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If Best Buy sold health care ...


It's a pretty safe bet that I'm going to be interested in any post entitled: "Health Care Costs: A Market-Theoretic View." And economist Austin Frakt delivers: His argument, essentially, is that a more competitive insurance market could lead to higher costs for consumers. The reason is simple enough: The relevant driver of costs is not the efficiency of the insurers but the prices charged by hospitals, doctors and other health-care providers. A really efficient insurer is still going to pay more for an MRI than the lumbering behemoth that is Medicare. Competitive insurance markets might save us if the driver of costs was an inefficient insurance market, but they're not going to save us when the driver of costs is the provider market.

At about this point, the conversation is usually interrupted by shouts of "socialist!" After all, this logic could also suggest that the government nationalize the nation's electronic retailers in order to lower television costs. But the market for health care is different than the market for televisions in important ways. In particular, insurers really can't say "no."

An insurer covering people in Redlands, Calif., cannot decide to stop paying for services at the local hospitals and instead demand that people travel to Intermountain Health Care in Utah. That is the fundamental difference between health care and other goods. In health care, we can't say "no." In television sales, we can. The fact that we don't care whether flat-screen televisions are too expensive for people means that Best Buy has to figure out how to make them affordable. The fact that we believe all people should receive health care -- even though we don't always make that possible -- means that hospitals don't need to make it affordable.

Indeed, their job is to make health care better. Imagine if Best Buy's job was simply to make TVs maximally awesome, and their business model relied on salesmen telling customers what they need, with the costs then being paid by a third party who mostly bills the customer's employer. How do you think the television market would change?

That's the health-care market, at least as currently composed. That isn't to say insurers totally lack the power to force lower prices. But they've been taught not to use it. In the 1990s, insurers pushed their market power as far as it could go. This was the period when serious HMOs ruled the world, when networks were tightened and care was reviewed. Spending growth dropped from double digits to 4 percent. But consumers rebelled. People hated HMOs. They yelled at their employers, they screamed at their insurers, and everyone decided to end the experiment. Costs shot back up, insurers learned that they were safer simply paying what providers asked and letting employers worry about where the money is coming from, and workers got a lot less money than they otherwise would have.

So what do you do about high provider costs? A couple of things, I guess. One is to move towards a single-payer system where the government simply sets payment rates. Another is to break the employer-based system that keeps people ignorant and insulated from the price of their own health-care coverage. But we're not doing either of those things. We're hopefully creating more competitive insurance markets, and that might save us some money, but it's not getting at the root of the problem.

Photo credit: By Matt Stroshane/Getty Images

By Ezra Klein  |  November 2, 2009; 2:31 PM ET
Categories:  Health Economics  
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Next: A pessimistic thought on the exchanges


wow... you just finally figured out that we have a healthcare cost problem in part because people don't at all care how much they spend on healthcare?

To me this is fundamental. If there is a pill thats 10% more effective but costs 3x as much, of course I'll take the more expensive pill since my copay would be exactly the same. Until there is someone, somewhere who actually has the incentive to lower costs then this is going to be a huge problem.

You have more faith in our political system being the one last in line being willing to control costs. When I look at how petrified our politicians are in controlling medicare costs when just 15% of the population is covered I think it will be pretty much impossible for them to control costs when the rest of the population is covered.

Posted by: spotatl | November 2, 2009 2:37 PM | Report abuse

It's taken you this long to realize this? shouldn't this be obvious? the follow up question is why aren't the politicians (on either side of the aisle) willing to address or able to understand this key systemic problem. This is the reason why the current "reform" proposals will only serve to increase overall expenses and the promised subsidies will be unsustainable.

Posted by: PindarPushkin | November 2, 2009 2:39 PM | Report abuse

Seems to me that there is more we could do to bend the cost curve beyond just competition or price-fixing. Personally, I'd be ok with price-fixing, but I know I'm an outlier.

