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John C. Goodman / May 12, 2013

Health Care That Is Priceless

Something is wrong in the hospital marketplace. Government data released this week show that some hospitals in Dallas charge five times as much as other hospitals for the same procedures! This follows on the heels of a Time magazine/ CNN report, showing that hospitals routinely charge ridiculous prices for items and services -- prices that bear no reasonable relationship to real costs. But then we learn that no one is actually paying these prices, except some poor sap who happens to be uninsured and has to negotiate with the hospital on his own.

Something is wrong in the hospital marketplace. Government data released this week show that some hospitals in Dallas charge five times as much as other hospitals for the same procedures! This follows on the heels of a Time magazine/ CNN report, showing that hospitals routinely charge ridiculous prices for items and services – prices that bear no reasonable relationship to real costs.

But then we learn that no one is actually paying these prices, except some poor sap who happens to be uninsured and has to negotiate with the hospital on his own. Even so, there is no way you and I can know what we are going to pay in advance. We can’t get what we would get in every other market for repairs (a dented car, a damaged roof, etc.): an estimate. Even if we did have an estimate, we would have no way of knowing what competing hospitals charge.

There is just one problem with the flurry of news about hospitals. No one is pointing out that all these problems are the result of government intervention in the marketplace. They are not the result of a free market for medical care. In health care, we have so completely suppressed the market – for year after year, decade after decade – that few people ever see a real price for anything.

Employees never see a premium reflecting the real cost of their health insurance. Patients almost never see a real price for their medical care. Even at the family doctor’s office, it’s hard to discover what anything costs.

Although many would like to think that our system is very different from the national health insurance schemes of other countries, the truth is that Americans mainly pay for care the same way people all over the developed world pay for care at the time they receive it – with time, not money.

On the average, every time we spend a dollar at a physician’s office, only 10 cents comes out of our own pockets. The rest is paid by third-party payers (insurance companies, employers, and government). As a result, for most people, the time price of care (waiting to get an appointment, getting to and from the doctor’s office, waiting in the reception area, waiting in the exam room, etc.) tends to be greater – and probably much greater – than the money price of care. When patients aren’t spending their own money, doctors will not compete for their patronage based on price. When doctors don’t compete on price, they won’t compete on quality either. The services they offer will be only those services the third parties pay for and only in settings and ways the third parties have blessed.

In a very real sense, there are no prices at a typical hospital, or even in a physician’s office. Medicare pays one rate, Medicaid another, BlueCross yet a third. In some cases the rates are negotiated. When the government is the payer, they are typically dictated.

The result is a hospital marketplace that has no resemblance at all to a free market. As I wrote at my blog:

CNN and Time Magazine discovered how charges mounted for one family. Nurses pricked the patient’s finger for a glucose test 190 times. At $39 a pop that totaled $7,410. A breathing ventilator generated 32 separate bills, totaling $65,600. There were separate charges for the IV tube and for asking for a urine bottle.

A box of tissues is a “mucus recovery system.” A teddy bear is a “cough suppression device” and can cost between $128 and $200.

Remember those little white cups fast food restaurants give you for free to put ketchup in? In fact there are restaurants giving them away for free in the lobby areas of many hospitals. In the hospital room, however, these are billed as “oral administration fees” and for one patient they totaled $5,000.

How could things be different? They already are different. Show me a market where there is no BlueCross, no Medicare and no employer paying the bills and you very likely have found a health care market that works very well.

All over the country, retail establishments are offering primary care services to cash-paying patients. Because these services arose outside of the third-party payment system, their prices are free market prices. Walk-in clinics, doc-in-the-box clinics, and freestanding emergency care clinics post prices and usually deliver high quality care.

Cosmetic surgery is rarely covered by insurance. Because providers know their patients must pay out of pocket and are price-sensitive, patients can typically (1) find a package price in advance covering all services and facilities, (2) compare prices prior to surgery, and (3) pay a price that has been falling over time in real terms – despite a huge increase in volume and considerable technical innovation (which is blamed for increasing costs for every other type of surgery).

In the market for LASIK surgery, patients face package prices covering all aspects of the procedure. As with cosmetic surgery, whenever there is price transparency and price competition, the cost tends to be controlled. From 1999 (when eye doctors began performing LASIK in volume) through 2011, the real price of conventional LASIK fell about one-fourth.

Medical services for cash-paying patients have popped up in numerous market niches where third-party payment has left needs unmet. It is surprising how often providers of these services offer the very quality enhancements that critics complain are missing in traditional medical care. Electronic medical records and electronic prescribing, for example, are standard fare for walk-in clinics, concierge doctors, telephone, and email consultation services, and medical tourist facilities in other countries. 24/7 primary care is also a feature of concierge medicine and the various telephone and email consultation services.

In the international tourism market, patients generally get package prices for most types of elective surgery and hospitals often post their quality metrics online.

Is it possible to replicate this experience in the domestic hospital marketplace? It’s already happening. By one estimate 430,000 nonresidents a year enter the United States for medical care. Canadian patients seeking medical care at U.S. hospitals, for example, are able to get package prices that are about half of what BlueCross patients typically pay.

An essential ingredient in this market is the willingness to travel. If you ask a hospital in your neighborhood to give you a package price on a standard surgical procedure, you will probably be turned down. After the systematic suppression of normal market forces for the better part of a century, hospitals are rarely interested in competing on price for patients they are likely to get as customers anyway.

A traveling patient is a different matter. This is a customer the hospital is not going to get if it doesn’t compete. That’s why a growing number of U.S. hospitals are willing to give transparent, package prices to out-of-towners; and these prices are often close to the marginal cost of the care they deliver. North American Surgery has negotiated deep discounts with about two dozen surgery centers, hospitals and clinics across the United States, mainly for Canadians who are unable to get timely care in their own country. The company’s cash price for a knee replacement in the United States is $16,000 to $19,000, depending on the facility a patient chooses, making it competitive with facilities in other countries.

But the service is not restricted to foreigners. The same economic principles that apply to the foreign patient who is willing to travel to the United States for surgery also apply to any patient who is willing to travel. That includes U.S. citizens. In other words, you don’t have to be a Canadian to take advantage of North American Surgery’s ability to obtain low-cost package prices. Everyone can do it.

The implications of all this are staggering. The United States is supposed to have the most expensive medical care found anywhere. Yet many U.S. hospitals are able to offer traveling patients package prices that are competitive with the prices charged by top-rated medical tourist facilities in such places as India, Thailand and Singapore.

Bottom line: Markets in medical care can work and work well – especially when third-party payers are not involved.

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