Supply-Side Health Policy

See my article in The Wall Street Journal today. It makes a point I haven’t seen made anywhere else: In order to control costs and raise quality we must make changes on the supply side of the medical marketplace.

Managed care, pay-for-performance, and even Health Savings Accounts are all demand-side reforms. Their effects will be limited as long as doctors are not free to re-bundle and re-price these services.

How might that work? We need only look at those parts of the medical marketplace where providers compete on price and on quality. Examples:

  • Cosmetic surgery
  • Lasik surgery
  • Walk-in clinics
  • Internet drug sales
  • Concierge doctors
  • Medical tourism

One part of our health care system (the part where third parties are absent) is teeming and bristling with entrepreneurship and innovation.

In the other part (where third parties pay the bills), entrepreneurship has been all but extinguished. We need to make the latter more like the former.

Also see the longer NCPA study on which the editorial was based.

Comments (20)

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  1. Bud Weinstein says:

    Great article in today’s WSJ. Congratulations.

  2. Michael Horowitz says:

    An utterly superb piece in today’s WSJ.

  3. John R. Graham, Director, Health Care Studies, Pacific Research Institute says:

    Congratulations Dr. Goodman! BTW you will soon see a paper come out of PRI that does address both supply and demand (Index of Health Ownership) in which the analysis of Medicaid that you and Pam Villareal did is cited as an input.

  4. George Mullen says:

    Congrats. Great to see someone finally using their head in how to deal with this issue. Hopefully you can wake up our fellow conservatives with their heads in the sand.

  5. W. Steven Barnett says:

    Congratulations on your great article in the WSJ, one of the best I have

  6. Dr. Bob says:

    John; Supply side economics is a good way to address healthcare delivery, but I must disagree with parts of your assumptions.

    1) Concierge medicine, if provided properly, can be very exceptional. But it is a program mainly for the wealthy-which is fine. If you can afford it, why not?

    2) Medical tourism is also very cost saving. And can be very well done. Most of the surgeons in India performing this service are U.S. trained, and their hospitals are state of the art. But what happens after the patient returns home and has complications. Most physicians don't relish dealing with other's mistakes, let alone from a foreign country. Cost savings are well documented, but the biggest challenge is post operative care and support.

    3) Cosmetic surgery and Lasik are areas where I must disagree. The adage that the bigger the advertising and marketing expenditures in medicine, the poorer the service. The finest surgeons in both fields do not advertise. Full page ads in D Magazine, Texas Monthly and the DMN do not ensure better quality and expertise. All they are looking for is a bigger piece of the market. 93% satisfaction with Lasik is due to the fact that the technology makes it almost failsafe. My youngest daughter was to have Lasik surgery several years ago. On the operating table, her surgeon examined her and called off the procedure because of something that didn't look right. How many others would have shrugged it off and done it anyway? I suspect the vast majority (>95%) would have proceeded with the surgery anyway.

    4) Internet drug sales is another iffy area. $32B is spent annually on counterfit drug sales, which causes huge trickle down costs because of unsuspected complications, or even death. Only drugs produced by ethical pharmaceutical companies and sold in reputable outlets should be the rule, either by written Rx (legible) or via email. I am on the board of a track and trace company that is partnering with Cardinal Health to prevent the continuing escalation of the availability and sale of counterfit meds.

  7. John Baden says:

    Great work!!!

    This is an wonderful example of intellectual entrepreneurship.

  8. Norman Brodsky, MD says:

    Given that hospital costs, including outpatient diagnosis and care, dwarf that part of medical costs over which physicians have control, the most efficient approach to cost savings would be to provide a real market in the hospital sector. Even some very simple steps could move in that direction. For example, if hospitals would (be forced to) publish their price for a CT or MRI scan or for a CBC, the consumer could 'shop', at least for outpatient care.

    At present, there is no relationship between cost and price. The '$600 toilet seat' is a commonplace. Even with our present lousy system, many consumers have copays and could use price information effectively. As you know 'not-for-profit' hospitals are given huge tax subsidies but are simultaneously strongly incentivized to build and to duplicate costly diagnostic facilities and services, at little risk because they are protected by multiple direct governmental subsidies in addition to charitable giving. They have nothing to lose and so continue to build extravagantly and duplicate …the bigger they are the richer they get. Perhaps hospitals could somehow be induced to offer price packages, at least for elective procedures, or for commonplace emergencies, such as heart attack. To be sure, the number of costly CT's and other interventions would decline abruptly.

  9. Bob Dufour says:

    Thanks John
    Great point.

  10. Benjamin Cutler says:

    John KUDOS! On a terrific piece on this critical subject of transparency. One suggestion I think you missed entirely in your section on the causal factors. A huge reason we lack transparency in health care is due to the HMO/PPO network discount arrangements. A typical doctors office can have upwards of 20-30 different network contracts for services. Each contract is separately negotiated, at different points in time, with different commitments from the networks as to how much steerage they will bring to that physician. As a consequence, the physician’s office staff have no clue at the point of service what in fact a specific customer would pay for an office visit, for any other treatments performed during the visit, etc. It’s not until the physician sends the “gross charges for services” to the network for re-pricing is the amount due from the customer finalized.

