Why Profit Is Our Best Friend

One reason why entrepreneurs do what they do is that they want to become rich.

I don’t think that getting rich is the main motivation. The possibility of innovating in order to change the world may be an even stronger desire for most of them.

But you can almost guarantee there will be no entrepreneurship if you do two things: (a) eliminate all possibility of getting rich, and (b) make it impossible to change anything without the approval of an intractable bureaucracy.

That in a nutshell is my explanation for why our two most visibly dysfunctional social systems — health care and public education — remain so dysfunctional.

I meet entrepreneurs in health care almost every day. Their novel ideas are invariably focused on helping some entity — a hospital, insurer, employer, etc. — solve a problem. They are rarely focused on how to solve an overall social problem, however.  Yet because our health care system is so dysfunctional, in solving the problem for a client, they may be making our social problems worse than they would have been.

Solving social problems in health care with innovative policy proposals is what I do. It is a lonely field. But it would be a lot less lonely if we allowed people to get rich doing it.

To take one example, it is often asserted that one-third of all health care spending is wasteful. Suppose Bill Gates was able to write a computer program that would find the waste and eliminate it. Society as a whole would save more than $800 billion. So how much should we be willing to pay Bill Gates? A tenth of the overall benefit he creates ($80 billion)? One-half the benefit ($400 billion)?

Perhaps you’re thinking that we shouldn’t pay Bill Gates anything. Maybe you think he should give us the program for free, as an altruistic gesture. Or, maybe you think the most he should get back is a 1% or 2% return — something close to the return paid by government bonds. If this is your viewpoint, welcome to the world of health policy. You will find all kinds of people who think just like you do.


He’s your guy when stocks are high
but beware when they start to descend

In general, there is no limit to how much people can make in health care by successfully exploiting reimbursement formulas. But the federal government is in the process of limiting what insurance companies can earn, effectively reducing them to the role of public utilities.

Two recent items in the news help illustrate why this approach is so wrong. In one, The New York Times reports:

The brothers, Philip and Joel, earned close to $1 million a year each as the two top executives running a Medicaid-financed nonprofit organization serving the developmentally disabled.

They each had luxury cars paid for with public money. And when their children went to college, they could pass on the tuition bills to their nonprofit group.

Philip H. Levy went as far as charging the organization $50,400 for his daughter’s living expenses one year when she attended graduate school at New York University. That money paid not for a dorm room, but rather it helped her buy a co-op apartment in Greenwich Village.

In the other story, The New York Times reports that BlueShield of California will voluntarily limit its profit to no more than 2% of revenues — no doubt anticipating that government regulators were going to force that result anyway.

Think about those two examples. Almost everybody in health care agrees that many of our biggest problems stem from the way we pay for care. And who is paying? Insurance companies. So another way of stating the social problem is: we need to find newer and better types of third-party payment.

Yet we are living in a world in which entrepreneurs are encouraged to make unlimited amounts of money exploiting reimbursement formulas, but are not allowed to make any extra money making the formulas better and more effective.

Let’s suppose that an insurance company contracts with Bill Gates for the hypothetical software described above. By using it, the insurer will cut its spending one-third and add that amount to the bottom line. But under ObamaCare, the software will never be invented, never be purchased and never be used. Why? Because under the new health law it will be impossible for an insurer to cash in on that innovation.

An insurer’s medical loss ratio (MLR) is the percent of its premiums spent on medical care. The remainder includes administrative costs and profit. As reported previously, the new law establishes a minimum MLR of 80% for most insurers and 85% for large insurers like BlueCross.

This is intended, among other things, to make sure that insurance companies do not have above-normal profits. As an additional hammer, the Obama administration is encouraging state governments to aggressively regulate insurance premiums, and if they are not aggressive enough, the federal government is threatening to step in and do the job from Washington.

Absent ObamaCare, BlueCross could use Bill Gates’ hypothetical software to achieve a MLR of 55%. That would be good for numerous reasons: the elimination of wasteful spending would improve the quality of care for patients, reduce the chance of medical errors, free up resources for use by other patients and encourage every other insurer to find ways of achieving the same outcome.

But with the new health reform law, BlueCross would have to rebate its 33% profit to enrollees in the form of lower premiums. Thus, neither BlueCross nor any other insurer will be able to profit from cost-reducing discoveries like this one. Nor will any insurer even try. Instead, insurance companies will function like utilities, taking no real risks and making no radical changes in their current business model.

ObamaCare has ensured that our health care problems will not be solved by stifling innovation in the one sector of the market that most needs vigorous entrepreneurial activity.

Comments (66)

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  1. Vicki says:

    Nice musical pairing. I like the oldies.

  2. Bruce says:

    You think profits are good? What heresy. Your lucky they no longer permit burning at the stake. LOL

  3. Buster says:

    Liberals dislike for-profit health care and seem enthralled bynon-profit organizations. Yet, even a non-profit organization has to earn a profit or it goes out of business. The lack of stockholders is partly why the examples above are possible. The executives above were able to live such lavish lifestyles because of taxpayer subsidies and because their businesses were not burdened by the need to pay taxes (something a for-profit would be required to do).

  4. Karen Yancura says:

    What do you think is the main, over-riding reason that proposals you intelligently and cogently make are not jumped on and promulgated and ultimately — adopted?

  5. Uwe Reinhardt says:

    John, are you suggesting a sole source contract for Bill Gates? I believe in markets, where they work, and would have put this business out for competitive bid. Who knows what Larry Ellison or SAP could have done.

    Second, of course, the fee paid to these IT kings would be bid in the form of a contingency fee. Bill Gates can have great software written, but can he fight the K-Street insurgents — powerful tribes by the name of AHA, AMA, RPharma, Avamed, etc that can make any president, Republican or Democrat, look like Karzai?

    Third, as far as I know the MLR regulations took effect only this year. But Bill Gates was in business long before that. So the question I have for you, John, is this: Given there were no restrictions on what insurance companies could have kept in the form of profits, why did these free enterprisers not cut a deal with Bill Gates before 2011? What was stopping them from cutting out the waste better?

  6. Joe S. says:

    Good post. You are the only person out there saying this sort of thing.

  7. Carolyn Needham says:

    I don’t think the necessity of profit for entrepreneurship and innovation is articulated enough. Good post.

  8. John Goodman says:

    @ Buster

    Agree completely.

    @ Karen

    See the next post. Instead of taking my great ideas to his freinds on Capitol Hill, Uwe Reinhardt is taking pot shots at me.

    @ Uwe

    Your third point is interesting, and I don’t know the answer — except to say that so much of what is done today is because of the anti-competitive culture inherited from decades past. I do know that if that is going to change we have to let people profit from the change. Utilitiy companies don’t take big risks.

  9. Linda Gorman says:

    With all due respect to Professor Reinhardt, there has been a lot of innovation over the period in question. The question of why they didn’t cut a deal with Bill Gates is hypothetical. In practice, US providers have cut a lot of deals with software providers and by some measures is the most wired in the world.

    The left ways there isn’t enough innovation because people don’t have electronic medical records. But this is the result of entrepreneurs evaluating the costs and benefits and concluding that there isn’t enough benefit from them. The British are finding this out in spades. The VA probably would show that, too, but it has never had an independent audit.

