Is Price Competition the Key to Higher Quality?
In our third-party-payer health insurance system the price for care is typically set by entities external to the doctor-patient relationship. As a result, providers rarely compete for patients based on money prices.
Potentially they can compete on the time price of care, on amenities and on quality. In posts I prepared with Gerald Musgrave and Devon Herrick at the Health Affairs Blog and at my blog, I noted that there is a tendency toward uniform (market clearing) waiting times and amenities, or at least a uniform trade-off. Yet providers rarely compete on quality; and substantial quality differences not only exist, they persist over time.
If lack of price competition is normally associated with lack of quality competition, could the reverse be true? Do providers who compete for patients on price also compete on quality? There is a lot of evidence that they do.
Quality competition in health markets without third-party payers. In those health care markets where third-party payment is non-existent or relatively unimportant, providers almost always compete for patients based on price.
Where there is price competition, transparency is almost never a problem. Not only are prices posted (e.g. walk-in clinics, surgi-centers, etc.), they are often package prices, covering all aspects of care (e.g. cosmetic surgery, Lasik surgery, etc.), and therefore easy for patients to understand.
Wherever there is price competition, there also tends to be quality competition. In the market for Lasik surgery, for example, patients can choose traditional Lasik or more advanced custom Wavefront Lasik. Prices range from less than $1,000 to more than $3,000 per eye. In the international medical tourism market, some hospitals in India, Thailand and Singapore, disclose their infection, mortality and readmission rates and compare them to such U.S. entities as the Cleveland Clinic and the Mayo Clinic.
Even when providers do not explicitly advertise their quality standards, price competition tends to force product standardization and this reduced variance is often synonymous with quality improvement. Rx.com, for example, initiated the mail order pharmacy business, competing on price with local pharmacies by creating a national market for drugs. Industry sources maintain that mail-order pharmacies have many fewer dispensing errors than conventional pharmacies. Walk-in clinics, staffed by nurses following computerized protocols score better on quality metrics than traditional office-based, doctor care and have a much lower variance.
In general, 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 they 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 e-mail consultation services, and in medical tourist facilities in other countries. Twenty-four/seven primary care is also a feature of concierge medicine and the various telephone and e-mail consultation services.
Waiting times and amenities. Competition in the provision of amenities is also common in the niche markets. Cancer Treatment Centers of America takes third-party payment, but its patients usually have to travel some distance to get to the CTCA facilities — at both inconvenience and expense. To attract them, CTCA goes to great lengths to ensure the comfort of its patients and facilitates the needs of accompanying family members — offering services similar to what medical tourist facilities offer in other countries (CTCA also posts its cancer survival rates).
In general, providers who compete on price are competing to lower the money price of care. Where this occurs, they tend to compete to lower the time price as well (hence the term “Minute Clinic”). Teladoc promotes its services by publishing the response times (a doctor’s return call) for its clients. Most concierge doctors promise same-day or next day appointments. Some diagnostic testing services make the test results available to patients online within 24 to 48 hours.
In general, these markets do not appear to be fundamentally different from non-health care markets. Competition tends to produce more uniformity of fees and waiting times than would otherwise be the case. Similarly, quality competition also tends to produce either uniform quality or a uniform trade-off between money prices and quality.
Reverse medical tourism. In the international tourism market, quality is almost always a factor when people travel for their care. And when people travel for their care, cost often is also a factor — either because the patient is paying the entire bill out of pocket or because the patient and a third-party insurer have an arrangement that allows both to profit from the travel. More generally, we have seen that price and quality competition tend to complement each other.
Is it possible to replicate this experience in the domestic hospital marketplace? Even without a major policy change, developments are under way. By one estimate 430,000 non-residents a year enter the United States for medical care. Some Canadian firms are even able to obtain package prices for Canadians seeking medical care at U.S. hospitals.
Moreover, you do not have to be a foreigner to benefit from domestic medical tourism. Colorado-based HealthBridge International offers U.S. employer plans a specialty network with flat fees for surgeries paid in advance that are 15 percent to 50 percent less than a typical network. North American Surgery, Inc. has negotiated deep discounts with 22 surgery centers, hospitals and clinics across the United States as an alternative to foreign travel for low-cost surgeries. The “cash” price for a hip replacement in the network is $16,000 to $19,000, making it competitive with facilities in India and Singapore.