    Until recently, since most health plans offered doctor visit co-pays, the consumer only paid $15,20, maybe $30 for the office visit at the point of service. The physician’s office knew that the insurance company was obligated to pay the remaining “re-priced balance”, so there was no bad debt risk to them with that visit. NOW with high deductible _HSA’s

    More and more, the consumer is obligate for the full charges “still re-priced”. As a consequence, physicians are facing a likely increase in bad debts since it’s now the customers financial obligation.

    The simple solution is to abandon the whole HMO/PPO network arrangement, simply allow physicians to charge whatever their practice can justify to consumers based on the quality of the services they render (* just like every other business in America). So that at the point of service there is a price to be paid , the customer pays for the services and can readily determine whether they got value from the experience.


    Imagine where else we could send that $20 plus billion to improve coverage, improve quality——–whatever.

    John if you would like to discuss this further I would be happy to spend some more time with you on this critical subject.


  11. William M. Wallace says:


    From my perspective, we must restore the competitive side to the delivery of the medical product and eliminate the Entitlement Mentality.

    Thank you for all you do

  12. A J Kearney says:

    I found your article intriguing because I’ve always been troubled by the idea that people will really negotiate case by case with their health provider which implies a willingness to walk away from their most personal service provider. However, in looking for examples of how the market works, I’m not sure it works with Dentists. There’s nominal insurance for many people but the coverage is about 25% once major work is done. Having spent quite heavily on dentistry the passed few years, I’ve looked for the more cost effecient alternative but don’t see any providers marketing on cost differential.

  13. Bill Lewis says:

    Even though your article is right on the mark, such reform will most likely never take place. Our societal mode is one that utilizes blame rather than an honest approach to solving the health care cost problems. All one needs to do is compare comments on your article from the various players in the health care marketplace.

    Government, at any level, will never get it right. Unfortunately, they will continue to try to use bandaids to fix the problems.

  14. Stephen Entin says:

    Excellent analysis of the inherent screw-up in the health care market.

  15. Robert W. Geist MD says:

    John you slipped on the managed care banana peel, “Managed care, pay-for-performance, and even Health Savings Accounts
    are all demand-side reforms”. Wrong, MCOs are supply side rationing agents for their customers—government bureau and employer “buyers”. MCOs want as little as possible to do with consumers (patients) except to figure out ways they can’t “consume” scarce “resources” (corporate money). That’s not demand-side economics with price sensitive customers; that’s rationing by a corporation that already has in it pocket the family’s medical budget.

    More later on the “wonders” of massive federal Medicare subsidies, the 112% “investment” (MedPAC figure) to which you obliquely referred in the WSJ piece. When the fed (CMS) puts its thumb on the Medicare scale, how is that anything but putting a few mega corporations in control and thousands of private clinics out of business? That’s not competition. That doesn’t pass the smell test.

    Since Medicare+C HMOs were best known for “cherry picking” subscribers and “lemon dropping” the sick and frail and still could not make money thanks to high overhead and other inefficiencies, how will things be different when the “Advantage” MBAs get to feed at a bigger federal trough? The question to ask is how did Bush and congressional Republicans get bamboozled into thinking that HMOs would save money when they have been in charge of an untenable premium inflation rate and been delivering progressively poor quality in the private sector for over a decade?

    The HMOs don’t work and can’t compete with HSA/HDHPs. HSAs are what would work in the public sector—and that is possible thanks to you! Let’s get going on HSAs for seniors and Medicaid too.

  16. Michael F. Cannon says:

    Fantastic. For the first 90% you had me thinking, yet again, “I wish I had written this.”

    The last 10% threw me, though. For Medicare to create more Mayo Clinics the way you suggest would be a demand-side reform — driven by the demand side — wouldn’t it? Wouldn’t it be just another variation on pay-for-performance?

  17. Scott Chrimes says:

    It has been my observation that the big health insurance companies – United Health Care, Cigna, Humana, Blue Cross, etc. – actually drive up costs by funneling “captive” groups of employers to health care providers – thus eliminating any need for these providers to be competitive. In other words, the big insurers sell the fact they can win discounts for the employers’ health care plans they represent by delivering a large group of customers to the actual health care service providers. This group is hand-delivered to the providers, who in turn offer “discounts” to the insurance company. However, it is no trick for a provider to mark up his services and products beyond reason – and then – “discount” them back to the insurance company. This is like a department store marking everything up 100% and then having a 40% off sale. As long as the employer (the entity actually paying the bills) is not too upset with the cost of medical insurance, and has enough pricing power to pass these rising costs on to its customers, everyone is happy.
    However, the point has long passed where employers have started to scream “uncle” over the rising cost of providing health insurance to their employees.