    The relatively few severely ill people who do benefit already have them unless, of course, they are blocked by government rules.

    Lots of innovation has been occurring within the confines of the government administered payments system–the return of house call medicine in San Francisco, the development of HSA qualified policies, cash docs, concierge docs, stand alone urgent care, assisted living, outpatient surgery centers, stand alone labs, cash discounts, backpack infusion of IV drugs, and statins are just a few examples. Heck, female readers would probably agree that simple mammograms have improved a lot in the last two decades.

    The left prefers to claim that there is no innovation. It has problems separating useful innovation from the kind utopian dreamers of the left, who think that we live in some sort of 1930s factory oriented society, want to see, especially as a lot of it downgrades the importance of general hospitals, a powerful special interest group. So, with ObamaCare, they’ve taken steps to destroy the innovation that is happening that they don’t care for and to deny that what they are destroying ever happened.

  10. Uwe Reinhardt says:

    @ Linda Gorman

    Yet, with all the innovations you claim, we have now come to a pass where experts all along the political spectrum agree that health care is strangling the US economy. The Business Roundtable in 2009 issued a report arguing that for the money we Americans spend on health care we get 26% less value than we should.

    John was talking about an innovation that would take $800 billion of waste out of our system. The little innovations you list have not done that.

    Besides, you are selective in your listing of innovations. For example, you did not mention DRGs, now copied widely around the world, or the RBRVS, now used widely by US private healht insurers. As I argued in a paper in Health Affairs, they would make it at least possible to have a price competitive health system under “consumer directed health care.” I have long challened John to develop a proposal for a transparent price system for hospitals and doctors, one that does not have 20,000 iitems in it for hospitals or 9,000 for physicians.

    So, with all due respect, I don’t buy your story.

  11. Jennie Fiedler says:

    I’ve read some interesting studies over the years about how we as Americans compare to the rest of the developed world in terms of work, compensation and health. Apparently we work longer and harder than most, we are the only first world nation that does not have mandatory vacation benefits and we suffer the highest mortality rates due to the complications associated with chronic stress. I see some real possibilities for innovation there. I am inclined to believe that insurers, like so many other for-profit entities in this country, put those profits before everything else. That is the same as putting the cart before the horse. If their first priority was putting out a decent, effective, beneficial product (the horse), profits would naturally follow directly (the cart). Microsoft is what it is because of the products it produces. Apple is the same way. They make the money because people want their products. I think health insurance is just something people see as a necessary evil, they get what they get and they live with it. Not much innovation there at all. I know what I’d want as a health insurance consumer: an affordable monthly rate, (about 3% of my monthly income) 100% payment for all preventative (as in yearly) tests and exams, $300 to $500 a year deductible on anything else, 85/15 copay rate, and a portion of my premium going directly into a pre-tax health savings account. Along with that, the cultivation of a wellness versus sickness culture. Reward policy holders for good health by providing incentives like premium discounts. Reward employers for healthy innovations in the workplace the same way. I would also want my health insurance to be portable and belong to me, like my bank accounts do. Auto and home insurers operate this way and it sure seems to work. From what I can see, health insurers don’t compete because they don’t really feel they need to. In fact, rarely have I been treated with anything but indifference and disdain when I have dealt with them. Like I said, a good start would be putting the horse (product) in front of the cart (profit) instead of the other way around.

  12. Al says:

    Uwe writes: “why did these free enterprisers not cut a deal with Bill Gates before 2011?”

    I would think the answer to that question would be obvious unless one believes government has all the answers and that the American people are incapable managing their own problems.

    Perhaps too many innovations that might have led to good solutions were stopped in their tracks by government intervention. Those powers like the AMA etc. are only powerful because of their connections with government, not because of their connections with the people or physicians.

  13. Al says:

    Uwe, you seem to praise DRG’s and RBRVS, but things have gotten worse since these artificial devices were placed on the American public. Based upon RBRVS all physicians are paid the same regardless of their ability. Are you proposing that the one holding the Madison chair at Princeton be paid the same as an economist that just graduated at the bottom of his class?

  14. John Goodman says:


    Why do I have to devise a system for price transparency? We already have one. It’s called international medical tourism.

    More generally, in any health care market where there is no insurance, prices are always transparent.

  15. Dan M. Krausse says:

    This should be on the editorial page of every newspaper in the U.S.
    How can you make that happen?

  16. Stan Ingman says:


    Why is private profit health care so wasteful and so dysfunctional ?

    Why the USA , with the most profit health care units in comparison to most industrial societies , is the system that produces less value per unit of production and is the most costly in world ?

    Fewer people have access to medical as a % of the population than most industrial societies.

    We are more innovative is one response. Perhaps.

    However, we have most fake innovations also.


  17. Linda Gorman says:

    @Professor Reinhardt

    When it comes to health care policy, an appeal to experts generally fails to convince. Especially when the experts cited fail to distinguish between private and public expenditures and represent special interests to boot.

    The problem is that so many health care policy “experts” struggle so hard to ignore plain evidence in their pursuit of particular outcomes. As for the $800 billion, as was clearly stated, it is merely hypothetical and therefore is not a relevant comparison to anything.

    As for the “little” innovations, given that US private sector health expenditure growth has been below that of Medicaid and Medicare for decades, maybe the public sector has something to learn from the “little” innovations that the private sector has pursued. Most of the cost reduction in other private sector markets accrues from the steady accumulation of “little” innovations over time.

    The MetLife national average for assisted living care was about $40,000 a year in 2010. The national average for nursing home care was about $83,000 a year. If the invention of assisted living keeps 10% of the 1.5 million nursing home residents out of the nursing home for just 1 year, that “little” innovation saves 150,000 times $40,000 or $6 billion. The big government health programs have belatedly recognized that assisted living exists. Rhode Island is hoping to make use of it to reduce expenditures under its Medicaid waiver.

    The biggest problem with public sector provision of anything is that the tax wedge imposes huge costs by distorting production and consumption decisions. Plus, public sector entities are protected from having to innovate by statutes, regulations, and union rules. Danzon’s rough estimate of the tax collection costs for the Canadian case in her 1992 Health Affairs article was truly shocking. If nothing else, the results from the deregulations of the 1970s provide clear evidence to support the claim that deregulation improves service while reducing costs.

    This isn’t just my “story.” People concerned with real world results have verified that these effects occur in practice. Clifford Winston described the improved service and lower costs resulting from the 1970s deregulations (“Economic Deregulation: Days of Reckoning for Microeconomists,” JEL, September 1993, had over 400 cites last time I looked), Chris Conover added up US health regulation and calculated that 10% of national spending was due to unnecessary regulation, Patricia Danzon and her co-authors have examined the price that US citizens actually pay for the drugs they use and found that US prices compare favorably to those in other countries.

    “Little” innovations that pay attention to the demand side have the potential to save tremendous amounts of money. Numerous academic studies, starting with the RAND Health Insurance Experiment, show that moderate charges change utilization patterns and expenditures without affecting health. The RAND HIE showed that utilization with a deductible of about $3,000 in today’s dollars fell by 31% compared to zero out-of-pocket price (Manning et al., 1987). HSA QHDPs reduce both initial expenditures by up to 15% and trend increases by 3 to 5 percent. Cash and Counseling type programs reduce spending for Medicaid attendant care services by as much as 20%. Small fees for ER use decreases utilization substantially.

