Reinhardt Wins Smoot-Hawley Prize
I have decided to award Uwe Reinhardt the Smoot-Hawley Prize for the Worst Economic Idea of the Year. The award is named after the cosponsors of the 1930 Smoot-Hawley Tariff Act, which many economists believe pushed the economy into the worst depression in our nation’s history.
Uwe’s idea: let the government set medical prices, essentially forcing “all payers” to pay the same price for the same service.
Aah, I can already anticipate the objections: C’mon Goodman, this idea isn’t new or original. How can it merit a prize? It’s even been done before — in health care and in other industries.
True enough. Government started setting (all payer) prices a hundred years ago — first with the railroads, then with trucking and the airlines and every other form of transportation, then with electric power … and if Franklin Roosevelt had gotten his way, we would have all-payer rate setting in every market! (See my post on “progressivism.”)
But, the prize is not given for originality. It is awarded for exceptional refusal to learn the lessons of past experience. Smoot-Hawley, after all, didn’t invent the tariff. What made the measure remarkable was that it was enacted after almost 100 years of unprecedented economic growth under an international regime of free trade.
httpv://www.youtube.com/watch?v=7mSm19ETQvg
Lessons Learned
I realize that this blog attracts a lot of young people (especially single women), but some of you may be old enough to remember all-payer price fixing for air travel. Once the government starts setting prices, it becomes de facto responsible for making sure all the producers cover their costs. (Firms going out of business are prima facie evidence the rate setters are doing a bad job!) So airline fares were set not at average cost, but at the average cost of the least efficient carriers.
Then, since the airlines couldn’t compete for customers based on price, they engaged in inefficient non-price competition. To make air travel more convenient, they scheduled more flights and flew half empty planes. To make air travel more enjoyable, the airlines provided all kinds of amenities — including giving away free bottles of champagne. By the way, airline travel in those days really was more convenient and enjoyable, but it was also much more expensive than it needed to be. And travelers had no choice: they couldn’t choose less convenience and fewer amenities in return for (think Southwest Airlines) a lower fare.
If you still have your copy of Goodman and Dolan’s Economics of Public Policy (what real economist doesn’t?), go re-read the chapter on airline deregulation for all the gory details. Note: The average, inflation-adjusted airfare has declined almost 40 percent since deregulation, according to the Government Accountability Office. Through several editions of our book, we also went through the same story with trucking, electric power and other industries.
So why can’t people learn from history?
Because they make two mistakes. First, they assume that health care prices are set in a largely free market. Second, they observe enormous price dispersion — with different patients (and their insurers) paying wildly different prices for the same service — and assume that only government can equalize them.
The most important thing to know about health care is that the normal market forces have been systematically suppressed — in this country and all over the developed world. As a result, people almost never confront a real price for anything in the medical marketplace. Patients never see a real price for their care. Doctors never receive a real price for the services they deliver. Employees never see a real price for their health insurance. Since there are no real prices, price competition is impossible.
[By the way, the best history I’ve read on how the market was suppressed in the United States is (surprise) my own. But Paul Starr, coming from a left wing perspective says much the same thing — although with much less economic insight.]
In such a world, there are basically two fundamental options: (a) suppress the market even more by completely outlawing it, or (b) encourage its emergence.
One fortunate aspect of all this: if you like markets, time is on your side. Price competition engendered by medical tourists who pay with cash has the potential to cut the average price of care in half. Insurers who offer products that take advantage of the domestic medical tourism (they are on the drawing board right now), can cut their premiums in half.
Let’s take a few numbers I reported in a recent post:
- Hospitals in the Dallas area tell Medicare that their cost for a knee replacement is about $15,000, on the average, although Medicare itself pays as much as twice that amount at some facilities.
- Private insurers, on the average, pay about twice that amount.
- Uninsured patients who have the misfortune of paying list price pay about four times that amount.
- A knee replacement for your Labrador retriever costs about one-third that amount.
- Canadian medical tourists (as well as Americans willing to travel for their surgery) pay about $1,000 to $2,000 above that amount.
