Do Markets Work in Healthcare?

From Dr. John Goodman of the National Center for Policy Analysis…

Perhaps you have heard that health markets work reasonably well when
patients pay with their own money. LAZIK surgery and cosmetic
surgery are two examples. Yet, the authors of a new study dispute
this claim.

The article is called “Self-Pay Markets in Health Care: Consumer
Nirvana or Caveat Emptor?” It was funded by the Center for
Studying Health Systems Change (an RJR outfit) and appears at the
Health Affairs web site. The authors (both non-economists) focus
mainly on LAZIK surgery, but also include in vitro fertilization,
cosmetic rhinoplasty and dental crowns. They do not find nirvana.
But first things first. Buried in the middle of the article, in
the middle of a paragraph, with no bold heading and no mention in the
Abstract, as though it were only of passing interest, is this amazing
factoid: over the past decade, the real price of LAZIK surgery has
decline by 30 percent. Equally buried, is another startler: The
satisfaction rate among patients is 93 percent. And we can all be
thankful the editor’s shears did not expunge this tidbit: unlike every
other kind of surgery, in LAZIK surgery higher quality service
routinely commands premium fees.

Is there some relationship between falling prices, high patient
satisfaction, higher pay for superior quality and the fact that
patients are paying out of pocket? The authors never ask this

Given that the rest of the world is apoplectic over rising health care
costs and people everywhere are telling pollsters how much they dislike
their third-party payer systems, you have to wonder. Either a)
the authors are remarkably uncurious, or b) their world view is several
standard deviations away from the mean.

The authors did find many blemishes, however, causing them to conclude
that self-pay markets don’t work, or don’t work very well.
Although they never talked to any actual patients, interviews with
people on the supply side revealed a market with inconsistent pricing
and inconsistent bundling. (Some quoted prices include initial
screening and follow up procedures; others do not). Worst of all:
the primary source of patient information is word of mouth! Alas.

Here’s a personal confession. Before I go to the supermarket I do
not know the price of bread. Nor do I know the bundles (is the
sales price per loaf? Or is it buy one, get one free?) I
would not be surprised to learn that most shoppers are just like
me. But prices are not determined by what most buyers do.
They are determined by the buyers at the margin.

It’s economics 101.

John C. Goodman
National Center for Policy Analysis