    A “little” innovation resulting in a 31% reduction in Medicaid spending would have reduced spending by more than $100 billion in 2009. A “little” 31% reduction in Medicare would reduced expenditures by about $150 billion. A little emphasis on profit might reduce the billions of dollars in fraud government run systems enable.

    The effect of DRGs has not been well documented because DRG researchers mostly ignored their effect on patients and the private overhead costs they generated. There is an industry devoted to coding system software, production, and verification. The few studies of the effect of DRGs on the functioning of hip transplant patients did not, if I recall correctly, suggest that they were good for patient health.

    Only now is it beginning to dawn on the academic health policy community, which thought that the be all and end all of cost control should be hospital days, never mind nursing home costs or greater mortality in nursing homes, that quicker but sicker discharges may lead to higher downstream costs and, horrors, more readmissions.

    That DRGs have been adopted around the world is not much of a recommendation. Most government run systems are concerned with minimizing government administrative costs and pay less attention to outcomes. This is why they have poorer health outcomes than the US, and, possibly, higher cost systems. If foreign systems are adopting them it may because they make things easier for government.

    DRGs and RBRVS are just price controls. Unless proven otherwise, price controls increase inefficiency. Perhaps they are better for the government than the claims system developed by hospitals in the 1930s, but that does not make them good in view of the fact that private markets manage to establish prices for all kinds of complex goods without DRGs.

    British private hospitals quote a range for hip replacements, examine the patient, and give a firm fixed price good for so many days. US dentists function just fine without Medicare DRGs–orthodontists will price 3 years of care and provide financing without any government price fixing. US cash docs and outpatient facilities quote prices without benefit of DRGs.

  18. Patrick Skinner says:

    The Fed’s have put price controls on the most efficient part of the healthcare system. Insurance companies make 3-6% on average. Name me a doctor, pharmaceutical provider, hospital, or medical device maker who would EVER take a risk of 12 years of education, $300k in student loans, R&D costs, drug study costs, etc for 3-6% price controlled ‘potential’ profit. Oh, and if you lose money – eat it. It’s funney democrats and attorners hate insurance companies, but the insurance industry makes a high percentage of attorneys well off. How would they eat if not for the insurance industry?

  19. ralph says:

    John and Uwe,
    We have another device for price transparency in the US as well as overseas, it’s called http://www,medibid.com. It allows you not only to get a competitive bid on medical care from overseas providers, but also from US hospitals and doctors, will all prices disclosed up front.

  20. ralph says:

    And by the way, it works. We are seeing knee replacement prices of $12,000 in the US and open heart surgery for $11,000

  21. Uwe Reinhardt says:

    Response to AI:

    I agree that there is something amiss in a system that pays the same fee for good and mediocre or lousy service. It is why, for example, the ACA has quite a few provisions tying payment to quality, especially for Medicare Advantege plans.

    But here’s another intriguing questions: have private healht insurers paid on quality? I know they have talked about it for over a decade, but such efforts are still in their infancy and not widespread. How is it, for example, that both employers and their agents, insurers, still allow the insured to go to hospitals with low quality ratings (e.g., low volume for certain kinds of surgery and correspondingly high mortality rates from thst surgery) and even pay the same fees for it — perhaps even higher fees if the hospital in question has a lot of market power?

    I always see Medicare accused of paying the same fees regardless of quality. But who actually is seriously paying on the basis of quality, aside from a few local experiments?

  22. Uwe Reinhardt says:

    Response to John Goodman:

    John, I asked you a serious question. Referring to medical tourism may be worth a debating point here, but it is hardly a serious answer, nor are the the few markets for elective procedures that function in absence of health insurance.

    Whether you and most of your commenters like it or not, the bulk of US health spending — at elast 70% to 75% will always be covered by health insurance. Indeed, I’ll go out on a limb — way out, I am sure –and venture to guess that you and your employees at the NCPA have health insurance for serious and costly cases. But perhaps at least the senior folks at the NCPA are people of backbone who have no health insurance at all. I could admire that, John. Why would you need it?

    I very much doubt that even a million Americans get their health care abroad as medical tourists. There are, however, about 320 million of us. Around 319 million Americans probably would prefer to procure health care near home. I was thinking about them.

    Now suppose the NCPA’s prayers were heard and every American had a high-deductible policy with, say, a $10,000 deductible. I am talking about websites that would give these Americans meaningful, user-friendly and robust information on the prices that different doctors and hospitals and other providers in their area will charge them for care under the deductible.

    My paper sought to adress the needs of these “consumers” — people who may want to have their babies, for example, near their home rather than at Bumrumgrad hospital in Thailand or in Mexico.

    So I am afraid your answer was not an answer.


  23. Uwe Reinhardt says:

    @ Linda Gorman:

    You write: “As for the “little” innovations, given that US private sector health expenditure growth has been below that of Medicaid and Medicare for decades, maybe the public sector has something to learn from the “little” innovations that the private sector has pursued. Most of the cost reduction in other private sector markets accrues from the steady accumulation of “little” innovations over time.”

    I would like to ses cites to the literature that supports this claim. In return, I’ll cite you literature that shows quite the opposite.

    Ditto for this: “That DRGs have been adopted around the world is not much of a recommendation. Most government run systems are concerned with minimizing government administrative costs and pay less attention to outcomes. This is why they have poorer health outcomes than the US, and, possibly, higher cost systems. If foreign systems are adopting them it may because they make things easier for government.”

  24. Uwe Reinhardt says:

    @ Patrick Skinner:

    You write: “The Fed’s have put price controls on the most efficient part of the healthcare system. Insurance companies make 3-6% on average. Name me a doctor, pharmaceutical provider, hospital, or medical device maker who would EVER take a risk of 12 years of education, $300k in student loans, R&D costs, drug study costs, etc for 3-6% price controlled ‘potential’ profit. Oh, and if you lose money – eat it. It’s funney democrats and attorners hate insurance companies, but the insurance industry makes a high percentage of attorneys well off. How would they eat if not for the insurance industry?”

    In normal times, and on average, private insurers do earn profit margins of between 3% and 8% of total revenues in the commercial, depending on the year and the book of business. True. Those are the margins before 2011. In what way were they the result of price controls?

    Furthermore, as I probably wrote before on this blog, the question is whether we should normalize insurance company profits by total throughput, including the providers’ bills they just pass on to consumers, or to the piece of the premiums that represents the insurer’s own production — administration, marketing, care managing, etc. On the latter, the insurers earn a very handsome profit. Indeed, look at a paper by Jamie Robinson in Health Affairs (2004). He shows that the return on equity earned by these companies tends to fall into the 20% to 30% range. Not bad.

    After all, ask yourself this question: If a hospitals charges Aetna $10,000 more for a CABGs and the insurer passes this on, in what way does Aetna merit a profit margin on this throughput?

  25. Eric says:

    “Most government run systems are concerned with minimizing government administrative costs and pay less attention to outcomes. This is why they have poorer health outcomes than the US, and, possibly, higher cost systems.”

    Really? There are plenty of examples of countries with government-run systems who pay less per capita for health care and have better overall life expectancy than the US (and if I remember correctly also have better outcomes on a number of metrics). To ignore these data is to perpetuate the largely baseless fantasy that the US has the best health care system in the world.