Now let’s think about what an all-payer, price fixing system would look like. To make sure even the most inefficient hospitals cover their costs, I would guess the all-payer rate would be about $30,000. That means almost a doubling of the price now being charged to medical tourists and an abrupt end to the only part of the market where providers are actually competing for patients on price! If pets are included, the price of Fido’s knee would grow six fold! And in the process, providers would be encouraged to engage in even more non-price and amenity competition than they do today. (See here, here and here.)
Can anybody seriously believe this is a solution to anything?
By the way, Reinhardt has his own disturbing stats on price dispersion (minus any discussion of how to encourage price competition) and here is some piling on by Austin Frakt and Don Taylor.
Here is a question Uwe asks: Why do insurers pay twice as much at some hospitals as they pay at others, for the same services? Apparent answer: because employers insist on keeping every hospital and every doctor in their networks. Follow up question: Why do employers insist on structuring a benefit package in a way that potentially doubles its cost, when those marginal dollars could be used to pay higher wages instead. Apparent answer: because they have been unwilling to make the effort (and it really does require effort) to control costs aggressively. But that is changing. And without any act of government, it will keep on changing — especially with the cost increases expected under Obama Care.
Bottom line: the solution to a dysfunctional system replete with perverse incentives is not to create more perverse incentives. It is to remove the perversions and liberate the market.
Poor Uwe. We’ve already done all-payer rate setting for hospitals. It was adopted by 30 states in the 1980s and was soon repealed by all but one (Maryland). See my post — http://healthblog.ncpathinktank.org/myth-busters-5-hospital-rate-setting/ — on this. It was yet another monstrous failure because, as you point out, such a system must guarantee solvency of even the least efficient facilities. Closing a facility becomes a political, not an economic, decision.
This whole notion that a variety of prices is a bad thing strikes me as bizarre. A friend was telling me on Saturday that he needed to have all of the plumbing in his house replaced. (The original builder used cheap copper.) He got a lot of estimates from contractors. They varied from $4,000 to $20,000. In what way does that indicate a non-competitive market? It would seem to indicate just the opposite.
This is a great post today. Very clever. But where is the song pairing? I feel cheated.
Greg – I may be on thin ice, but I don’t think so. Your reference to the Maryland exception is dependent on surrendering to people like Uwe the right to determine what the term “all payer” really means. To my knowledge, Maryland does not have a “single price/all payer” system, which is the narrow definition that John’s commentary is based upon, apparently what Uwe is describing. The government commission sets the price for any given hospital, but not across hospitals. The hospital then charges their customized rate master to all payers, with no discounts for third party payer affiliation allowed. It this is NOT how it works, then it certainly is the way it SHOULD, in the absence of allowing every hospital to establish whatever rate schedule they want, so long as they charge it to all comers without exception. Maryland has succeeded, at least relative to all the other states, in mitigating the cost curve in hospital costs, which must be the case or Medicare would have pulled their waiver there. I believe in “all payer,” but in this latter context – the provider establishes their rate/charge master, but it is publicly available/transparent/ AND most importantly, absolutely consistent on the “up front” exchange between the patient (who must be viewed as the purchaser, not the insurer or other entity standing behind the patient) and the provider. As I have described here before, the provider is allowed, on a one-off basis patient by patient, to forgive all or part of the net balance amount due from the patient after all third party coverage has been settled based on that “all payer” rate. The market is then allowed to function with cost/quality balanced in a supply and demand environment. (Emergent care must be handled in a more uniform, universally accepted manner, however, in order to avoid severe cost shifting in such situations. Clearly, this approach to independent by provider, but all payer, system works for services that are not truly emergency in nature.)
Ummm….don’t we already have price fixing in medical care? Since CMS in a “private-public partnership” with the AMA sets Medicare rates for 14,193 procedures, and every third party payer pays based on a factor of that (which usually does not vary by more than 20%). The socialists on the left and the right say that this proves that the free market does not work, when it actually proves that price fixing does not work.
Maybe Uwe should enroll in some classes in economics! Being a political commentator means pushing a political ideology.
Excellent use of examples.
Maybe it’s just me, but I thought the price “setting” advocated by UR was between coalitions of insurers and associations of providers at the state level, not the governemnt. Ignoring anti-trust for a moment, wouldn’t this private contract at least provide transparency of price, and, unless all parties agreed otherwise, force inefficient providers to lower costs or go out of business? Of course, insurers today compete for corporate accounts by negotiating discounts with large networks. An all payor rate would remove one element of that competition, perhaps to invite something better.
John: “So why can’t people learn from history?”
Two mistakes are highlighted, but generally we learn from mistakes especially if we are professionals, so perhaps past experience is blurred by those with an ideologically and faith based type of collectivist religion where faith trumps repetitive scientific investigation.
John,
To look at Uwe’s proposal, there are several fallacies that he doesn’t own up to. You know that the “re-do” affects our industry/profession daily. By giving all doctors the same compensation he misses the point. People having the same illness should provide same fee for their services to whatever physician sees them. This does not include the basic tenant that all docs are not of equal education, knowledge, wisdom, commitment, training, dedication, sensitivity, etc, etc. I did not have my residency training at Yale starting at $25 per month, YES, PER MONTH, to become what I am now and be told that since I am on a provider list, furnished by the insurance company, I am no better or worse than anyone else who is on that list. AND I DO NOT BELIEVE THAT FOR ONE MINUTE. I await your response. All autos who are made correctly are not equal, because there are Chevy’s and there are Jaguars. Don’t tell me that they are the same. Just try to buy a Jag and give the salesman a check for the cost of the Chevy, saying that all cars are equal. This might be a poor analogy, but I am so steamed about this I feel like I am on a rampage.
Your thoughts and responses.
Dr Bob Kramer
You are not a good reader, John. These are negotiated prices, negotiated by associations of providers and payers, as in Germany. I believe that makes them different from unilaterally set rices, like the DRG.
But to you it probably makes no difference, as you believe that the current price discriminatory price regime is efficient (and perhaps even fair).
I respect your belief, just as I respect the beliefs of Christians, Muslims, Hindus and other religions.
Will there be a handsome plaque? I hope you won’t be cheap in this regard. I am sure Neiman-Marcus can be of help here or Lucheses.
Best
Uwe
Would it be “fair” to have a nicer plaque than anyone else? Shouldnt every plaque cost the same?
I agree with Ralph. I was part of the mid-1990s CMS team to set Medicare prices for physician practice costs. Our directive was to pay the costs of each procedure, basically ‘average cost pricing.’ We followed the directive. After several years we submitted our results, which the AMA objected to on the basis that our rates would redistribute payments from those they represented to primary care physicians and non-physician providers. After subjecting our higher-ups to political pressure (through certain Congress-people), their top-down method and rates were enacted. Our bottom-up average cost rates were discarded. A “private-public partnership” indeed.
Yes, a “private public partnership” for which they earned $66 million a year before they endorsed obamacare, and $72 million a year after. I’m sure the increase was coincidental
Uwe has never been on the front lines, never been involved in medical care. Like (or even leading) the bean counters who are interested in low cost, he does not understand quality, has no comprehension of the multiple variables of each patient with the “same” condition or undergoing the “same” procedure, and has no idea of the stresses upon a physician entrusted with the responsibility of caring for someone’s life…all the time being threatened by potential lawsuits, not necessarily for “substandard” care but simply for bad results; he has led America into the era of decreasing quality of medical care, unavailability of doctors, denial of needed procedures, and the shunning of medical careers by the best and the brightest. (Only Faulkner should be able to get by with a sentence that long).
I see nothing in this article, good though it is re. variability of hospitals (how DO they determine prices, anyway?), about the abysmal reimbursement to doctors. Medicare pays doctors at a rate equivalent to, if it were “Gasicare,” 80 cents per gallon. A brain surgeon receives 80% of the fixed $1,760 price from Medicare for brain tumor surgery, to include the examination beforehand, the operation, plus all hospital and office care for 90 days after the surgery. And with an office overhead of about $150/hr.