    There is no incentive for insurance companies to control health care costs in this environment because they merely pass rising costs on to the employer/healthcare plan payor. There is no incentive for employee/beneficiaries to control costs because they, typically, are only paying a tiny fraction of the actual cost of the services being consumed. Ultimately, the only way to control medical related inflation is to make the consumer of the services responsible for paying the bulk of routine medical services. This can be accomplished by offering some sort of medical savings account in conjunction with catastrophic loss coverage. I would think this model is going to become increasingly prevalent as fewer employers can continue absorbing rising medical expenses – unless big government steps in first and mandates some model of socialized medicine, which would be a disaster for everyone.
    Everyone, that is, except the Hillary Clintons, Al Gores, and other similar politicians in this world, who make their livings convincing other people they are “victims” and setting themselves up as “saviors” – and gaining power, wealth and influence in the bargain.

  18. Brant S Mittler MD JD says:

    A few comments:
    1. The Mayo Clinic is not cheap. My mitral valve repair surgery cost $53K for an thankfully uncomplicated procedure. The same surgery would have cost about 1/2 to 1/3 less anywhere else. But I happily paid more because I believed the surgeon was the best and that Mayo had the best outcomes. There weren’t a lot of good data at the time and no randomized trial data ( 2001). If Mayo Clinic medicine a la this surgery were replicated all over the country it would cost a lot more. For one thing, more cardiologists would know to refer mitral valve prolapse patients for surgery earlier than later and that would cost more initially. Two so-called national experts told me to not worry about new-onset atrial fibrillation with what was thought to be mild prolapse. Mayo’s “third opinion said to worry about it. Whether the overall costs would be less over the life of the patient remains to be seen. Mayo transthoracic echocardiograms for follow-up cost much more than those done in the average community hospital. So, that’s an extra cost. Adn Mayo tells you “Pay up or don’t come back” As usual, Dr. Wennberg gets all the headlines from the mainstream media and little critical analysis of his “scientific” findings. Don’t get me wrong, I love the Mayo Clinic. But it’s Rolls Royce care at Rolls Royce prices. Fortunately, I can afford to get care there — at least for now.

    2. Doctors shouldn’t treat patients by telephone with good reason. As a lawyer, I can talk to a client by phone. Lawyers deal with words and verbal concepts. As a cardiologist I can’t evaluate chest pain over the phone. And it’s not because I don’t get paid for telephone calls. I have to listen to the patient’s heart and look at the ECG and chest x-ray and evaluate lab values. If I treated everyone who said they had “the flu” over the phone as “the flu” there would be a lot of dead patients and I would no longer have a license to practice medicine. When I hear “flu” I think “congestive heart failure,” among other serious diagnoses. Sorry to say this, but this is exactly why economists should not be put in charge of health care policy. And eonomists are precisely the folks who run health care policy. See the last time the Wall Street Journal or New York Times quoted a physician on health care policy.

    3. In terms of buying health care, no one has the foggiest idea about outcomes. And I am talking about patients’ clinical outcomes not process outcomes. We are coming up on the 40 th anniversary of the Duke Cardiovascular Database — a project which is still going strong but not used to make real time patient care decisions — other than to support randomized trials. The payors didn’t want to support real outcomes collections which is expensive and hard to do. By the way, neither did the Robert Wood Johnson Foundation back in the 1970’s. ( They were content with having outcomes divined by hand picked “experts.” See Rand methodology) Everyone wants to advertise they have good outcomes and figure out a way to sweep bad results under the rug. Electronic medical records won’t solve this problem — which is a political problem not a technological one. There are some observational databases that do function — like the New York State registry for bypass surgery and angioplasty — but these are few and plagued by methodological issues. It’s hard to get a few – much less all – doctors to agree on what they mean by “unstable angina” or “acute coronary syndrome.”

    John, thanks for stimulating this discussion. And thanks for your critical comments that Medicare HMOs won’t solve the Medicare cost crisis.

  19. Vic Wood says:

    I am a physician and would like to congratulate you on your article which ran today, PERVERSE INCENTIVES IN HEALTH CARE. The article was right on. I have been practicing medicine for almost 20 years and have seen all of the changes that the insurance industry have evolved into and from in an attempt to decrease cost to them. I recently was successful in the WV legislature in trying to bring my brand of Primary Care to my patients. The insurance industry tried to stop my attempt at introducing a patient financed system that could eventually bring to the market competition among practitioners that would improve cost and quality. If you would like to read more about it I’m on the cover of the 12/15/06 issue of MEDICAL ECONOMICS. It is nice to finally hear a voice that has reason and intelligence on an issue that can be solved without government or insurance control.

  20. Eric says:


    I do think you right on the spot with this post, i could use a lot a struff for my new study thank you very much.