One reason why so little is known about the domestic medical tourism market is that hospitals prefer that most of their patients not know about it. The reason: they are often offering the traveling patient package prices and lower prices not available to local patients. That occurs because the hospital is only competing on price for the patients who travel.
If traveling patients begin to make up a large percent of a hospital’s caseload, however, medical tourism has the potential to change the hospital’s entire business plan.
Detroit Medical Center. In a previous post I noted that the Detroit Medical Center is unusual in the way it competes for patients based on quality. Its website informs you that the DMC “is dedicated to staying ahead of the crowd when it comes to the quality of our care.” A link to the Leapfrog website allows patients to compare quality metrics at Detroit-area hospitals and the language at the DMC site clearly implies you’re risking your life if you patronize a competitor. “If you want a hospital with walking trails or a day spa, go someplace else,” the site advises. “Just don’t expect the latest in patient safety technology. Because 100-percent medication scanning is only at DMC.”
An explanation for Detroit Medical Center’s emphasis on quality competition may be its interest in competing for traveling patients — both internationally and within the United States. The DMC draws about 300 international patients a year. For robotic prostate cancer surgery, it has attracted 600 patients from 50 states and 22 countries. Although DMC’s website does not post prices, if you are an international patient, you are promised “cost estimates” and “package pricing.”
They also advertise the availability of rooms and suites for family members on campus, their willingness to book rooms for family at area hotels and free parking and other amenities.
Furthermore, it may be no accident that such facilities as the Cleveland Clinic and the Mayo Clinic also attract large numbers of patients who travel. High quality care and medical tourism seem to go hand in hand.
Excellent post. As usual.
If you don’t compete on price, you don’t compete on quality. And the reverse is also true. If you do compete on price, you compete on quality as well.
Shoud we treat this as another Goodman’s Law?
This is EXACTLY the mission of MediBid.com. The status quo where prices are fixed by CMS and managed by the AMA is like a union, where poor performing docs get paid the same or more than good docs. With MediBid, docs not only compete on price, they also compete on location, experience, training and quality
In normal markets, firms that must directly compete for customers do so by competing on price and quality. For instance, a Mercedes isn’t as cheap as a Hyundai. But Mercedes still has to emphasize the quality and prestige for the price because other carmakers are competing in the same luxury car market. Hyundai, on the other hand, emphasizes its quality for the money by suggesting buyers get a better deal (on quality and amenities) for the money they spend. These are both examples of two very different carmakers competing on price and quality.
However, when third-parties pay most of the tab for a given service, firms face less scrutiny and change their behavior accordingly. In health care, this means providers emphasize costly amenities (e.g. beautiful buildings, comfortable rooms and an abundance of technology) and attempt to enhance perceptions of quality rather than compete on price. This is why prices rise over time and why technology increase — rather than decreases — the cost of medical care. It is also why hospitals tend to compete on perceived quality (billboards on the freeway touting technology and skill) than real quality.
Devon,
Isn’t that exactly what I have been saying for years, and writing about? If you get a colonoscopy through your fixed price, it costs $438.17 whether a nurse practitioner, a physician’s assistant, or an MD from Harvard med school does it. Through MediBid, a nurse will charge less than the MD, and that is the market in action
Third party payment is THE main problem in health care today. This results in demand inflation driving costs. We need a health care system where the patient is primarily responsible for payment controlling where dollars go and therefore will be inherently driven to seek a good price and quality. Obamacare does not address this and will reinforce the failed status quo. Medibid is the marketplace for medicine where patients can seek care based on price, value, location weighting these factors to whatever degree is appropriate for their situation. This is how real markets work. PPACA is centralized control from above and disempowers individual choice.
It seems clear to everyone that the health care system would be greatly improved with more hospital competition as described in this post. I am curious about something that some of the physicians may be able to address regarding actual patient access to different facilities.
Assume that I have a good relationship with a doctor (primary care or specialist), and that doctor has recommended surgery for my ailment. Historically physicians have admitting privileges in certain hospitals and not others. If I want to maintain my relationship with my doctor, but I do not want to use the facility in which he has privileges, we have a problem with opting for the most attractive hospital arrangement.