  26. Linda Gorman says:

    @Professor Reinhardt

    On literature for public versus private expenditure increases: The Long-Term Outlook for Health Care Spending, Congressional Budget Office, November 2007. Table 2, page 8.

    On the literature for outcomes and costs, mainly in OECD countries, see Goodman, Gorman, Herrick, and Sade, “Health Care Reform: Do Other Countries Have the Answer,” June 24, 2009. The first two sections discuss the problems with international comparisons, the results of the OECD SHA and HealthBasket work, and some of the micro results on outcomes that are overlooked by authors relying on sources such as WHO and the Commonwealth surveys. We will not agree on costs unless the sources that you cite take into account the costs of waiting lists. The refusal of American academics to seriously address the costs of waiting lists when doing international comparisions continues to astound me.

    As for 70-75% of US health care being paid for by insurance, in 2009 total US spending on private insurance was 34.1 percent of total spending. Medicare, Medicaid, the VA, SCHIP etc. do not meet the definition of insurance. Even if one includes Medicare, Medicaid, the VA and all the rest the total the NHE gives for health insurance in 2009 was 66.3 percent of spending. (Table 15 of CMS NHE web tables.)

    Did you mean that 70-75% of US health care would be paid for by third party payers?

  27. Linda Gorman says:

    We do have websites with transparent pricing in the cash market. For an example, see http://www.surgerycenterok.com/pricing.php.

  28. John Goodman says:

    @ Uwe
    You are making two mistakes.
    First, you assume that just because people need private insurance, the insurer must fix all the prices. That only happens in health care. In other insurance markets (e.g., home-owner , auto, etc.), the insurer generally pays a fixed fee and the consumer is free to shop, pay more or even pay less. In health care, however, the insurer has negotiated a price in advance – so that there is no possibility for price competition for patients. For a long time, I have advocated the casualty insurance model for health care You should read it.
    Second, you seem to think there can be price transparency when there are no real prices. There can’t. I wasn’t being flippant when I brought up medical tourism. There is always price transparency when consumers control the marginal dollars. There is never price transparcny when they don’t.

  29. Al says:

    Uwe writes: “I agree that there is something amiss in a system that pays the same fee for good and mediocre or lousy service. ”

    So much for the government success with DRG’s and RBRVS. Now to part 2.

    Professor, do you honestly believe that at this time we have the ability to accurately measure quality in enough areas that we can use those measurements in the clinical setting? Can you even define quality with regard to what clinicians generally do? I know we can break it down into outcomes etc., but that involves large numbers. When dealing with individual clinicians we are dealing with small numbers where quality is affected by a multiplicity of issues outside the control of the clinician.

    Even in areas of quality agreement all we are doing is spotlighting one element to the disadvantage of another leaving us with the politicalization of healthcare accomplishing little except to promote gaming the system over intellectual honesty.

    You say that quality is unrewarded. I believe you feel that way in part because you have removed the patient and the doctor from the equation. It seems that to you a reward starts and ends with the government (as does the definition of quality). It doesn’t have to be that way as we see hospitals rewarded for good care by becoming centers of treatment for particular diseases. That had little to do with government and more to do with doctors and patients trying to find the best treatment for a particular problem. Government is inhibiting these solutions.

    For the above reasons and a few others I believe you to be wrong on both sides of the coin with regard to quality, but I thank you for your kind response.

  30. Al says:

    Eric, life expectancy is not a good measurement of the quality of a health care system.

  31. ralph says:

    I think you missed my last post. If you go to http://www.MediBid.com and make a medical request, you will get doctors from across the US providing competitive bids for your care, as well as overseas facilities.

  32. H D Carroll says:

    @ Uwe Reinhardt

    The first step towards transparent pricing competition is to require rationality in pricing, and yes, that will require, initially, a list of 20,000 or 9,000 items, depending on provider, until opportunity to package and innovate in pricing mechanisms becomes obvious through value added to the process. Rational pricing means a consistent all payer system (providers choose their price list/ packaging list/ whatever, but it must be charged to all patients no matter what their third party payer affiliation – no favored nation discounts, no volume discounts, and certainly no government price fixing for their programs). Then you will have your consumer assistance and information services be able to provide meaningful value added for high deductible products. Then you will see innovative pricing arrangements (as long as they are consistent and offered to all payers). Then you will see insurers need to actually do something to offer a “network” worth its salt based on QUALITY instead of volume pricing. Combine that with true transparency in insurance company sources and uses of funds, and you can do away with minimum loss ratio requirements, because the market will force them to compete on service, price, quality – value – and where their premium revenue goes will be an open book so if they want to make profits, spend it on executive salaries and bonuses, more power to them if they can convince the consumer that they are worth it. Just like providers who want to charge more for the same service or package, if their quality justifies it, they will persuade consumers to buy from them. We will need a special arrangement for emergency care, however – a nationally established schedule recognized by both providers and third party payers – but once the patient is stabilized and movable for predictable treatment, then the consumer choice comes in again. It is the prices, or lack thereof, that causes most of the problems in the system. You can’t measure value if you can’t pin it down.

  33. Linda Gorman says:

    @ H D Carroll–why do you disapprove of airlines, restaurants, and hotels that charge different prices to different people for the same room?

  34. Uwe Reinhardt says:


    Tks, for your response. I agree with you on the scence of measuring quality, but actually the ACA has funds to make good strides in that. Perhaps private insurers have contributed to the science. Do you know if theu have? Are there soucres you can cite. I am not saying thare aren’t; just can’t recall seeing them. Private insurers could jointly have established an AHRQ, but they haven’t. Even the national BCBS association has not done very much along those lines, other than using the same shaky quality metrics others have used.

    Now just reently one of the major dailies carried an article reporting that patients frequently rate very highly hospitals with poor outcomes statistics. I’d have to look for it though.

  35. Uwe Reinhardt says:

    @ H D Carroll:

    I agree with you on the all payer system as a starter. My article in HA actually was a downpayment for such an approach.

  36. Uwe Reinhardt says:

    @ Ralph:

    I saw that comment and but a request in. let’s see what I get for $25. I think that website charges way too much. They just get me bids without telling me anything about the bidders, which is left up to me.

    But I just wanted to see how it works. I put in a request in the early afternoon. So far no response.

    I am not overly impressed, yet.

  37. Uwe Reinhardt says:

    @ John:

    Two years ago my wife and I (both endowed with mellow accents) called the local hospital, pretending to be immigrants making $80,000 a year but without healht insurance.

    My wife asked for a quote for a normal delivery for such persons. Later on, after they refused to quote her a price, I called for a colonscopy. Same respone, that is, nada.

    We’ve had enough uninsured people for there to have emerged price transparency. It hasn’t come.

    You are a dreamer, John, which in some ways is charming.

  38. Uwe Reinhardt says:

    @ Linda Gorman:

    The pricle list for that Oklahoma surgey center is impressive. That is what we need at a minumum (it does of course not include quite few ancillary services), and they should be on a similar website listinge side-by sides for all centers in the market area.

    I am not aware of such easily readable wbsites. As the info is reeally a public good, access to them should be free to anyone who pays a membership fee.

