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Free market health care

Summary:
and transparent pricing are  possible. Russ Roberts has a great econtalk podcast, interviewing  Keith Smith of the Surgery Center of Oklahoma Click on that link, roll over the areas of your body that hurt, and find out exactly how much it will cost to fix them.No insurance. Pay a preset transparent surprisingly low price. Get surgery. A great ...

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and transparent pricing are  possible. 

Russ Roberts has a great econtalk podcast, interviewing  Keith Smith of the Surgery Center of Oklahoma Click on that link, roll over the areas of your body that hurt, and find out exactly how much it will cost to fix them.

No insurance. Pay a preset transparent surprisingly low price. Get surgery. A great piece of news is that this is actually possible -- you won't go to jail (yet) for just running a hospital like any other business.

Russ and Keith had one particularly good interchange on why regular hospital pricing is so screwed up. I have made the point several times that our government wants to cross-subsidize indigent care, medicare and medicaid, and the insanity of hospital and insurance billing is mostly a reaction to that. I went on to speculate that the government is also restricting competition to uphold these cross subsidies. The existence of the surgery center of Oklahoma says to some extent I am wrong about hospitals, though it raises the question why the model is so scarce.

Russ: A friend of mine recently had back surgery at an academic institution, a nonprofit regular hospital, a very good one with a good reputation. The surgery... was $101,673.77. Seriously. Now, my listeners know that macroeconomists have a sense of humor. We know they do because they use decimal points. But it turns out hospital finance offices do too. ...That is not--repeat--not--what the hospital collected from the insurance company. But that list price, that weird, enormous list price of $100,000--a little over 100,000--was on the form. 
The surgery facility... got $13,000 from the insurer. You charge for that same surgery, I looked it up, a little under [$10,000]. So, they're 30% more than you for what they collect and they're 10 times what you charge on the list price. 
My first question is why did they write down that goofy number of $100,000 on the bill, even though the insurance company only pays [$13,000]? ... 
Keith Smith: Well, I'll back up in time. I was at a meeting where there was some hospital people and they were very angry with me because we put our prices online.... and this angry hospital administrator lost his cool....he asked me what percentage of my revenue at the Surgery Center of Oklahoma was uncompensated care.... that question haunted me, because that is a very bright, very articulate person. And he does not misspeak. I thought very carefully about what he actually said. What percentage of my revenue is uncompensated care?  
[JC, in case you're skimming read the literal words. Normally, uncompensated care might be a big fraction of your costs, but sort of by definition zero percent of your revenue]
...So, I did some checking and indeed hospitals are paid to the extent that they claim that they were not paid. And this is a kickback... Hospitals are paid to the extent that they claim that they were not paid. 
Russ Roberts: So, explain. 
Keith Smith: So, a $100,000 bill, the hospital collects $13,000. They claim that they lost $87,000. 
This $87,000 loss maintains the fiction of their not-for-profit status, but it also provides the basis for a kickback the federal government sends to this hospital in the form of what's called Disproportionate Share Hospital payments. 
So, when you hear uncompensated care, that is the $87,000 that your friend saw written off on the difference between hospital insurance and what insurance paid.
So, the fact is, the hospital made money on that case. But they claimed that they lost $87,000. 
And then that fictional loss provides the basis for a kickback from the federal government, called--it's uncompensated care or DSH, Disproportionate Share Hospital payments. So, as I thought about this, I began to realize that there's a lot of people in on this scam. Including the insurance companies. I mean, why would an insurance company agree to play along with this hospital? Well, the insurance company actually wants an inflated charge because then, for employers they work with, they can show that the savings that dealing with that particular insurance company generates is very, very large.... 
Now, what the insurers actually do is ask the hospital administrators, 'Can you do a brother a favor and actually charge $200,000 for that, so that our percentage savings actually looks larger?'
It goes on like this. A definite must-listen.

In related news, "the Trump Administration Releases Transparency Rule in Hospital Pricing" reported by Stephanie Armour in the Wall Street Journal. The subhead is "legal challenges are likely!"
The final rule will compel hospitals in 2021 to publicize the rates they negotiate with individual insurers for all services, including drugs, supplies, facility fees and care by doctors who work for the facility. 
The administration proposed extending the disclosure requirement to the $670 billion health-insurance industry. Insurance companies and group health plans that cover employees would have to disclose negotiated rates, as well as previously paid rates for out-of-network treatment, in file formats that are computer-searchable, officials said.
...
The requirements are more far-reaching than many industry leaders had expected and could upend commercial health-care markets, which are rife with complex systems of hidden charges and secret discounts. The price-disclosure initiative has become a cornerstone of the president’s 2020 re-election health strategy, despite threats of legal action from the industry. 
Hospitals and insurers typically treat specific prices for medical services as closely held secrets, with contracts between the insurers and hospital systems generally bound by confidentiality agreements. 
All well and good, and a testament to lots of the good  regulatory reform work going on under the radar screen in Washington. In some sense the headline chaos is quite useful. And my personal kudos to the market oriented health economists working on this effort.

But... You have to ask, just why do we need another layer of price-transparency regulations? Why are hospitals choosing such devious schemes, while grocery stores don't? Or, a better analogy, tax lawyers, contractors, car repair, pet repair, lasik surgeons, or anyone else performing complex personal services does not do this sort of thing? Are hospital administrators uniquely devious? Of course not. They are good hard-working men and women trying to do the best they can in a screwed-up regulatory and legal system.

So as long as hospitals and insurers want to play these games, as long as the strong incentives are there to play these games, so long as many arms of the government want to play these games to support medicare, medicaid and indigent care that governments don't want to pay for, I'm less than sanguine about their inability to get around a set of transparency rules. It seems about like bank risk regulation, a game of cat and mouse. It would seem more effective to reduce the government-provided incentive to screw things up in the first place. I guess that if transparency is politically hard and headed to legal challenges, reforming a system that so many people have so much vested interest in -- intellectual as well as financial -- might be even harder.

But, as long as the Surgery Center of Oklahoma is not driven out of business -- which its many competitors would surely like -- maybe there is hope. Free market, cash and carry, competitively priced health care might just upend the ossified current system.

Imagine if there were two Surgery Centers of Oklahoma, competing on price and quality...

John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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