Perhaps this is no longer a big deal and someone can verify that, but if it is a problem it seems that we should discuss how to overcome it. Clearly these types of (facility) decisions have to be made in concert with one’s physician unless there is no relationship at all between the two.
Your indirect argument is well crafted and persuasive, as always, but allow me to preach to the choir for a moment.
If you have to fire your employer to fire your insurance company and your insurance company is “between” you and your doctor because of managed care resulting from first dollar coverage that invited excessive consumption, there is no mystery why quality is low and falling over time. This is the real health care issue (the more highly touted ones are largely phony ones). And if you thought having to fire your employer to fire insurance company eroded quality, just try having to fire your government to fire your insurance company. That experiment has already been run, of course, so this is no idle prediction.
I am a voucher guy, as you know, but I have also argued, like you, that we can make substantial progress with far less ambitious reforms. I continue to believe that if we simply got rid of preferential tax treatment for employer provided insurance and removed barriers to interstate competition (the latter is more tricky than the former, but not impossible) things would improve so much and so fast that the health care reform issue will just die (you know, like the nationalized life insurance issue). In states like Missouri it is already easy to get very good insurance at surprisingly reasonable rates because we don’t regulate health insurance to death with mandates. Once people in New York, California, and Massachusetts can buy policies such as I can today, this will quickly become much ado about nothing.
David
Price and quality competition work well … in a free market.
I agree with Medichick. What we need is more competition and the ability to shop services, like everything else we buy.
Inbound medical tourism to the US is also a fast growing segment of medical value travel with an estimated 561,000 patients traveling to United States by 2017, according to Deloitte. Patients are traveling because of their belief in the high quality of healthcare, cutting edge medical procedures, advanced medical treatment and expert surgeons in the US
How does one shop for price or quality when having a heart attack? or a broken leg? or a ruptured appendix? You are at the mercy of location when these events occur.
Health care is not a pure market where there is a meeting of the minds on every transaction. Therefore market remedies will NOT work.
The reality is that the medical profession is going to be deflated. At which rate (or organizational model) is what the discussion is about. We can either be creative or destructive as those are the only two alternatives. The question one has to ask themselves is where do you want to plant you flag. Do you want to create or destroy? But the medical profession will be deflated.
VERY PROPHETIC INDEED, ERIK.
@Erik
With due respect Erik, you are wrong. It is not pre-ordained that the medical profession is going to be deflated, although that is exactly what has been going on for the past few decades. The decline of the medical profession is in direct proportion to the increase in third party management. Get rid of that and the circumstances will reverse.
With regard to your first comment, no one expects that there will be “negotiations” in emergency situations, although much of the negative impact of emergencies can be eased by what has gone on before in personal preparation. But moreover, free market health care is not about emergencies or even (in most aspects) about any type of catastrophic health occurance. The thing is the vast majority of health care encounters are none of the above. Rather it is about lab work, radiology, examinations, health maintenance, out patient services, planned surgeries, and so on.
There are a lot of economic transactions that cannot be made in a “free market” environment, but that doesn’t invalidate the superiority of free market transactions as the default process.
It strikes me that a single-payer financing mechanism would be conductive to quality competition. In other words, if you remove the financial barriers to choosing physicians on the basis of whatever criteria you consider high quality care – be it perceived or measured quality metrics, hospital affiliation, training & experience, etc – you will make it easier for patient/consumers to “shop” for the best bargains. The current third-party system erects barriers to the freedom to choose. A single-payer system such as Canada’s does not impose government control over which doctors you can see. True, you have rationing on the basis of medical need (which I would argue could be mitigated by financing a Canadian-style system with the $2.5 trillion a year we spend in the USA), but at least it is not rationing based on ability to pay.
@Erik,
We make purchases under duress every day. We buy a meal after skipping 2, we buy a windshield after being hit by a rock, we shp for a job after being fired, and sometimes we buy medical care under duress as well. And sometimes we dont.
@David,
The cost of health “insurance” is based on the cost of medical care times utilization. In order to save money, you need to shop for medical care across state lines.
