it. I don’t work in the ins. industry so I have no idea.

        2. Remember that they are legally required to spend 85% of their premium intake on non-administrative healthcare.

          1. That would explain why they don’t give a fuck about costs. They have to spend the money by law. There is the problem right there. The government is telling them to spend 85% of their money. So they don’t have any interest or ability to cut their costs.

            That is a brilliant piece of rent seeking there. It made Congress feel good by letting them think they are making the evil insurance companies cough up the money. It made the insurance companies happy because it allowed them to not worry about cutting costs. Meanwhile, the hospitals are free to over charge because the insurance companies have to spend the money any way.

            1. And then the best way for the insurance company to make more money? Increase your premiums so the 15% you are allowed to keep is higher. Great for consumers!

              1. That is the only way to make money. In fact that rule makes it in the insurance companies’ interest to over pay. The more they over pay, the more they can raise premiums and the larger that 15% is. Add to that the administrative burden that the government is imposing on them, which has to come out of the 15%. The created a system where the only way an insurance company can make any money is by over paying for medical services.

                It is so retarded that you have to kind of admire it in a twisted way.

      3. Besides which, a large portion of the cost of health care is administrative now, which is why so many doctors join hospital systems.

        1. Well, then the problem is government regulation not the existence of insurance.

      4. In New York, the Insurance companies have long been forbidden from doing most of what a rational actor in their circumstances would have. This is part of the process that made the individual market insurance rates here so astronomically high that ObamaCare led to a reduction for theose 17,000 really sick sods who were still on it (while increasing it for the rest of the 19 million here).

      5. I am not pissed. I am asking for a rational explanation why insurance companies don’t care about giving their money away

        See my post above, they do. But they’re working within a system of mandates, insurance regulation, price controls and rate caps. They’re really doing the best they can in a twisted situation.

        1. Bret L explained it. They are required to spend 85% of their revenue.

      6. I am asking for a rational explanation why insurance companies don’t care about giving their money away.

        Oh, and Insurance companies are regulated/treated almost like public utilities, so there is a certain amount of not caring (I have to admit) because while heavily regulated by government, no major insurance provider would ever be allowed to fail.

      7. Because insurance companies would need the cooperation of their customers to keep costs low, but the customers don’t get the signals they need to help out. And the providers do everything they can to keep it that way.

        1. No they wouldn’t. No insurance company in any industry gets its customers too cooperate keeping costs low. If you are the insured, you just want your shit fixed. You have no incentive to worry about what it costs the insurance company.

          The explanation is above. Brett L just gave it. The government forces them to spend 85% of their revenue on non administrative health care costs. And that creates all sorts of perverse incentives that are explained above.

          1. That regulation is brand new, and insurers have been acting this way for decades.

            1. But there are not state regs that say the same? There has to be some reason why insurance companies don’t care. And the government mandating they spend money sounds like a pretty good suspect.

              1. I don’t think any state had this rule prior to ACA.

      8. I am asking for a rational explanation why insurance companies don’t care about giving their money away.

        From my time in the insurance biz (on the sales side) I can make some guesses as to what’s going on. I should stress though that they are guesses and I could be off by a mile.

        First, insurance companies are very heavily regulated. The degree of regulation varies from state to state, but the basic framework was established by a series of Federal laws dating back to the Great Depression.

        These laws and regs severely constrain insurance companies by having many of their business decisions be subject to the oversight of a commissioner of insurance for each state. The upshot of this is that political considerations color not only their business decisions, but how they are communicated.

        There is also some degree of regulatory capture, with larger, established firms using regulation to make it difficult for smaller upstart companies to enter markets. An example of this is the decimation of the fraternal orders (think Elks and Moose Lodges and Intl Order of the Eagles etc) that provided social services to their members in the first half of the 20th century, via regulations that controlled what services they were allowed to offer (for example, preventing them from hiring a doctor who was on call to treat their members at a flat fee).

        1. On its part, the medical industry is in a similar state: heavily regulated, keeping competition down and prices high through regulatory capture. Additionally, the medical industry benefits from a tax law that rewards them for charging high prices and writing down lost income from deadbeats who can’t pay them.

          My hunch is that the regulated industries are
          a) conservative because change is hard. Thus they are loath to rock a boat since the boat is mired in very viscous tar.

          b) conservative because a pissed of comissioner of insurance can put them out of business very quickly

          c) conducting their negotiations on prices and service behind closed doors in order to prevent political backlashes.

          The beneficial regulation of prices in a marketplace is largely driven by people’s ability to walk away from a deal they don’t like. If Foot locker wants $150.00 for a flip flop, you can walk away. In this political environment, having Blue Cross Blue Shield tell Lahey Clinics to take a hike isn’t going to happen. The DOI would never permit such a breakdown, especially in light of the negative publicity Lahey could kick up.

          In this environment, the health service providers have a political advantage over the insurance companies; the voters are biased to want to see the docs paid and the insurance companies as greedy middlemen.

          1. If we want to make price signals work again, making it easier for all participants to enter and exit the market is critical.

            Again, I’m not certain that I’ve captured what’s happening, but this is my guess.

            1. Look at Brett L’s point above. I had no idea that rule existed. That explains so much about what is going on here. The government is mandating that insurance companies spend money and setting their profits based on how much money they spend. So, it is no surprise at all that insurance companies are paying way more than the actual cost of procedures.

              1. Yeah, I was aware of that rule but hadn’t recognized the implications of it. Jesus.

                More evidence of the 30 years of destructive libertarian policies. 😉

  13. I wish alt-text had a market.

  14. Even the intentions are bad along the road to hell.

  15. A Dr. recently shared this site with me. It seems to be an, of sorts, for medical services. I think this is a perfect example of what Dr. Singer is advocating.

Please to post comments

Comments are closed.