A Free Market Antidote to High Medical Prices?

Scartelli Olszewski P.C.

The cost of medical care impacts all of us, directly or indirectly. We pay for it either out of pocket or, as costs increase, our health insurance premiums or deductibles increase. By one estimate, medical care costs consume 20 percent of personal spending.One suggestion to slow medical cost inflation, if not reduce costs, is the power of the marketplace. In a Wall Street Journal opinion piece, James C. Robinson writes about the virtues of comparison shopping for medical expenses. If patients are aware of the charges for procedures at area hospitals, the logic is that informed, motivated medical consumers will go where prices are lower.

That should drive down costs as hospitals compete, according to the theory.Robinson, a professor of health economics at the University of California, Berkeley, cites the example of efforts by the California Public Employees’ Retirement System (CalPERS) to limit payments for routine hip and knee replacements. Administrators discovered that the program was paying “between $20,000 and $120,000 for the same procedure across the state, without commensurate differences in outcomes.” CalPERS, the second largest benefits program in the country, created a “reference pricing” system in which it determined an average cost for the procedures at hospitals with good quality outcomes, then established a $30,000 limit on what it would pay.According to Robinson, after that change was made,

The percentage of CalPERS patients selecting low-price hospitals increased to 63 percent in the year after reference pricing was introduced, from 48 percent in the year before…Half of the high-price hospitals cut their rates, many by a considerable amount…Across all hospitals, prices charged to CalPERS for joint-replacement surgery declined by 26 percent in the first year and by even more in the second. The combination of changes in market share and cuts in prices reduced CalPERS’ expenditures over two years by $6 million.

This is a great start, but health care is not composed only of medical procedures for which you can plan in advance. People injured in car accidents, for example, can’t shop around for treatment. After a car accident, even if you’re conscious and have your wits about you, you don’t know what medical procedures are needed, let alone are able to surf the Internet to comparison shop local hospitals for the best value. You’re put in an ambulance and you go to the nearest, most appropriate hospital for treatment.A possible danger of the “reference pricing” marketplace approach is that if hospitals are forced to lower prices and cut costs in areas where they compete with other hospitals, they may make up the difference by charging more in the emergency department. They know most emergency patients can’t shop around, so there will be much less price pressure due to the lack of competition.The nation’s medical system is complex and no one solution will single-handedly reduce health care costs. The free market system can help reduce costs, but may not address all costs for all patients, especially accident victims.