@jmitch,
Single payer does not work, as it is still based on price fixing. Try to get a doc to see you in Canada, and you’re lucky to get a walk in clienc. I am in Canada at this moment. More money does not work. If I pay $13,000 for a Kia, it’s a Kia. If I pay $50,000 for that same Kia, it’s still a Kia, it does not “become” a BMW
@ jmitch
No, no. no. There is no quality competition in Canada precisely because no provider is competing on price. Without competition for patients based on price, there will be no quality competition either.
But John,
In Canada, people get diagnosed by the 80% of GP docs, and then wait in line to be treated by the 20% of specialty docs!
The competition and rewards of capitalism to specialize compared to the geographical area covered is different in Canada. We have the opposite of 20% GP’s that people still wait to see, or go to Doc in Boxes, drugstore or other clinics for emergency treatments at lower costs than hospitals. We then have to wait even longer for specialists who are also too few in number and not distributed in relation to need. Improper quantities and distribution alwasy tend to skew price and quality statistics.
Bottom line is I don’t think Canada has a shortage in GP’s but do of specialty docs. We have a shortage in both and can’t “pick up the pace” and train large numbers more, which is also true for nurses which “experts” say will “fill in the GP shortage”. In addition, if we could train more GP’s and nurses, [which we can’t due to a lack of experienced teachers’] they almost always become more expensive specialists, NP’s or PA’s.
But not to worry, government will figure out how we get better, less costly care provided faster from the same doctors you use today; right after they figure out how to handle the Medicare, Medicaid and deficit crisis; not being able to “see” that Medicare and Medicaid are the deficit crisis!
“But not to worry, government will figure out how we get better, less costly care provided faster from the same doctors you use today; right after they figure out how to handle the Medicare, Medicaid and deficit crisis; not being able to “see” that Medicare and Medicaid are the deficit crisis!”
The government being able to see what is in front of them is a funny joke. As seen by the politics of President Obama and the Democrats, politics seems to always to prevail over reasonableness. You would think that S&P threating to cut our rating would change the tone in Washington.
We seriously need a leader… I think David Cameron is really leading the world right now. I am have Prime Minister Envy!
Another inspiring post!
Thanks Dr. Goodman
I am currently visiting Canada, and they are having an election on Tuesday. They were talking about organ transplants, and are entertaining a thought that since “the government” provides all healthcare, people’s organs are “property of the crown”. Because of that, they feel that they can require people to donate organs at death.
It has been an interesting visit.
Someone mentioned that in the comments that competition could occur within a single payer system such as Canada’s. I worked in that system as a physician for 13 years. There really isn’t competition. With “free” health care, demand is unlimited. Every doctor that I knew had as many patients to see as they possibly could and often with very long waiting lists. My waiting list for a CT scan was seven months. For an MRI, it was 13 months. People take whatever health care they can get. There is no competition for the best. Furthermore with price fixing, this is another reason for shortages. Docs avoid doing low paying high risk work. I was reimbursed 14 dollars for lumbar facet injections. This is a procedure requiring accurate needle placement in a person’s spine for pain management. For 14 dollars, I would assume millions of dollars of liability. I had to stop doing them. Price controls simply DO NOT WORK. They have been tried since ancient Babylon and yet what is one of the cornerstones of PPACA (aka “Obamacare”)? You guessed it, price controls!! Good luck with that.
Art, 16% of Canadians cannot access primary care short of going to the emergency department. Where I worked (Thunder Bay, Ontario), the percentage was conservatively estimated at 40% of the population. Canada is not a health care utopia.
John,
I’ve never heard of Health Bridge, but they appear to be an overseas company which claims an affiliation with the WHO, so I’m not sure how much credibility to assign to them. I am however well aware of North American Surgery. In regards to your paragraph below, see my response:
“Moreover, you do not have to be a foreigner to benefit from domestic medical tourism. Colorado-based HealthBridge International offers U.S. employer plans a specialty network with flat fees for surgeries paid in advance that are 15 percent to 50 percent less than a typical network. North American Surgery, Inc. has negotiated deep discounts with 22 surgery centers, hospitals and clinics across the United States as an alternative to foreign travel for low-cost surgeries. The “cash” price for a hip replacement in the network is $16,000 to $19,000, making it competitive with facilities in India and Singapore.”
The last time I checked, North American Surgery was working on a fee splitting basis which is against medical licensing laws under the “no-kickback” rules in most states. Perhaps since they are based in Canada, they feel they can get away with it.
The prices of $16,000 to $19,000 are not great. We at MediBid are getting hip replacements done domestically for $12,000 all in, and for $7,000 in India. The practice of collecting $16,000 from a patient, and paying the doctor $12,000 is clearly fee splitting. Or if you pay the facility and they pay a kick back to the facilitator that is also fee splitting. One of our attorneys for MediBid is Norm Jeddeloh, and you can see his article on fee splitting here: http://www.scribd.com/doc/12952367/SUPREME-COURT-BROADENS-FEE-SPLITTING-PROHIBITION At MediBid you, or your TPA, pays the facility directly, and there is no kickback to MediBid.
We have one client with 16,000 self-insured American families, and we get them cash rates for medical care domestically. In the first 3 months, this client saved over $40,000 and that was with only about a dozen of their members getting medical care. We have other employers with 1,000 to 50,000 people which have an element of self-funding. Domestic medical tourism is our model, but we also have overseas doctors, in order to create global competition. Sometimes overseas providers have treatment protocols not available in the US.
You must be very careful when looking at domestic medical tourism that there is no kick back to the facilitator. Either by him collecting your fee, or by the facility paying him a kickback.
Dr. Goodman: if, as you say, quality competition is linked to price competition, then clearly some people – the uninsured & underinsured – will be priced out of the market and will be forced to accept low quality care, or no care at all. The only way they could access high quality care (at presumably higher prices) is if their costs for getting it were subsidized.
Dr. Kurisko: Of course Canada is not health care utopia. But it must not be all bad if you worked there for 13 years. My point is that if Canada spent anywhere near what the US does, on a per capita basis, there would not be 13 month waits for MRIs. Demand is indeed limited in Canada – by the opportunity costs (the time factor) of waiting for care. And if things are so bad in Canada, why is it that Canadians live longer than Americans, despite comparable smoking & alcoholism rates? And why is it that survival from diseases amenable to medical care (as opposed to genetic, behavior & environmental factors) is higher in Canada than in the USA? And why is it that studies have shown that the quality of care in Canada is comparable to that of the USA *for most conditions* and for some conditions (eg, kidney failure) it is actually better?
Mr. Weber: interesting comment about organ transplants; I was not aware. But you say “Try to get a doc to see you in Canada, and you’re lucky to get a walk in clinic.” Same thing here: try to get an elective colonoscopy anytime soon if you have Medicaid.
James:
Do you not see a difference between subsidizing the buyer and allowing sellers to compete on price and quality (as we do with food stamps) and paying the seller to provide service for free, rationing by waiting and removing all incentives for price and quality competition?
Anyone who questions the validity of the importance of letting the free market work in reforming the health care system please take note of John Goodman’s last post (question). If you don’t understand what he is saying you really don’t understand the point of opposing not only Obamacare, but the problems with the existing system.
James: The reason I worked in Canada for 13 years is because it is where I was born and raised. I didn’t know at the time that I should have left as soon as possible rather than living through the angst of trying to deliver care under impossible circumstances ( see my book, “Health Reform – The End of the American Revolution?”)
I lacked understanding about how the world works at that time and believed in the benevolence of the Canadian system and also believed that the American system was an evil capitalist system that let people die in the streets. Both are false.
I saw far more people turned down for health care in Canada than I have here in the US. Both systems are highly flawed because they are based on third party payment.
Those that believe in government health care tend to ascribe to the view in the perfectability of society which is an illusion. Society cannot be perfected but it can be made better. Capitalism is a very good system. The value for value trading that occurs in true capitalism (not crony capitalism) is the basis for wealth development.
No bureaucrat ever produced any health care. In a true capitalist health care system, their would be imperfections. Some people would get better care than others just as some people have better cell phones than others and some have fancier transportation and food. But because of capitalism, generally people get what they need. You may not have a Lexus but have a Toyota Corolla or perhaps access to a bus. Because of capitalism, it has been claimed that 75% of the world now has cell phones (sounds high to me) but the point is, under capitalism, the very wealthy initially pay through the nose and then products drop in price and accessibility. A mobile phone used to only be for the fantastically wealthy. Likewise in a free market health care system, not everyone will be able to have every little ache and pain investigated with expensive imaging. But, I would wager that in a true free market system, the patient with a headache and ominous physical findings (such as papilledema, a potential brain tumor finding) would be subject to the charitability of doctors and hospitals. Most doctors and hospital workers became such because they do care about the welfare of their patients. There already is more money spent on charitable care in the US than the entire Canadian health care system. Would it be perfect? Absolutely not but it would be better than the muddled mess we have now with hyperinflation for health care that we have now because of the government created third-party payment system. Obamacare will make it worse because it is a reinforcement of the status quo.
Also I suggest taking a look at my book or John Goodmans’ book, “Lives at Risk”for an explanation about why “outcomes” such as life expectancy is a complete canard. Short version; Canadians live longer because they are a different biological people less genetically diversified with fewer racial groups with intrinsically lower life expectancies ( even when correcting for socioeconomic differences). When looking at individual diseases states, eg. breast cancer, prostate cancer, ischemic heart disease, Americans do better than anywhere else in the world. According to Sally Pipes, factor out deaths in America from violent crime and traffic accidents, and Americans are the longest lived people in the world. You never hear that in the liberal media.
James.,
Please tell me where you get your information, much of it is incorrect, and some of it is irrelevant to the points you attempt to make.
Survival rates from cancer and heart disease are better in the US than they are in Canada.
Spending in the US per enrollee on Medicaid and Medicare are higher than in Canada, however spending per enrollee who are privately insured are far less, thus it is government healthcare spending in the US which skews the total per capita upward.
The uninsured and underinsured can get gouged on price, however many physicians realize that cash at the point of service which is not subject to down coding, saves them so much overhead that they are able to provide market prices, meaning they can get medical care at often lower rates.
If deaths due to motor vehicle fatalities, and violent crime related deaths are removed, then US life expectancy is higher than Canadian life expectancy. The fact that 96% of Canadians are covered by socialized medicine, does not mean they have timely access to quality care.
Lee,
Do you seriously believe that purchasing health care is akin to buying a cell phone or a new car? Or that the average patient/consumer can easily distinguish between effective and non-effective health care?
No doubt the uninsured patient with a brain tumor would eventually get charitable health care, but only after he had irreversible brain damage that might have been prevented had he received timely evaluation from a primary care physician that he could see without facing financial hardship.
You say, “I saw far more people turned down for health care in Canada than I have here in the US.” Were they REFUSED care, or did they simply give up seeking it because of the long waits?
RE: “Canadians live longer because they are a different biological people less genetically diversified with fewer racial groups with intrinsically lower life expectancies ( even when correcting for socioeconomic differences).” and “… factor out deaths in America from violent crime and traffic accidents, and Americans are the longest lived people in the world.” – – this is interesting; please supply peer-reviewed references.
RE: “There already is more money spent on charitable care in the US than the entire Canadian health care system” Really? And what do we have to show for it? According to the latest report, there are about 45,000 Americans who die annually as an indirect result of not having health insurance.
Finally, I have read “Lives at Risk”, in which Dr. Goodman seems to imply that citizens who live in countries with single-payer systems face mortality risks that are not present in the USA. Given the reports from the IOM, RAND and AHRQ on safety and quality, it seems to me that the people whose lives are at risk are Americans.
@Lee
” Were they REFUSED care, or did they simply give up seeking it because of the long waits?”
Good grief. Is there a difference?
“According to the latest report, there are about 45,000 Americans who die annually as an indirect result of not having health insurance.”
That is simply not the truth, and anyone who thinks through it would come to the obvious conclusion. No one in the U.S. is currently denied health care.
John, Admittedly there have been few price/quality signals to consumers to date. However, as I’ve posted many times before: I believe third party payers will soon return to a table of allowances with electronic tools and patient advocacy services that will “grease the skids” to a marketplace based on price and quality. See what is being done with Castlight and Compass SmartShopper for example.