Why Health Care Markets Are Not Competitive

Sounds like I'm going to write about boring crap, eh?  But it's important boring crap.

First, this bit of news:

Managed-care companies in New York have come under fire for signing up vigorous older adults referred to them by social day care centers, customers whose health needs are relatively small.

But on Tuesday, legal advocates for the disabled told the state’s Medicaid director that the most seriously impaired people were getting the opposite treatment.
Among the examples reported to the director, Jason A. Helgerson, in a meeting were cases in which the advocates said representatives of the managed-care plans deterred people who were bedbound or affected by dementia from enrolling in a plan, often by refusing to do an assessment at all, or by falsely saying that the plan’s budget or policies did not allow as much care as the person needed.

The practice of picking the healthiest cases is called cream-skimming or cherry-picking.  It makes sense for profit-based firms if the fee they get for each patient is roughly the same, because the healthiest people will have the lowest costs.  Outcome:  More profits.

To avoid that, the fees must be set to reflect the costs of each case.  That can be pretty tough to do.  But suppose that it could be done.  Then profit-based firms would have an incentive to exaggerate the difficulty of a particular case.

There's no simple way around this basic problem.  It is caused by the fact that the characteristics of the patients affect the overall costs of care, but those characteristics are not easy for some third party observer to quickly and cheaply determine.  That lack of information (and the one-sidedness of information) are what makes markets poorly functioning in much of health care.

Second, another example of the inherent problems in health care:

The data posted today on CMS’s website include information comparing the charges for services that may be provided during the 100 most common Medicare inpatient stays.  Hospitals determine what they will charge for items and services provided to patients and these “charges” are the amount the hospital generally bills for an item or service.
"Transformation of the health care delivery system cannot occur without greater price transparency," said Risa Lavizzo-Mourey, M.D., RWJF president and CEO. "While more work lies ahead, the release of these hospital price data will allow us to shine a light on the often vast variations in hospital charges."
These amounts can vary widely.  For example, average inpatient charges for services a hospital may provide in connection with a joint replacement range from a low of $5,300 at a hospital in Ada, Okla., to a high of $223,000 at a hospital in Monterey Park, Calif.

Prices do, indeed, vary widely.  But knowing just that isn't going to help consumers much at all, not to mention the fact that those who are covered by Medicare might not care what the costs are.

This is because price comparisons only help a little if consumers don't know the quality of care.  Just like comparing the cheapest and most expensive cell phone isn't going to be enough to tell you which you should buy, knowing that one hospital in your area charges more than another hospital is somewhat meaningless unless you also get statistics of how well the treatments worked and how satisfied the consumers were.

In a wider sense, that prices can vary so much is an indication that the markets are not competing in price.  And they won't do so unless pushed into that by the government.  Even then the problem of unobservable possible quality differences remains.

There are many reasons why competition is unlikely to reduce health care costs.  The one mentioned here:  That the information on prices is both unavailable and meaningless on its own, is only one of those reasons.  Others include the fact that even partially insured individuals will be less concerned about prices because someone else will chip in with the bills and the fact that the demand for much medical care is very price inelastic, meaning that individuals are willing to pay a lot for the treatment rather than do without.