More on the health care market failures

A number of stories in recent days about the distorted US health care market. Zero Hedge has a graphic that shows how the price of appendectomy varies within America and between countries. The most striking figure being the more than four times lower price across the border in Canada.

Last month, the NYT had a big story that explored the distortions in the market for routine cancer screening colonoscopy procedures. It varied widely, even within cities. In most, if not all, other developed countries, a basic colonoscopy cost just a few hundred dollars, certainly within $1000. It also finds that the emergence in 1980s of outpatient surgical centers, ostensibly intended to cut down on long hospital stays, has, on the contrary, ended up boosting prices further. 

Appendectomy and Colonoscopy are not isolated examples. Much the same trend is evident with Angiograms, hip-replacements, and other scans.

Further, as a new report by Commonwealth Fund explores health care costs in 13 developed countries, finds that though the US spends far more on health care than any other country, its outcomes are no better than far less expensive systems. In fact, in terms of outcomes, the performance of US has been falling relative to its OECD peers. It attributes the higher spending on higher prices, more readily accessible technology, and greater obesity. It also finds that Japan, which has the cheapest health care system, achieves similar outcomes through aggressive price regulation. 

In fact, a recent NBER working paper (pdf here) finds that productivity dispersion among hospitals in the US is lower than in manufacturing industries, thereby questioning the argument that price variations are determined by wide variations in the quality of care. Drug prices and physician fees also higher in the US, though not by the same magnitude. 

A recent Times report has a nice graphic which shows that rising prices, and not greater use, is the driving force. Its report focuses attention on the market power exercised by service providers. Since health care markets are highly localized, it is vulnerable to excessive market concentration. You generally do not have too many providers in the same region offering similar quality services for the same medical condition. The report argues that the wave of hospital chain mergers since the mid-1990s has increased market concentration. It reports that market concentration raises hospital prices, lowers quality and innovation, and increases the number of uninsured in the vicinity. 

Health care in the US is a clear example of a market failure. Its reasons are not difficult to fathom. The incentives of all major stakeholders - patients, care providers, doctors, insurers, and employers - are not aligned towards containing prices. Insured patients have little incentive to bargain for lower costs. In any case, patients do not see prices till service is provided, if they see them at all, and they have limited choice in both the treatment options (you take the treatment the doctor prescribes) and the treatment location. Doctors seek to automate the process of diagnosis so as to minimize their clinical judgement and thereby limit the risk of being exposed to the ever present danger of patient litigation. The aggressive marketing of sophisticated latest tests and procedures, and the shadow of peer (and patient - Katie Couric effect) pressure, makes them prefer those tests and procedures, even when exorbitantly expensive and of limited known marginal value. Insurers can pass on the higher prices to consumers (or employers, in case of employer sponsored insurance) by way of increased premiums. Employers, in turn, pass on the higher premiums by muting the pay rises of employees. Faced with high cost of equipments used in the latest diagnostic tests and procedures, preferred by doctors, care providers are inclined to raise prices so as to recover their investments as quickly as possible. Those worst affected, the uninsured, are classic price takers - too voiceless to be of any influence in the price determination process. 

The only way to address this vicious loop of market failures is effective external regulation. And that is what the better performing health care systems in continental Europe, Japan, Taiwan, Thailand, and so on, have done, and have the results to show. In those countries too, the dynamics of market forces, arising from the aforementioned incentive incompatibilities, may result in higher prices unless the regulators stay one step ahead.

Update 1 (24/8/2013)

Excellent article by Ezra Klein making the case for why young people benefit from Obamacare. Essentially, as he writes, the ACA does not affect those currently covered by employer-sponsored insurance programs or those under Medicare and Medicaid. Its target is the 8% or so of Americans who are expected to benefit from the nongroup health insurance through Obamacare's new marketplaces.

Update 2 (10/6/2014)
Matt Yglesias points to four reforms that can transform US health care - liberalize immigrant doctors flows, curtail pharmaceutical monopolies (replace patents with tax-payer finance prizes), let non-doctors treat patients (nurse practitioners and dental hygienists can do many things in place of doctors), and move over to all-payer rate setting system (Maryland and many European countries a Government Commission negotiates with hospital groups and sets prices instead of each insurer doing separately).

Update 3(10/6/2014)
The NYT has a good interactive graphic of the price variations for 100 commonest treatments and procedures from 3300 hospitals across the US for 2012. It points to wide variations between the price charged by hospitals on uninsured patients for various medical conditions and the price paid by Medicare. The list price charged by the hospitals is a measure of the price paid by the uninsured, those with deductibles. It also gives a measure of how much private insurers will have to negotiate.