By Paolo von Schirach
August 22, 2013
WASHINGTON – The two most bloated and least efficient sectors of the US economy, education and health care, also happen to be the most regulated and least competitive. This was stated back in 2005 by Paul London, Deputy Under Secretary of Commerce in the Clinton administration, in his book The Competition Solution. Yes, only true competition over time brings about more efficient, cost-effective solutions and improved quality of service. Simply stated, it is only when providers have to compete to get your business that they have an incentive to do their best. Macroeconomic reforms, such as a more efficient tax regime, may help the broader economy. But if a sector is shielded from competition because it is effectively controlled by oligopolies and rent-seeking entrenched constituencies who can determine their own prices, then costs will stay high while quality will not improve.
Health insurance and the inflated cost of care
A scary example illustrates this point. In America we do not have heath insurance systems, argues Dr. Jeffrey Singer in a revealing WSJ op-ed piece, (The Man Who Was Treated For $ 17,000 Less, August 22, 2013). In America we have a system whereby the patient’s insurance is charged a pre-arranged lower fee for services that would ordinarily be much higher. Only patients with no insurance pay full price. But while this puts them at a disadvantage, the pre-negotiated fees between health care providers and insurers are a built-in disincentive to improve systems and generate efficiencies.
$ 20,000 for minor surgery?
Dr. Singer describes a simple case of a patient who needed minor surgery. He was covered by a bare bones insurance policy, therefore (he discovered) the discounted fees did not apply to him. And for this reason, for a minor hernia operation, he was told he would have to pay out of pocket $ 20,000, on top of what his insurance would cover.
The patient refused. With the help of Dr.Singer he decided to go to a different hospital as an uninsured patient. Singer managed to negotiate a heavily discounted fee of $ 3,000 for the whole thing. So the patient saved $ 17,000, while the health care providers still made money. So, $ 3,000 instead of $ 20,000 for exactly the same procedure?
No incentive to become more efficient
Again, if you carry a “regular” insurance policy you do not pay $ 20,000. But the fact that these are the official fees indicates a system that could not care less about cost reduction and efficient services. Under the present, cozy arrangements the health care providers are guaranteed a certain profit. The insurance companies know what they will end up paying and so they adjust their premiums accordingly. Most patients pay only a little; and so they do not care. But, by accepting this system in which inflated costs are the norm, we have created a monster that now absorbs 17.5% of US GDP. this stunning amount is about 1/3 (or more) higher than the cost of health care in other developed, rich countries. To put this in context, the amount of US health care waste is much larger than the entire US Defense budget, (about 4% of GDP and 20% of federal spending), by far the largest in the world.
The virtue of competition
The solution? Well, the solution, argues Dr. Singer, is to expose everybody to the winds of competition. Medical insurance should be there to cover catastrophic events: accidents, major surgeries, cancer. For all the ordinary stuff make people pay out of pocket. All of a sudden, health care providers would discover and learn all about the virtue of efficiency, cost cutting and improved customer care. They would not charge $ 20,000 for something that can be reliably done for $ 3,000 down the street.
Well, competition is already the rule in the few areas of medical care that are not covered by health insurance, namely cosmetic surgery and Lasik eye surgery. Precisely because these providers know that they need to do their best to attract customers who will pay out of pocket and who have a choice, they have every inducement to find out ways to reduce their costs while improving quality in order to stay ahead of the competition. If they do not, they are out of business, just like in any other sector of the US economy.
Competition is the rule for all other sectors
If the market oriented and competition driven environment created in these two (admittedly small) segments of medical practice could be extended over time to all the other areas of health care, chances are that all providers would be forced to adopt best practices. As they would have to compete for patients, they would need to be lean, as inexpensive as possible and most reliable. Yes, they would need to follow the rules that apply to every other sector of the economy. Isn’t that remarkable?
Indeed, as a society, we accept –in fact we demand– real competition when it comes to cell phones, automobiles, plumbers, financial services and everything else. And this is because we believe that competition increases choice and reduces prices. If this is indeed the standard, how can we think that by protecting the vast health care industry from real competition we are going to have better results?