To Ralph at MediBid: How, pray tell, does the AMA “partner” with CMS? AMA does not set prices. AMA did not set up the relative value system used by HCFA/ CMS. That contract, and schedule, was set up by Dr. Hsaio of Harvard in 1989…and modified/butchered by HCFA. Losing bidders for that contract included the AMA and American College of Surgeons. Further, the AMA does not support doctors, esp whistleblowers against poor hospital care, and its membership includes only 14% of the doctors in the US. Further, the AMA had no input whatsoever into the hated Obamacare/Abysmalcare bill.
Note that Dr. Berwick was in office 17 months and never fixed the reimbursement problem. After all, he was an administration hire, not an advocate for doctors, nor worse still, for patients..but rather someone directed at rationing money.
To clarify the “doc fix,” needed to keep more than the 30% of doctors who cannot afford to see any Medicare pts because of the low reimbursment to increase in numbers: Doctors get equivalent to 80 cents a gallon. With the drastic formula started in 1998, they were scheduled to get 60 cents next year. With the marvelous doc fix, they will get 81 cents. That’s 81 cents per usual $3.20 a gallon, not 81 cents vs a dollar.
Longer lines ahead.
If price fixing is the goal, why not let patients fix the price of their service?
Dr. Kramer,
Certainly having done a residency at Yale may be a marker or quality indicator of the graduate physician, but the quality information ends there. Chevy and Jaguar compete on both price and quality. They do not sign up with a third party payer to provide autos to individuals for a set copay and discounted reimbursement. When we physicians get down to competing on price and providing quality outcomes and other information to consumers, then and only then will the quality distinctions a given medical school or residency represent truly come into play.
HD Carroll,
If your description is correct, it is even more baffling. This commission will set the price for each procedure at each hospital? So, some (politically influential) hospitals will be allowed a higher rate and others will get a lower rate? And all payers must comply with this rate?
You don’t see any possibility for mischief here?
Prices are wonderful things. They are amazingly sophisticated ways of aggregating information. The price of a chocolate bar at my corner store carries within it information about the weather in Columbia, the sugar cane harvest in Louisiana, the cost of oil to power the tankers that deliver raw materials, the cost of labor at the chocolate factory, how much the store pays its stock clerks, etc. etc. etc. All wrapped up into a single price for a single bit of candy.
Involve the government and you no longer have a “price,” you have a penalty for consumption that is heedless of all of this information. It has never worked and can never work.
Uwe must believe that M.D.’s are widgets that are identical and therefore their services ought to carry the identical price. Thus the professor from Princeton who is the leading expert in cardiology should according to Uwe be paid for his expertise the same as the general practitioner that just graduated from a school in Granada. I think Uwe should have practiced what he preaches when his compensation was determined whether it was as a professor, lecturer or writer. I am sure he doesn’t think of himself as a widget, but I will bet he shopped at Neiman-Marcus.
[Note to Uwe: I think you meant Lutece Restaurant not Lucchese as in Lucchese Crime Family]
Seems I’m the designated UR defender today. I think he means boots.
Underwriterguy,
Do you mean Uwe wants to be a cowboy? 😉
Greg – I was merely reporting on the fact that Maryland does not set a chart of prices that then apply to every hospital, but that each hospital goes through an annual review/justification for their own based on costs, and whatever other factors are involved (I am sure there is plenty of room for mischief) – Johns Hopkins gets a higher rate for the same service, or at least some of them, than St. Mary’s (there must be one). I also said this is better, or appears to have worked better, than a “universal price” all payer system, and the distortion of cost shifting from Medicare and Medicaid that exists everywhere else. I prefer the hospitals package their prices/services any way they decide to – i.e., market – but simply require that they are not allowed to play games with inappropriate intermediaries such as the government, health plans, insurers, etc., when it comes to varying that price. The price must be consistent to all patients walking in the door of THAT provider. They can package things any way they want, be innovative, creative, etc., as long as they are consistent. I don’t want government to do anything but establish some boundaries and basic rules, and then let the players play, but the game needs to be defined without the distortions caused by giving discounts off of bill masters that are meaningless as a measuring stick for true cost.
