January 5, 2017

Why Health Care hasn't been a free market and has little price competition (regardless of Obamacare)

Graph via California Health Care Association
Before the Affordable Care Act, health care costs and insurance expense rose every year, often sharply.

As I wrote in 2010 here, people will pay whatever health care costs up to the limit of their ability to pay in order to get what they think is needed.   For much of care, having insurance makes price shopping feel beside the point.  Even for expensive care in terms of out of pocket cost, price shopping can be harder to do than we'd guess at first.  Often there is a feeling of little time.  Why not trust the insurance choices of network providers, because quoted non-network prices are often higher as one learns calling around the area one lives.  Of course the idea of a network to begin with is that price and quality have been shopped for....  But have they?

Health care insurers often have little opportunity to do effective price shopping in the U.S.!

Why?  For the reasons below.

What Prevents Price Competition:

1) Most doctors have banded together into associations to negotiate prices with insurers, so that there are in most places no significant (large enough patient capacity) competitors outside the near monopoly association groups to compete on price.

Two competing associations will naturally set their prices only a little apart.  For this reason -- most people prefer certain doctor or a certain specialist or group.  Insurance then hides the real prices of that doctor's services from the patients, who only pay a fixed co pay most often, such as $20 or $40, regardless of the price.

The somewhat lower cost association knows there is effectively no other choice available, except the somewhat higher cost association.

Therefore, they have zero need to lower prices to get enough customers.

As the other group raises prices, they can simply raise their own a similar amount without losing any customers.

2) Many possible types of competitors are prohibited by law--

As it's illegal to practice medicine without a license, meaning it's illegal to practice medicine without meeting the certain standards of what licensed doctors consider correct knowledge created by current and past licensed doctors and then taught by accredited medical schools.  Which are expensive here in the U.S.

New doctors going through these expensive schools to acquire this certain knowledge and then passing the licensing are economically compelled to join the higher-wage (existing) associations by student debt, and to avoid many of the overhead costs of offices by combining with other doctors in a group.

Thus there was and is little significant price competition in most areas.

This will not change merely by removing the Affordable Care Act.

One wonders if classic anti-trust legislation could even help, because even having 3 associations in an area may only have a small competitive effect unless they are all high-capacity, and there is at least some excess capacity.

It's feels more intuitive given patient doctor-preference or medical group preference that at least 3 high-capacity associations/groups (who are not price fixing together behind closed doors) in an area would be needed to get some actual price competition.  And that's only if there are sufficient sufficient doctors available for that competition, which is constrained by current laws about licensing and the outcome of medical student debt.

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