Competition can’t reduce health care costs if the prices are a secret

The Pediatric Insider

© 2017 Roy Benaroch, MD

Competition often works. Competing dry cleaners or donut shops must either improve the quality of their product or keep their prices low, or customers will go somewhere else for their cruller fix. In time, the better businesses – the ones that provide tastier pastries at a lower price, – will thrive, and less-good, more-expensive businesses will go away. In the long run, all customers benefit from competition between businesses.

That’s how it’s supposed to be in the American marketplace. But the reality in health care is that it’s not a free market, and it can’t be a free market, and we cannot rely on competition to keep prices down. One big reason: health care prices are a secret.

 You know how much a donut costs. If it’s too much, you’ll take your business elsewhere. Or eat a croissant, or (God forbid) a gluten-free muffin. But can you shop around to find  better health care costs?

A quick story: I use a CPAP machine at night. (Apparently, if I don’t, I stop breathing. I’m told that’s bad.) I get billed $140 a month from the CPAP company, which is magically transformed into $42 a month on the insurance statement, which I pay towards my deductible. I called today to find out from the CPAP company what the total cost will be (it’s a rent-to-own deal, and eventually the machine will be paid off.) They wouldn’t tell me the total, but suggested I call my insurance company. Who also wouldn’t tell me the total, but assured me that if the CPAP company went over their “contractual rate”, the insurance company would stop paying. (How this helps me, I don’t know, but isn’t it nice to know that my insurance company won’t overpay? I might get hosed, but thankfully the good people at Aetna are protected from CPAP price gouging.) That “contractual rate”? It’s a secret (their computer knows, I was assured, but they can’t tell me.)

Even if I wanted to shop around for a less-expensive CPAP device, I couldn’t, because no one will tell me the price. Not that I would shop around, honestly – after those two phone calls, I’d rather poke a fork in my eye, or just stop breathing at night and let my wife shake me awake (which has always worked before. Maybe I need to start paying her that $42 a month.) Secret pricing and means that competition and comparison shopping just aren’t possible for many medical services.

There are other reasons that health care doesn’t abide by free-market principles:

Hospitals and emergency departments have to provide care to everyone, even if they can’t pay. Imagine running a grocery store where sometimes you had to give the food away. To stay in business, you’d have to jack up the prices on the paying customers to cover the non-payers. Now: emergency departments are not grocery stores, and I agree that it is morally unacceptable to turn sick people away. But someone has to pay for this. Emergency departments cannot be run like an ordinary competitive business.

The “barriers to entry” are too high to ensure competition. If a donut shop offers crappy, expensive donuts, another shop can open up across the street. But opening up a hospital is very expensive – and requires government clearance for a “certificate of need” and all sorts of other hoops. Pharmaceutical companies, device manufacturers – these are also very, very expensive companies to start up, and that stifles competition. Legal wrangling also gets in the way. There is no fair playing field to even out or control prices for the biggest-ticket medical expenses.

On the other hand, it’s relatively inexpensive to open up another walk-in or urgent care center – that’s why there’s one on every corner. At least in wealthy neighborhoods. You’d think that would create competition and lower prices – but that won’t happen, not unless their customers can comparison shop for price and quality. (By the way: judging the quality of medical care is also fraught.)

Many people don’t pay their own health care bills. We’ve come to expect health care to be covered by insurance (though that’s changing, with more high-deducible plans and cost-sharing). Many of us don’t even think to comparison shop. But if no one cares about the prices charged, “competition” doesn’t work.

Health care is often “purchased” under duress. When you’ve got crushing chest pain, you don’t call your insurance company to find an “in-network” hospital or ambulance service. And you shouldn’t have to.

The biggest problem with health care is that it costs too dang much. Providing better access to insurance and doctors is morally the right thing to do, but – and this is important, here – better access does not control costs. Competition, alone, won’t work. We’d better come up with some better ways to get costs under control, or there won’t be any money left over for those tasty donuts.

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Tags: health care reform

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