Morris Bryant makes a great point, as does H.D. Carroll in his second post. Price fixing is price fixing when it comes from organizations that control the access to the markets. That would be the case with government (Medicare/Medicaid) as well as the insurance companies and health plans.
Isn’t it amazing that the billion/trillion dollar healthcare industry sells its services for the most part without publishing its prices for those services to the buyer of the services? Is there really any lasting solution that perpetuates this practice?
Dr. Bryant,
It’s difficult to measure quality outcomes except in certain specialties. Where you go to medical school/residencies doesn’t ensure quality…there are plenty of Docs that come from small schools/residencies that are competent and just as skillful. That said, I agree with you that where you go for school/training may be a marker of quality.
Which gets us back to the Smoot-Hawley Award and Uwe’s idea.
If the government is the only payer and sets medical prices, then there may be no incentive to be the “best” except b/c of individual desire and a life-long desire to learn/stay abreast of the new information in our respective fields. It’s not like McDonald’s french fries that are reproducible at every restaurant.
The final quality is determined by patients. They will pay you or they won’t. They want to know that you are well-trained and that you care about their well-being.
Even if there is only one payer, if they don’t trust your judgement/best side manner/etc….they won’t be coming back for seconds….
Greg…Cut the carbs….
To give credit where credit is due: Let’s not forget Dr. Goodman’s recent post regarding competition on price and quality. When competition on price is apparent, competition on quality is very close by.
Dr. Goodman, I hope that is a fair summation of your conclusion.
Dr. Bryant: yes. Thanks for remembering.
John, your Blog today and the varied responses are indicative of the disparity in beliefs and opinions about how US healthcare should be delivered and priced today.Furthermore, the political reality in the US now appears such that compromise and bipartisanship is dead on arrival. With all of the hard evidence from the One-Payor systems in Europe and Canada that government control of pricing and services DOES NOT work, it is very hard to understand how anyone (no matter how liberal minded they are) can honestly think that government price fixing and control over service delivery or even large association price fixing is good and cost-effective. However, as astounding as it is, people continue to ignore the hard evidence and believe that government control is the answer! Even intelligent economists!!!
Uwe, on this note, how can you possibly resolve the long waits for basic diagnostic services in the UK, Italy, Canada, etc. with quality healthcare? (I really would love to hear your answer to this question) These long waits do not occur in the US. People without third party insurance simply go the hospital ER’s under EMTALA endorsement and receive the healthcare they need or they receive financial assistance from family members and charities. I am a former hospital administrator and have run hospitals in rural settings and in the cities. I know that this is a fact from personal experience! But I digress…back to the subject at hand…
Therefore, given the political realities in this country and since we are presently saddled with the fixed prices set by CMS for Medicare and Medicaid beneficiaries and since many of your readers and many in this country seem to think that this fixed pricing system is transparent,understandable and fair, I believe that transfering this existing system to the private sector to manage is a workable solution. Again, with the risk of sounding like a broken record (I’m revealing my age), the Medicare Advantage system does exactly this…it transfers all of the financial risk and reward to physicians (when the Health Plan partners with a physician directed IDS.) This partnership then allows the Health Plan profits and losses to be shared with these IDS doctors who deliver Best practice healthcare to the patients enrolled in the Medicare Advantage program.