  39. ralph says:

    Sorry, i did not know that you needed medical care. The Oklahoma Surgery Center is a registered facility under MediBid. One patient was quoted $30,000 for hernia repair and OK Surgery center did the procedure for about $3,600, saving the self pay patient about $27,000.

  40. Al says:

    Uwe writes: ” I agree with you on the scence of measuring quality, but actually the ACA has funds to make good strides in that.”

    Professor, thank you for being forthright about our lack of ability to adequately measure quality. We did not need the ACA to study quality. Quality has been studied for decades without adequate conclusions. Thus many of the hopes behind the ACA are just hopes that are based upon things that do not yet exist and probably will not exist for the reasonable future. Now that quality is a part of the ACA quality has been made into a slave of politics.

    Everyone contributes to our knowledge of quality including the patient since as our end product how the patient reacts to what has been done can be as important as the outcome itself.

    You say that ” Private insurers could jointly have established an AHRQ,”, but I don’t know that the results of AHRQ are that great. Knowledge in the healthcare sector changes very fast and the production of studies as you well know take tremendous amounts of time. It can easily take a decade to collect data and then several more years for the study and peer review. By that time a lot of things are outdated. To review practices takes even longer so one has to rely upon the most recent credible data available.

    I am not saying that retrospective analysis even years later isn’t helpful. It is. It keeps us on the tracks, but it is not as useful as many think for the treatment of present day problems. That said, once an opinion by government is created it becomes near impossible to change in a reasonable time frame.

    Why should insurers be judging quality if the government is so closely governing the way they do business? It’s much easier for them to work within the government bureaucracy then to actually have to compete for customers in the market place. Under the ACA the prescribed MLR would prevent them from even trying. Their job is to pay for care and control fraud, but even there the ACA rules might get in the way.

    I would be very careful about those outcome statistics because it is hard to judge risk. Take a good community hospital with a good cardiac surgery program and compare it to Mayo. The community hospital ends up operating on those too sick to fly to Mayo. That means that Mayo will have better statistics and in the comparison a selection problem will be severe. The poor also won’t fly because they don’t have the funds and we know that the poor have worse outcomes then the wealthier group.

    I think we would be better served by trying to weed out the providers that provide substandard or fraudulent care then spending so much money on trying to reproduce excellent care that is not reproducible. That is a way of elevating overall quality without being offensive to good providers while raising the bar at the same time.

  41. ralph says:

    Since you have used the MediBid site, I assume that you have a high deductible plan, or are uninsured, and I congratulate you on taking a step towards consumerism in medicine.
    I’m dissapointed that you have made such a premature judgement in saying that you are not impressed so far. Depending on the kind of care you need, you may save between $25 and $100,000. We at MediBid have the same amount of costs regardless of how much we save you. Others might charge you a percentage of the amount you save, but at MediBid the charges are based on the amount of work done. You may believe that profit is not good, but is being paid a reasonable amount for work done equally as bad?

  42. Al says:

    Uwe, why did you bother calling a hospital to find a price for a self pay colonoscopy? Hospitals are inefficient and frequently don’t know what they are doing because they are so used to following the government’s commandments. I’ll bet you could have found a GI guy who did his procedures at a local surgical clinic at a much lower price.

    I know a lot of people that have high deductibles or no insurance. Either way they are self pay. They get a lot of their studies at a price below what private insurance or Medicare charges by calling around. Once a center cracks the nut anything above the marginal price is profit.

    I used to buy my cars at the end of a quarter when the dealer was anxious to sell in order to obtain a bigger bonus or rebate. I never limited myself to the city (or even the state) I lived in. I used to get some of the cars below cost. Why shouldn’t that be done for elective medical care?

  43. ralph says:

    When you go to a market place…take a gun show for example. Exhibitors pay a certain amount to rent a table and display their wares. Consumers pay a certain amount 9usually smaller) to attend the exhibition. If the exhibitor does not sell anything, they do not get their money back, and if the consumer does not buy a product, they do not either. I’ve not seen you speak out about the inequities of this type of exhibition.

  44. H D Carroll says:

    @ Linda Gorman
    Actually, I do disapprove of the examples you give, but that misses the point entirely. Airlines and hotels are not medical service providers, and whether we like it or not, society seems to think medical care is some variant on a social utility – I am trying to come to a reasonable middle ground. Actually, the difference is that the airline or hotel negotiates with the actual consumer, which is exactly what I want to happen for medical care – third party payers (insurers or the government) are not the consumer of medical services, and there is no value added to society for an “association” discount – it will distort the pricing mechanism to everyone else. In my all payer system, each provider does, in fact, retain the right to negotiate with the consumer, and the reverse, only it is allowed to take place AFTER any third party payment towards the published, consistent charged price – that is, only on any balance bill. Once any “balance bill” is known as a result of the provider’s consistent price is compared with the allowed charge and cost sharing of the third party providing financial resource to the patient, THEN the patient and provider can adjust that balance. That is the comparable mechanism to your hotels and airlines to my mind. We must not allow, however, any back door attempts to arrange for discounts for “association” members as an automatic occurrence by a provider, that must translate into a general price adjustment available to all customers walking in. Insurers and the government are free to set their allowed charge levels in their contracts with their members, and they may or may not cover the cost of a given provider, but that will allow for free choice of the patient against what they perceive as the quality difference – is it worth it.

  45. Uwe Reinhardt says:

    @ ralph

    You write:”When you go to a market place…take a gun show for example. Exhibitors pay a certain amount to rent a table and display their wares. Consumers pay a certain amount 9usually smaller) to attend the exhibition. If the exhibitor does not sell anything, they do not get their money back, and if the consumer does not buy a product, they do not either. I’ve not seen you speak out about the inequities of this type of exhibition.”

    There’s no inequity here.They paid not for the consummation of a deal, but to have a convenient place where they had the option to consummate a deal efficiency. They paid for the room, so to speak.

    If honeymooners rent a hotel room on their wedding day but nothing much happens in the room because they are too exhausted, there’s no reason why the hotel should refund them the rent money for the room, is there Ralph?


  46. Uwe Reinhardt says:

    @ AI

    I did not call the hospital actually to have a colonoscopy there, but merely to test whether or not they would reveal prices.


  47. Al says:

    Uwe writes: “I did not call the hospital actually to have a colonoscopy there, but merely to test whether or not they would reveal prices.”

    That of course was understood, but what you saw is typical of hospitals that have been trained in bureaucracy and used to working with government and other large organizations instead of patients. Permit a marketplace to occur and you will see how fast the hospital’s attitude will change. Either that or they will disappear.

    Hospitals are quasi-governmental which is my point. Quasi-governmental doesn’t really deal with patients except as provided by law and a few promotional items. That is one of the reasons the ACA should be abolished. If you dealt directly with the doctor owner of a surgicenter or even a doctor you likely would have gotten the cash price and if needed a discount or terms if you already had an established relationship with the doc.

    Despite the fact that the surgicenters are less expensive then hospitals the government is trying to curtail their existence. More patient friendly, less expensive, faster, outcomes likely not better then a hospital, but overall care probably better yet it seems that you frequently prefer mechanisms where government is overly involved, costs are higher and convenience for the patient lower.

    That is something I never understood about your views or at least the way you express them. Occasionally it is almost as if you do not believe in the market place. Understand like Hayek I believe that government can have an involvement in healthcare (though that is not my preference) as long as it doesn’t significantly impair the market place. You appear to be advocating programs that directly interfere with the market place. It makes me believe that health care economics is a different animal then economics?

  48. Reinhardt says:

    Yes, AI, I do believe that much of health care is a different commodity than the legendary widgets we discuss in freshman economics.

    I say “much of health care” because there is no such thing as “health care” per see. It is really a huge vector each of whose elements is a particular type of health service or product. There is, in my view, a difference between nose jobs or lasik treaments or colonoscopies, on the one hand, and most of tertiary health care, especially when multiple diseases are concerned or cancer is involved.

    For one, the degree to which voters want the financiing of health care socialized (through public or private insurance) varies by element in the vector. Ethical concerns do make the market for much of tertiary care different from, say, restaurant food, a commodity often used by herzlinger to extoll markets.

    For another, the ability of patients to assess the clinical merits of health care varies by element in the vector, too.

    Markets with asymetric information are not quite like those for ordinary commodities whose properties are well understood.

    Finally, we can show in economics that because the need for health care is so stochastic, people will purchase insurance for the cost of illness and they would, even in the absence of ethical concerns.

    My problems with this blog is that illustrations of markets working well are always drawn from the more tricial elements of the health care vector. The discussion is too facile, ajust as is the idea among liberals that if every providers of healht care were a public or private non-profit entity, everyting would be fine.

    I have, as we say in the Ivy League, a more “nuanced” view of the healht care market.

  49. Linda Gorman says:

    Why should one be so concerned about how society defines medical care that one demands that everyone pay the same price? Society doesn’t exist except as a collection of individuals. Saying that society gets to define something is simply saying that either custom or law determines what it is.

    Under ObamaCare, “society” has apparently managed to define a minimum insurance package as one that pays for kids eyeglasses. A lot of us trying to make ends meet are not amused. We’d rather pay cash for our kids’ eyeglasses and hope that providers offer sales around the holidays when they have excess capacity so that we can save big bucks on various procedures.

    Leave producers alone to price things as they see fit. A one price law is just another form of price control.

  50. Al says:

    Uwe, You have divided the medical widgets into two classes, possibly a few more that are not mentioned. Let’s take colonoscopy as one type of widget representing other widgets in its class. Why do you appear to want colonoscopy to be placed under the same confining government controls as the other widget, tertiary care? Its price would surely fall if it were totally deregulated. You might say that quality could be reduced, but in reality the opportunity for so many more patients to undergo the procedure would mean that many lives would be saved from cancer. Thus deregulation of this type of widget likely decreases costs, increases access and finally increases overall quality as the death rate from cancer of the colon falls. What objection could you possibly have to those results?

    Your second widget is tertiary care. Tertiary care has two major components, perhaps more. One is the building which is nothing more then a shopping mall that has vendors (the second widget) occupying many of its bays plus some common areas. What your policies seem to promote is a very expensive brick and mortar mall promoting excessive costs for something that has a lot of plumbing. Why?

    Government, what you appear to prefer prevents innovation. Years ago hospitals made it difficult for the elderly to get simple x-rays and scans. They had to travel a long distance, obtain transportation and when they got there they had to wait in cold halls and were not appropriately cared for. Frequently they were left for hours when emergencies pushed them to the bottom of the list. To top it off years ago government selectively permitted hospital outpatient services to charge the 20% on their total charges not just the approved charges. This with government approval permitted hospitals to jack up their profits and rape the elderly.

    Innovation in the private sector occurred to alleviate these problems. Physicians got together and created outpatient x-ray centers. Patients were treated like humans, driven to the center and kept comfortable with the procedures being done quickly and the patient returned to home. The patient was only charged the permissible 20%. This was innovation by the private sector and this innovation at least in the areas I am familiar with caused the hospitals to reevaluate this income source and copy the innovation of the private sector. What was government’s response?

    Close down the successful outpatient x-ray centers by passing laws that would make many of them go out of business. There was no proof that these centers on average were abusing the system any more then the centers within the hospitals. I will bet that many of the outpatient centers were even more careful because they couldn’t afford the litigation that hospitals are accustomed to. Thus government destroyed an innovation that improved care and only created gaming of the Stark laws wasting more time and more money. One has to remember the Rand Study. Patients were self-controlling testing because they had to pay the 20%. What was the outcome of this crazy government policy?

    Hospitals had less competition and total costs rose. This type of private innovation that improved service and reduced costs occurred in almost every area that hospitals have dealt with including laboratory, pathology, diagnostic procedures and even invasive surgery. All of these innovations were stopped or diminished by government to the advantage of hospitals, but to the disadvantage of the patient, taxpayer and overall future quality. Hospitals retained their inefficient profit centers boosting the revenues of these tertiary centers that charged a lot to maintain the plumbing and electric.

    Is it any wonder that hospitals are essentially the same entities as they were prior to modern medicine? Shouldn’t that surprise us? After watching how government has bungled much of tertiary care you want more of the same? The fact is that most medical care is not emergency care and can be purchased just like anything else. Legal care is more complex and more hidden then health care. Information asymmetry is only made worse by so much government intervention that suppresses transparency and profitable modalities that would otherwise distribute information. We have to remember that information asymmetry even exists among the treating physicians who are also impacted by a lack of knowledge of what other specialists do.

    You say: “For another, the ability of patients to assess the clinical merits of health care varies by element in the vector, too.” So what. I hate to disillusion you or anyone else, but even physicians and chairmans of medical schools have difficulty evaluating the clinical merits and will differ 180 degrees as to who is providing the best quality. Reputation and quality are not the same.

    You continue: “For another, the ability of patients to assess the clinical merits of health care varies by element in the vector, too.” I am not certain this is exactly what you intended to say, but responding despite that concern, perhaps you are over analyzing the problem.

    Continuing you say “the need for health care is so stochastic, people will purchase insurance for the cost of illness” Perhaps you are measuring the wrong things. Have you ever thought of all the different reasons to use insurance that perhaps are not covered in your studies especially when insurance isn’t tailored to need? How about a counterintuitive reason. Carrying insurance so that you can tell a spouse to let the spouse’s parents die in dignity and not have the spouse say the decision was made to save money? How about children paying outlandish premiums for 100% coverage just so their parents will go to the doctor instead of worrying about $5. Were things like that ever looked at? They are not uncommon and quite voluminous. Peace of mind and an expensive sexy pair of sun glasses can go a long way to satisfying an individual’s needs.

    I assume the word you meant was trivial with regards to the problems on this list. If that indeed is your concern then why aren’t you suggesting utilizing the market for trivial or lesser concerns (presumably most of the health care market) and something else for the rest while demonstrating what makes those things different. Why don’t you list those major concerns and the % of total cost.

    My problems with all discussions regarding health care is that though economics (access, quality and cost) is the body and politics the tail it seems the tail is wagging the body. Eyes are being kept closed as to why certain things occur and that can only be seen at ground zero. Unfortunately policy is being created in the sky without the advantage of the tens of millions of bits of information that the general public and the treating professionals have. Practicality and experience trump your “nuance” especially when nuance is cut so thin that one cannot see what it is made of.

    I am sorry to have responded at such length, but I don’t have the ability to provide my thoughts in a more abridged fashion. In fact IMO I barely met the needs of a reasonable response.

    Thanks for listening.