For example, doctors' bills - part of the problem we're facing is that doctors charge much more in the U.S than they do in other countries. If we established a Federal no-fault malpractice insurance system, dropped physician costs down, you could lower their rates without lowering real income. Likewise, if the Federal government made med school tuition free, you could reduce physician rates by the cost of servicing student loans.

It seems to me that this model of dropping rates by dropping fixed costs might be a way forward.

Posted by: StevenAttewell | November 2, 2009 2:39 PM | Report abuse

Government as single-payer system which sets the price or also pays the price?

I think it should be 'just' setting of the price, it is not needed to force Government to pay that price. It can be still the employer's insurance or some other insurance.

The thing I am curious is how Public Utilities Commission decides prices for electricity and I believe for drinking water too. Why is that model not workable here? Since that was the motivation for Medicare Commission (Medpac or iMAC whatever is the name); why are we not trying that? How can we make it stronger so that 'price bars' are set and costs are controlled? Insurance and from whose pocket that money comes, it is a separate issue and frankly after the cost control. What is the politics of such a commission?

Posted by: umesh409 | November 2, 2009 2:51 PM | Report abuse

Single3 payer is inevitable. Now that we've moved beyond it being acceptable in this country for tens of millions of people to not be able to afford healthcare, any of these reforms that try to maintain the current system will rapidly prove way too costly, and lead to even further reforms that get at costs, and this is going to lead to single payer.

I feel like I'd like to fast forward on the whole health care debate maybe 20 years after whatever bill we get this year is passed, when we'll have the socialized medicine the right tries to drive up fear about, and maybe 70% of the public will love it.

Posted by: zeppelin003 | November 2, 2009 3:13 PM | Report abuse

Don't forget that the HMO model of the 90's had the same or similar administrative costs (i.e. the expense of weeding out sick patients) to the more lax system we have today. So reform doesn't just mean going back to the bad old days of the HMO's. All the proposals on the table would bar insurance companies from excluding patients with preexisting conditions, etc., which means that savings come both from keeping prices in check and from eliminating a lot of the administrative expenses that do nothing to improve health-care outcomes.

Posted by: csdiego | November 2, 2009 3:15 PM | Report abuse

Ezra- Then why do you support the current bills? If we have one shot to change the system drastically (before waiting another 40 years) why not actually try for substantive change - such as decoupling employment and insurance.

Also the focus on health insurers is ridiculous. Health insurance companies are not the problem. Why do Obama and congressional D's spend so much time and effort demonizing them? Is it to distract people from the fact that the current health care reform bills actually won't solve any of the real problems? I think so.

Posted by: MBP2 | November 2, 2009 3:25 PM | Report abuse

StevenAttewell: "It seems to me that this model of dropping rates by dropping fixed costs might be a way forward."

And what bigger fixed cost is there than the entire private insurance industry? We need to get rid of that. We also need to have the government negotiate directly with manufacturers of drugs and medical devices.

Tort reform--okay, but if the Workman's Comp system is any guide, no-fault would be a colossal money-waster that overcompensates malingers, undercompensates the most seriously injured, and lets bad doctors hide. Making med school free--only if docs will agree to practice in low-cost settings or underserved areas. (As an aside you'd be surprised at the huge number of med students whose parents pay cash.)

Administrated rates is not price fixing. Like umesh said, it's like the public utilities. You have to justify your costs and independent experts decide. It's ridiculous to think that when you're in the ED having a heart attack that anyone has any pricing power except for the doctor. Exchanges will save money mainly by encouraging people to skimp on routine care. Then they will end up in the ER in extremis. Pennywise and pound foolish.

Posted by: bmull | November 2, 2009 4:37 PM | Report abuse

Ezra is just as trapped in the mire of a sick industry as the rest of them. The difficulties of controlling costs simply highlight some of the major problems.

How do you control costs? You decide how much of the cost you want to control, take control of that cost, and then control it.