Pricing is therefore NOT fixed in this system – in fact, the CMS established Medicare Fee Schedule is simply the starting point for the real compensation paid to doctors working in this free market based system. Proof: PCP’s and key specialists working in this Health Plan-IDS partnership often receive 200%-300% of this fixed Medicare Fee Schedule in return for practicing Best Practice medicine and for improving patient clinical outcomes. The evidence which is accumulating about the effectiveness of these Partnerships is irrefutable and is the basis for the government sponsored ACO’s that are contained within the PPACA. Regrettably, these ACO’s will ultimately fail because the government has only committed to half of the Medicare Advantage model, has too much control over pricing, profits,and service delivery and is allowing hospitals to participate in this service delivery model. When hospitals are allowed to control or influence physicians, costs escalate faster than Forest Gump in running shoes! Its the old “Fox in the Henhouse” model, all over again! Believe me, I know this from 25 years of experience at every level of hospital administration, to be a fact.
Dr. B and JG…fair and true..
LW…well stated from someone who has been in the thick of things for a long time. I agree.
Larry Wedekind’s response illustrates nicely how reading a paper through an ideological prism distorts the reader’s perception.
He writes: “Uwe, on this note, how can you possibly resolve the long waits for basic diagnostic services in the UK, Italy, Canada, etc. with quality healthcare? ”
It is remarkable that her picks out three systems that are precisely not the all-payer systems I talk about.
Take off the ideological prism, Larry, and read my paper again. You will discover that I am referring not to Canada, the UK and Italy, but to Swizterland and Germany.
Next, go to those countries and find me the kind of rationing you are talking about.
Canada is a single-payer system which, in my paper, I argue is not even on the drawing board in the US. The UK and Italy are national health services — not at all what I am talking about.
Maryland in the US is an all-payer system for hospitals. Are people there queueing up for MRIs?
You are in good company, though. John Goodman misread my paper, too. In his case I forgive it, because he is a preacherman.
So, try again, Larry. See if you can get my point this time.
I have heard the term “all-payer” before, frequently associated with confusing and conflicting definitions so I am not sure how Uwe defines the term.
Maryland has an “all payer” system, but does Medicare have a special rate it pays John’s Hopkins? If so wouldn’t that be considered price discrimination in the reverse?
If “all payer” existed throughout the nation would we see the development of systems that excluded low paying insurers such as Medicaid and perhaps Medicare? Of course I am not sure if “all payer” simply means one price that could voluntary be reduced or not. If the price can be altered I don’t know how to distinguish it from price discrimination. If it is a strict fee system then I wonder how it will work with a hospital system that has more than one hospital in an area.
Uwe,
You bring up religion:
“I respect your belief, just as I respect the beliefs of Christians, Muslims, Hindus and other religions.”
Is that your view of economics? It is not mine.
We economists have both theory and evidence concerning the workings of markets, including the health care market. The theory says that markets without market failures provide socially optimal outcomes (see the First and Second Welfare Theorems). The theory yields testable implications that are consistent with the data, which is why I accept the theory. You seem to believe either that the theory is wrong or that there is a market failure. If the former, I can understand your reference to religion. If so, you and I part company at square one. I take economics seriously. In my view, it is not religion. If the latter, please identify the relevant market failure and provide some evidence of its existence and magnitude.
From my admittedly limited reading of the literature on health economics (I am a macroeconomist), my understanding is that, except for government-induced distortions, the only market failure people regularly mention is adverse selection. However, my admittedly limited familiarity of the health care literature leads me to understand that adverse selection in fact may be an irrelevant abstraction because the very people who would cause the problem are risk takers and take the additional risk of not bothering with insurance at all. They thus remove themselves from the system and prevent the adverse selection problem from being large.
If the issue is providing health care for the poor, why not drop all the government distortions of prices and quantities and substitute health care stamps, like food stamps? Wouldn’t that be far more efficient (by which I mean complete economic efficiency, which includes not just low cost but proper allocation of goods in the usual sense that economists use the term)? If not, would you advocate repealing the food stamp program and replacing it with government controls over what crops can be grown, what methods can be used to grow them, where they can be sold, what prices can be charged, and how they will be distributed among those demanding them? If you don’t advocate that for the food market, please explain what is different about the health care market.
Markets work for nearly everything, including food, shelter, and clothing, which are more important that health care. What is it about health care that makes it different in your view?