  51. Ron Bachman says:

    The reason Gates diod not do the error project before was that there is a competitive market for these services that keep private insurance fraud to less than 1%. PPACA will remove much of the current system checks as only found fraud is excluded from the MLR. Fraud costs for studies that provide a sentinel affect will be included in the MLR. The government should use these same services for Medicare and Medicaid. Instead they shout proudly that there administrative “check writing” pay and chase expenses are low. If Congress tries to get serious about fraud the libs yell and scream that the beneficiaries will get hurt and that Reps. are being unfair. Go fugure – there is no profit incentive or efficiency mentality in the government programs, only rheteric.

  52. Chris Ewin, MD says:

    Wow…A spirited blog today…

    Back to where the rubber hits the road..
    Why Profit is our best friend…

    It is all about OVERHEAD. Two of the biggest costs in a business: 1. salaries 2. rent.

    Pretty simple when you have a smaller practice needing less space. And less staff b/c you can only take care of so many people and do it well. Case in point…my family practice…Overhead has been cut from 65% (waste) to 25% (lean) by working for my patients.

    As been said many times, Quality, like beauty, is in the eyes of the beholder. patients determine it. I liken it to a restaurant/movie/etc reviewer telling us whether the food is good or the movie entertaining. To each his/her own.
    In Healthcare, Quality will never be determined by anyone else but the patient.

    The conclusion by many of us on the frontlines:
    We have a systems problem in bad need of repair. The only one that can fix this is entrepreneurs who are businessmen who can offer new systems to decrease cost.

    The Big Picture by me: It’s a primary care problem. At the point of care, we in private practice have to decrease our costs in order to stay open….I imagine it’s worse for businesses/hospitals/etc that hire PCP’s as employees. No one can streamline a business/practice then someone who is watching the bottom line.

    I do a quality survey every month with my concierge patients. They all have 100% satisfaction b/c they pay me…..

    Expansion brings complexity and complexity brings decay.

  53. H D Carroll says:

    @Linda Gorman
    I don’t understand why you insist on calling an all payer system a “single price” law. There is no single price set for providers by anyone. The providers are totally free to establish their own price list for services to the ultimate consumers. It does not take anything away from them to insist that they require the same price going in to all seeking the same service from them, while allowing them total freedom to adjust final balances after third party contributions. Society, through individuals, is the only consumer to providers, and it is not an infringement on market rights to insist on consistent and rational pricing – totally unlike what we have today.

  54. Linda Gorman says:

    Who will define “consistent and rational pricing” in your plan? The gist of the economic argument against central planning is that there is no way any single authority can create rational prices simply because it cannot process all of the information that a freely functioning price system does.

    The only “consistent and rational pricing” that we know of is that created by individuals who are free to offer services at whatever price they choose in concert with individuals who are free to choose what they want to pay for the services they wish to buy.

    The same price for all patients will not work because time, space, and demand fluctuations matter for pricing. Suppose a physician offers service A to person B on March 15 for $5,000. Suppose he offers service A to person B on December 25 for $3,000. Is service A offered on March 15 the same as service A offered on December 25? Does this mean that your price list have to differentiate services by day, and accurately forsee possible slack periods that no one has yet identified? Why can’t physicians have sales like every other producer?

    Suppose there is a local disaster and the physician’s services are suddenly in high demand. Is he allowed to charge much higher prices to patients who want immediate care and lower prices to those willing to wait? If not, how do you propose to ration the physician’s limited service capacity?

    Suppose a patient failed to pay for a service. Is the physician required to offer his services to that person at the same price he charges everyone else?

  55. H D Carroll says:

    No one sets the prices except the provider within their market, based on what they think they can get for the service given their quality standards, etc., and what they can persuade customers to pay. There is nothing wrong (except the need for some kind of minimum time frame for posted prices, perhaps such as quarterly) with the provider changing the prices from time to time, in fact that will be expected as market conditions change (competitors lower their prices, more competitors move in to the area, some competitors come up with more creative ways to package services, etc.). The key element that you don’t seem to get is that their charge must be consistent for the same service during the same “time effective” period for that set of charges. Of course they can charge more to one person if they provide different services to that person, as long as their pricing system accounts for the distinction, and as long as that pricing system is available to all patients during that same time horizon. Do you think it is proper for a given super market to decide to charge two customers a different price for exactly the same thing at exactly the same time? Let’s not get silly thinking that doctors should or would spend any time trying to data mine their business for charge differentials from hour to hour. All a rational and consistent system requires is that they post their charge list (or the formula by which they package/discount for multiple services/ whatever – they are free to innovate HOW they price) for some (yes, someone will have to decide what it means) reasonable amount of time for which the prices will be effective, and they charge consistently to every patient walking in the door during that effective time period for the exact same (quantity/variation/color/size/whatever parameter you want) service. After the initial bill and settlement by any third party to which that patient happens to be affiliated (insurer/government/association/health plan), the resulting “balance bill” which incorporates any copays/deductibles/coinsurance/limitations/limits on allowed fee schedules that apply, is subject to negotiation/adjustment by the provider, at their discretion. What does a provider do NOW if a patient doesn’t pay them? Why does all payer create any new problem? Perhaps the provider won’t treat customers who can’t show that their insurance covers at least a substantial portion of the bill – that is at least something that will be KNOWN in this situation, and which isn’t now – that’s the whole point.

  56. Chris Ewin, MD says:

    To HD Carroll:
    “The key element that you don’t seem to get is that their charge must be consistent for the same service during the same “time effective” period for that set of charges.”

    In pharmacy, pricing it not the same to all pharmacy chains…Walmart may get a huge discount compared to the same drug on the same day at an independent pharmacy across the street. And there are over 20,000 payers.

    In New Orleans during Jazzfest and Mardi Gras, hotel prices go up….

    Same with hurricanes….water, generators and plywood prices go up..

    The consumer (not “society”) makes the purchase decision.

    I do the same with my practice. I spent the last hour with 7 drug addicts having a 121MD NA meeting in my office. I made them pay a CASH price plus do drug testing to hold them accountable…..
    They make the choice…..And if they don’t come and pay, they’re out of my office….
    PS: It’s nice to see that 6/7 are sober and one will work on stopping today….
    It’s amazing that someone can chew up 20-25 Norco 10 at the same time and live….They’re are spending $100-150/day on their habits and some work as managers at Taco Bell etc…

  57. H D Carroll says:

    to Dr. Ewin – but those hotels and price gougers during hurricanes are at least consistent to all comers, which is all I am saying. Again, if you wish to post different prices for different times of the day, for different days of the month, whatever, I imagine that will be fine. You just can’t do it from one patient to the other based on the patient or with whom the patient is affiliated, not for the same service. By the way, pharmaceutical manufacturers should not be able to vary the prices to intermediaries, nor those intermediaries to retain outlets. They can add markup any way they want, as long as any purchaser (from them at their level) is offered the same terms. That would fix the Rx problem, and eliminate 90% of the reason for PBM’s to exist now, perhaps they would then focus on what they are supposed to be doing, managing the benefit, not milking it for rebates.

  58. Linda Gorman says:

    Price gouger is a pejorative term. Calling people who charge high prices after hurricanes have created scarcity “price gougers” is the usual way to ignore the fact that the natural disaster has created extreme scarcity and that that scarcity must be dealt with somehow.

