Market failures at supply and demand sides, the case of hospitals in the US

It's widely accepted that the United States has one of the most expensive health care system. It's also a good example of the limitations of the less regulated model of health care, and free markets in general. Market failures abound in the deregulated US health care market. Pharma prices are generally multiples of those prevailing elsewhere. This post draws attention to the exorbitant hospital prices as well as the vast variations in them. 

Elizabeth Rosenthal draws attention to hospitals as being a major driver of high medical costs in US. While insurers and Pharma companies get all the public indignation, hospitals, which make up 44% of personal expenses for the privately insured and hospital prices have risen by 42% from 2007-14 for inpatient care. 

The cost of a hospital stay in the United States averaged $5,220 a day in 2015 — and could be as high as over $17,000, compared with $765 in Australia. In a Rand study published earlier this year, researchers calculated that hospitals treating patients with private health insurance were paid, overall, 2.4 times the Medicare rates in 2017, and nearly three times the rate for outpatient care. If the plans had paid according to Medicare’s formula, their spending would be reduced by over half. Most economists think hospitals could do just fine with far less than they get today from private insurance.

This inflation in hospital prices applies just as much to non-profit institutions,

It would be unseemly for these nonprofit medical centers to make barrels of money. So when their operations generate huge surpluses — as many big medical centers do — they plow the money back into the system. They build another cancer clinic, increase C.E.O. pay, buy the newest scanner (whether it is needed or not) or install spas and Zen gardens.Some rural hospitals are genuinely struggling. But many American hospitals have been spending capital “like water,” said Kevin Schulman a physician-economist at Stanford. The high cost of hospitals today, he said, is often a function of the cost of new infrastructure or poor management decisions. “Medicare is supposed to pay the cost of an efficient hospital,” he said. “If they’ve made bad decisions, why should we keep paying for that?”

If hospitals were paid less via regulation or genuine competition, they would look different, and they’d make different purchasing decisions about technology. But would that matter to medical results? Compared with their European counterparts, some American hospitals resemble seven-star hotels. And yet, on average, the United States doesn’t have better outcomes than other wealthy nations. By some measures — such as life expectancy and infant mortality — it scores worse than average.

The high prices are complemented with wide variations in prices charged by the same hospital on different insurers. The Times has an investigation of the variations in the prices that hospitals charge insurers.  

This year, the federal government ordered hospitals to begin publishing a prized secret: a complete list of the prices they negotiate with private insurers. The insurers’ trade association had called the rule unconstitutional and said it would “undermine competitive negotiations.” Four hospital associations jointly sued the government to block it, and appealed when they lost. They lost again, and seven months later, many hospitals are simply ignoring the requirement and posting nothing.

What does the data show?

It shows hospitals are charging patients wildly different amounts for the same basic services: procedures as simple as an X-ray or a pregnancy test. And it provides numerous examples of major health insurers — some of the world’s largest companies, with billions in annual profits — negotiating surprisingly unfavorable rates for their customers. In many cases, insured patients are getting prices that are higher than they would if they pretended to have no coverage at all.

For example, at Memorial Regional Hospital, Florida, a MRI costs $1827 with a Cigna Plan, $2148 with a Humana Plan, $2455 with a Blue Cross Plan, and $262 with a Medicare Plan. At the University of Mississippi Medical Center, a colonoscopy costs $1463 with a Cigna Plan, $2144 with a Aetna Plan, and $&82 with no insurance at all. At Aurora St Luke's Milwaukee, a MRI costs $1093 with United's HMO Plan and $4029 with United's PPO Plan. 

Why don't insurers push back to lower prices?

Until now, consumers had no way to know before they got the bill what prices they and their insurers would be paying. Some insurance companies have refused to provide the information when asked by patients and the employers that hired the companies to provide coverage. This secrecy has allowed hospitals to tell patients that they are getting “steep” discounts, while still charging them many times what a public program like Medicare is willing to pay. And it has left insurers with little incentive to negotiate well.

The peculiar economics of health insurance also help keep prices high. Customers judge insurance plans based on whether their preferred doctors and hospitals are covered, making it hard for an insurer to walk away from a bad deal. The insurer also may not have a strong motivation to, given that the more that is spent on care, the more an insurance company can earn. Federal regulations limit insurers’ profits to a percentage of the amount they spend on care. And in some plans involving large employers, insurers are not even using their own money. The employers pay the medical bills, and give insurers a cut of the costs in exchange for administering the plan.

The high drugs and hospital prices negates the conventional wisdom that bulk buyers like large employers and insurers can negotiate and contract the best possible rates. 

Update 1 (17.09.2021)

Important RAND study of drugs prices across countries. The takeaway is that apart from unbranded generics, the US drug prices are much higher than those in other countries.