For example, in Washington state, nursing homes billing for Medicaid patients set rates based on their costs of operation- but they are only allowed to set these costs up to a predetermined limit. If they can exceed the industry average efficiency, they can bill more than they spend- if not, they lose what their inefficiency costs them.

Americans take the same attitude towards healthcare that they do to transportation. Every person who has a shiny car pretty much regards transportation as a problem solved, regardless of the expense, effort, or danger their choice subjects them to.

However, they have this much excuse- they were told to do so by their doctors, by the "nurses", by experts of every kind. Nobody is so beat down at every turn of the road as the American "patient", who in every encounter with the healthcare system is forced to participate in superstitious voodoo rituals emphasizing how little the patient knows and how important it is that the patient do as they are told. It should hardly surprise us if the patient eagerly tries to do as they are told.

Yes, health insurers are the problem- them, and any other industry which can scatter twinkle dust over Congress in $100 million handfuls. Focusing on how they pay claims is simply misleading. They're spending that money so they can bilk the public of money for doing a job that SS can do better for less than half the cost. Naturally, when they can, they buy the support of hospitals, drug companies, and doctors by paying more than Medicare would. You'd do the same thing if you could pass the costs to someone else, but keep the profits.

Posted by: serialcatowner | November 2, 2009 4:47 PM | Report abuse

Just read an article in BusinessWeek, about where the cost burden of the reform is going. The bulk is being laid upon insurers, as smaller chunk on drug makers and device manufacturers.

But the Elephant in the room that hasn't been asked to pony up much of anything: The actual health care providers, doctors and hospitals. The article points out congress is terrified to try to take on doctors, so they won't be taking any trims in their reimbursments.

The Dems have done a great job of villifying the insurers, blaming them for all the problems in the industry, without looking at where the real costs lie. The PROVIDERS. I'm not arguing that we should cut provider payments, i'm just saying that's where the costs lie...NOT the insurers. All of this insurance reform isn't going to do crap for reducing costs.

Of course, in the end all costs will be passed to consumers.

Posted by: truth5 | November 2, 2009 5:03 PM | Report abuse


Regarding malpractice insurance reform (not the same thing as tort reform) - this also has the premium inflation problem that health insurance does. Moreover, and here I've actually read research done on malpractice cases, the reason you want no fault is that in the current system, people who doctors say deserve payment get nothing, where other people get huge payouts. The current system is a huge crapshoot that has nothing to do with what happened medically and nothing to do with the person's actual financial needs.

The reality is that someone who goes in for a back operation and comes out paraplegic needs financial assistance regardless of whether a doctor made a mistake or whether it was just a complication and bad luck. Hence, no-fault insurance - if someone gets injured, they should get paid.

Posted by: StevenAttewell | November 2, 2009 5:09 PM | Report abuse

"One is to move towards a single-payer system where the government simply sets payment rates."

Please stop with the binary choices Ezra. There are other types of systems where the government negotiates payment rates: take a look at all-payer systems (France and Germany) or even individual payer systems like the Netherlands and Switzerland. What all of these more efficient models have in common is not just that government sets the rates, it is that they are *universal*.

"Another is to break the employer-based system that keeps people ignorant and insulated from the price of their own health-care coverage."

That shoud be the first step. If everyone had the same exposure to the dysfunction in the current model, we would be much further along in finding a solution.

The exchanges you've been touting for all these weeks are nothing more than an extension of the same old broken model; as is the idea of a "public option". We don't another set of blocks in a patchwork, what we need *a* public plan...with some private options.

Posted by: Athena_news | November 2, 2009 6:18 PM | Report abuse

I suggest This American Life's coverage of the topic. They point out that in (I believe) Maryland, the state sets the rates for procedures, instead of insurers and hospitals reaching individual agreements.

Posted by: elainelinc | November 2, 2009 8:54 PM | Report abuse

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