    The high prices charged by those seeking a profit do three beneficial things: they reward people for preparing for the worst, they ensure that existing goods will be used wisely, and they attract profit-seeking entrepreneurs who work hard to remedy the scarcity.

    The alternative is to continue pricing everything the same and pay hordes of bureaucrats to determine who gets what. The result is FEMA, continuing scarcity, and waste.

    Leave prices alone. They transmit information essential to efficient system performance and there is no known way to do it better.

  59. Al says:

    What Linda G. says about so called price gouging is entirely accurate. South Florida had a hurricane right before a big three day weekend. The damage wasn’t that great, but due to a temporary closure of roads gas was unable to be delivered to the gas stations for a day or so and then a three day weekend hit. The governor had already gone after so called “price gougers” so there were none around.

    Normally one would have paid the truck drivers an extra amount of money to bring gas to the affected areas and thus the station would raise prices. Unfortunately the raising of prices during times of need is illegal so many people had to do without gas for a prolonged period of time for no driver is going to give up his three day weekend merely to be paid his usual rate.

    FEMA after another hurricane merely threw out money to those that lost nothing. They also tied up important roads preventing people from traveling on them. People would sometimes ask only for ice, but FEMA insisted that unneeded food be taken as well. They compensated people for lost income but didn’t check on the claims so part timers were paid for a full week. A lot of people bought generators whether needed or not because there was a 100% reimbursement. Some later sold the generators or perhaps they returned them and kept the money.

  60. H D Carroll says:

    Why are we discussing price gouging? It has nothing to do with a rational pricing structure. I will concede I should not have used the term – however, I am not the one who necessarily thinks of it as pejorative. I merely used it to describe a situation, and you understood exactly what I meant. It is still irrelevant to the discussion. I have described an essentially free market, one that does have some boundary conditions – (1) for practical reasons, a time period during which freely posted price structures are established by providers (each one separately, not as dictated by any outside agency) to be effective for all patients they see, complete with total freedom to create packages or combinations of services – (2) the provider may not offer any affiliation discounts on that charge master, the charge for the service or package they make applies to all persons getting that exact service or package, without regard to who or what might be providing them with financial support to pay for medical care – (3) the provider is totally free to adjust or waive any resulting balance bill after third party recover by the patient (or via assignment) has been made, but only in consultation/negotiation with the patient, not the third party. I fail to see how this can possibly be construed as fixing prices, or messing with market pricing mechanisms in any serious way. A consumer marketplace only exists if the information regarding prices (and quality and value) of a product can be known for an effective time period during which a decision as important as arranging and purchasing medical care (we are not discussing true emergency care here – that is another topic that does need to be discussed) is taking place. A rational set of reasonable “rules” in which the practitioners operate in order to facilitate this process cannot attract serious opposition. Or are you in favor of a one-sided game in which the surgeon decides on the operating table that it is a good time to up the price? The country has a reasonable, if not perfect by any means, beta test of an all payer pricing marketplace in the Maryland hospital pricing arrangement. The best proof of practice is that the feds have had to continue to honor their agreement to pay the all payer rates because it has consistently beat the infamous “cost curve” relative to the rest of the country. Why not let the physicians operate in a similar environment, but one where they choose their charge master rather than have to have it approved by a commission as with the facilities?

  61. Al says:

    HG Carroll:

    Do you believe banks should charge the same rate to everyone despite the risk factors of being paid back?

    Do you think physicians shouldn’t have the opportunity to charge one person less because the bill is so high that he no longer needs to mark things up?

    Do you think a physician shouldn’t have the right to charge a “most favored patient” less because of their support over the years?

    Do you think a physician shouldn’t have the right to charge a person more because the physician doesn’t like him?

    The only thing that I can quickly think of that count are transparency and freedom of choice. Freedom of choice in medicine can be a problem, but one can look at it in a contractual sense and I believe there is a legal term for this. If no true contract was made a physician cannot just simply make up a fee (One also can’t create an enforceable contract where life and limb are immediately at stake such as ‘I’ll throw out the life preserver if you give me a million dollars when you get to shore.”). Courts can be used to adjudicate this type of problem. Thus if a physician doesn’t provide transparency of price or if the situation was exigent without time for consideration then rules can be created to impose a price if the two parties are in disagreement.

  62. Chris Ewin, MD says:

    @ Linda

    @ Al
    Thanks for the point about the Gov going after price gougers…It should be done. But, like TPA’s & govt-run HC, it’s yet another example (FEMA) of wasting tax payers’ money. Joplin has a great work ethic and neighborly attitude about helping others. Same with Texas after Christina.
    And, like Linda noted so well, the 3 beneficial effects.
    A 4th, those with family and friends will pay b/c they aren’t prepared and they are willing to pay. market forces…

    @ Al
    “Unfortunately the raising of prices during times of need is illegal so many people had to do without gas for a prolonged period of time”
    You have a valid point, but people make poor decisions during a period of crisis (like hurricanes or when they are ill…a stitch in time saves nine)…
    They should leave town early before the hurricane when advised (even if they are prepared with generators/food/water)…Many (most) services may not be provided afterwards…My family and I are from New Orleans…Don’t ask me how I know…

    “If no true contract was made a physician cannot just simply make up a fee”

    “If no true contract was made, a flea market vendor, used car, furniture, estate salesman, etc cannot just make up a fee”

    A lady complained to her surgeon about the $1,200 bill for her appendectomy. “You only spent 30 minutes doing the procedure!!!”

    He changed it:
    $200 for the 30 minute service
    $1,000 for knowing where to cut.

  63. Al says:

    @Chris E. “Thanks for the point about the Gov going after price gougers…It should be done. ”

    In the case I was referring to it shouldn’t have been done (Gov going after price gougers) as that caused more suffering then necessary since the higher prices were only a recognition of the scarcity of products and the higher costs in time and money to bring those scarce resources to an area in need.

    @Chris E. “They should leave town early”

    The only ones that should leave town early are in the evacuation areas such as people on the coast or dangerous lowlands. To evacuate everyone from certain areas would mean that millions might have to evacuate several times in a year and the road systems can’t handle that type of evacuation. It is never certain where the hurricane will hit or hit hardest. Thus those (most) that remain always have the potential of being without certain services for a period of time. New Orleans is different then most places.

    Regarding my statement: “If no true contract was made a physician cannot just simply make up a fee”

    If there is no contract then no fee can exist. If a service was provided without a contract for various reasons then if there is a dispute the courts have to adjudicate that problem and determine the fee.

    My suggestion to solve the transparency problems is that if no fee was announced prior to a service that locally we set by law an average, preset fee, etc. to be used. If the physician sets the fee before hand and it is voluntarily accepted by the patient then that fee prevails.

  64. Kartik says:

    Let’s return Insurance back to it’s traditional role – reducing costs for them AND us!! Let’s also create a national market for insurance companies (health, life insurance national market already exists) and medical providers! Costs will go down.

    I was reading about Blue Cross Blue Shield of Tennessee, and they pay 84 cents for the premium dollar on medical care. But that 84% would be disproportionate and a lot of it would be going to routine expenses, best paid for out of pocket.

  65. Chris Ewin, MD says:

    Don’t forget that Docs often treat people for free even if there is a “contract”

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