Uwe Reinhardt has written a primer on how hospitals get paid. Government programs like Medicare and Medicaid might not be the most rational approach, but the free market is not doing any better for non-government paid health services.
Hospitals have a giant charge master, usually secret, with a master schedule of sticker prices for various services. Almost nobody pays these prices; though the uninsured tend to get charged these prices. Private insurers negotiate discounts from the master charge list, but the resulting prices tend to have less to do with quality of service than they do with bargaining power of the insurer vis-a-vis the hospital. Small hospital versus big insurer = big discounts while big hospital versus small insurer = smaller discounts.
Over all, then, annually establishing the prices that a given insurer will pay a particular hospital and the prices charged the uninsured is an enormously cumbersome and highly labor-intensive process not used by any other health system in the industrialized world. It adds a significant component to the high administrative cost that is unique to the American health system.
One interesting aspect of this process is the wide variation in how much a basic medical service costs at different hospitals — a variation that does not appear to be tied to quality.
Normal free market rules do not apply to health care, in my opinion. First, the market is inelastic. In many cases, you can’t simply do without unless you’re willing to die to save some money. Second, the knowledge of what needs to be purchased is not within the grasp of the average consumer. Third, the price and cost of the services from one provider to the next are not available to the average consumer.
Hey, Doug: Great post. I am not a health policy wonk and strive not even to play one on the Internet, but I want to add a note to your recap of Reinhardt’s primer about demand for medical services. It’s about the elasticity or inelasticity of health care demand. While it is true that demand for many health care products and services is inelastic (I think the classic example from my Econ 1 class for inelastic demand was syringes for patients with Type 1 diabetes), the demand — or at least the rate patients get these services, in case I’m spacing on the definition of elasticity — for other services is elastic and is driven, possibly in part, by non-quality factors such as the percentage of suppliers in a market that health services researchers are trying to figure out. Uwe’s series probably makes mention of the Dartmouth Atlas of Health Care (awesome graphic of selected Dartmouth data available here, which aims to measure and then try to understand why there’s variation across the U.S. in the rates in which people receive certain types of care. Given that in health care, too little is obviously a problem but more is not always better, this investigation is going to be helpful in a number of conversations related to reform. I mention this because variations in care received only make the 2nd and 3rd points you raise (about what consumers need to know to buy and how much things cost) even more problematic. The folks in my former day job at RWJF supported Dartmouth and continue to support efforts to engage consumer work and, like Daschle (just kidding!) I am cheering them on from the sidelines.
People who think this is a simple issue are not folks I want to see working on it – I worry that we may wind up even worse off by following the road paved by good intentions.
I’m just hoping that we can follow the start of the Hippocratic Oath: