THCB

Why Aren’t Medical Prices Infinity?

This blog continues my exploration of mysteries of health economics. The title of the blog may seem inane, but when a senior colleague asked me this question 25 years ago, it changed my life. And the answer helps us understand a lot about what is wrong with today’s healthcare system.

I was in my second or third year as an Assistant Professor at the University of Chicago when my brilliant senior (but still young) colleague Dennis Carlton asked me to explain how medical providers set their prices. I told him that we needed to throw the traditional textbook economics model of pricing out the window. This wasn’t a market where price sensitive consumers chose among homogeneous sellers, with the result that prices in competitive markets converged towards marginal cost. Instead, consumers had insurance that paid for all or nearly all medical bills. Moreover, patients were loyal to primary care physicians and their referral networks. As a result, patients rarely shopped around for the best price. This was when Dennis asked me why prices weren’t infinity. The question stumped me! I supposed that insurers would only pay usual, customary, and reasonable rates but that didn’t prevent providers from asking for infinity and occasionally getting it. Perhaps providers didn’t want to appear unseemly or were bound by ethical constraints. Or perhaps, as I ultimately responded, medical prices were inflating so rapidly that they would soon reach infinity.

The conversation ultimately led me to examine all sorts of pricing puzzles. Why did prices seem to be higher in more competitive markets (in violation of the traditional price/concentration relationship?) Why did specialists make so much more than generalists? Do any of the rules of pricing apply to medicine?

Economists have solved some of these puzzles. The seeming violation of the price/concentration relationship for hospitals was partly a statistical artifact resulting from a failure to control for quality and severity of illness. And once managed care took over, the traditional price/concentration relationship firmly established itself. The violation for physician pricing could be explained by simple economic forces in monopolistically competitive markets (i.e., markets with many slightly differentiated sellers each of whom has some loyal customers). If some factor causes prices to be higher in some areas than in others, physicians will tend to gravitate towards the high priced areas in order to share in the higher profits. It is not difficult to imagine what factors might cause prices to differ – socioeconomic conditions, culture, the willingness and ability of patients to shop around. Health services researchers offer an alternative hypothesis – that physicians in concentrated markets “induce demand” in order to drive up prices. But this hypothesis had little empirical support beyond some old studies with major statistical flaws. And even these old studies found modest inducement effects at best – not enough to explain the data. Besides, the inducement hypothesis fails to explain why some markets are more concentrated in the first place. The market forces explanation is consistent with the data with the added virtue of explaining the variation in concentration.

Economists will be hard pressed to explain the pricing data that was just reported in Health Affairs. Laugesen and Glied find that U.S. physicians earn far higher incomes and charge far higher prices than their counterparts in other developed nations. The pricing gap is larger for specialists than for generalists. These price differences cannot be explained by differences in costs, including the cost of medical education. Economists often suggest that entry barriers protect physicians against competition that might drive prices down. But it is more difficult to become a specialist in Europe and Canada than in the United States. Moreover, Laugesen and Glied provide further data suggesting that U.S. physicians are not working at capacity; excess capacity is one of the surest predictors of price competition in almost any market, even hospitals. So why not physicians? And the specialist/generalist pricing gap has not been explained to anyone’s satisfaction, especially when there is excess capacity.

Policy makers seem likely to use the Laugesen/Glied findings as an excuse to slash physician payments. But until we understand why physician fees are so high, we will never be able to accurately forecast the impact of fee reductions. Unfortunately, after 30 years of trying, we are no closer to explaining these pricing patterns. During this time, prices have climbed inexorably closer to infinity.

 

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Christa Sheidlerwww.chasonys.comJohn McAshtinMargalit Gur-ArieBobbyG Recent comment authors
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Christa Sheidler
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You do have a very nice layout for your blog, i want this to use on my small site also.

www.chasonys.com
Guest

Good website! I really love how it is simple on my eyes and the data are well written. I’m wondering how I might be notified when a new post has been made. I have subscribed to your RSS feed which must do the trick! Have a great day!…

Doug Arnold
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Doug Arnold

Peter, I wish it were so. You wish for a system that seems to be what a “single payer” system would be where everyone is covered and all providers must participate. Good luck getting that past Congress as it’s currently structured. Today in the USA we have an insurance system called third-party payment where the insurer (Medicare, UnitedHealth, etc.) is in between the physican and his/her patient. That is the reality, and all the wishful thinking in the world won’t change it.

Peter1
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Peter1

Dr. Arnold, I guess I did not phrase my question properly. Medicine should not be a game of financial power wrestling between “oligopsonists”, “monopolists” and doctor fee strategizing, but every person seeking medical care should know that the doc will see them, not on the basis of how much the collected fee will be but on their medical condition. So if the fee now were set at a fixed rate (depending on procedure) what price in the ones you listed would you accept and which would give you a fair income? Because now if patients really want to know that… Read more »

Margalit Gur-Arie
Guest

Here is my problem with all these alignments and market power plays: they don’t seem to accomplish anything other than shuffling and redistributing an ever increasing amount of money collected from the people. Truth be said, both private payers and private providers are naturally interested in maximizing profits. Building bigger providers to fight off big payers doesn’t make any sense to me if the goal is to reduce expenditures. And if we are to reduce expenditures, either by quality improvements or sheer brute force, somebody will have to take a hit. It’s basic math. The way things are shaping up… Read more »

Doug Arnold
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Doug Arnold

Peter, I’d like everyone to pay me $150 for a 99213. But that’s not reality. Government payers (Medicare and Medicaid) set their maximum fees by law. In most markets a couple of large national or regional health plans usually set the fees they will pay on a “take it or leave it” basis becuase they operate as oligopsonists (which are monopoly purchasers, as opposed to monopolists, which are monopoly sellers) and are exempt from federal antitrust laws. They usually dictate prices they will pay and contract terms and rarely negotiate with physicians, who are usually disaggregated into hundreds of small… Read more »

Peter1
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Peter1

So if the $150 is the billed list price, like a car dealer’s suggested manufacturer’s list price (the one they never expect to get) and the low is Medicaid and the high is regional PPO ($136.60), what would be the set good price for all patients you would want?

Doug Arnold
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Doug Arnold

I the example I posted above, all commercial & self pay patients are charge the billed charge of $150 (~200% 2011 Medicare) for CPT 99213. The reimbursements I listed were the maximum reimbursement (copay + insurance payment) for various managed care plans, Medicare and Medicaid. Various contracts (either direct or through my IPA) prohibit collecting above the lesser of billed charge of maximum reimbursement. HMO fees vary widely as some plans pay below Medicare (the one whose CEO made over $100 million a couple of years ago) and others pay better (usually one which contract with my IPA). I did… Read more »

Peter1
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Peter1

“In my area we get about $55 from Medicare”

So how many patients in a week are Medicare? Certainly not 100%. So your example of your net pay (65% of $258,500) is unrealistic low ball.

Peter1
Guest
Peter1

“You really should do a little more research in to how things work before you post.” Really, well not being a doc limits my access to the murky world of treatment codes and rules, but I imagine you saw the ? at the end of my sentences. “unless they are cash pay, and then you have to get creative to give them a break, because there are people like you around who will say that if I give a cash pay patient a break, that must be my true charge and I should discount everyone.” But if you’re accepting all… Read more »

Peter1
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Peter1

“Here is what I’ll get paid by various payers:”

Does the patient make up the difference with co-pay? How do you set your billed charge at $150? Wouldn’t it be better to be paid the same one charge by all payers?

Dr. Mike
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Dr. Mike

You really should do a little more research in to how things work before you post. Those prices are the limiting charge i.e they include the copay. It is illegal to collect anything from the patient above the amount stipulated in the contract. You can go to jail if you try to collect more than the contract amount for the covered service. You can set your billed charge at $1500 or whatever ridiculous amount you want, it is irrelevant. You only get what the contract stipulates (unless they are cash pay, and then you have to get creative to give… Read more »

Doug Arnold
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Doug Arnold

CPT 99213 (office visit, established patient) is the most frequently billed CPT code. Let’s say I’m a primary care physician seeing an established patient. I set my billed charge at $150 (roughly 200% of 2011 Medicare). Here is what I’ll get paid by various payers:
Payer Payment % Billed
Billed Charge 99213 $150.00 100%
Regional PPO $136.60 91%
Large national PPO $109.04 73%
Large national HMO A $99.42 66%
Large national HMO B $84.27 56%
Large national HMO C $79.80 53%
Large national HMO D $72.00 48%
Large regional HMO E $92.75 62%
Medicare $75.89 51%
Medicaid (patient>19) $55.14 37%
Medicaid (adult patient) $35.48 24%

BobbyG
Guest

Is this for real? Can I use this as a (blinded) exemplar? Most of mine with my Primary are 99213’s. That’s in the pocket for what I know of Medicare 99213’s (yeah, they vary geographically). I don’t see how y’all do it. Even with that illustrative distribution of a payor mix. Even with a chump-change Part-B copay. I was working with a doc this afternoon at his office on the Meaningful Use criteria. He didn’t even know what his CPTs were (he outsources his billing, and, I guess, doesn’t run backoffice reports). We were doing “Active Problem List” and he… Read more »

Margalit Gur-Arie
Guest

So if you see, say 25 patients per day, and work, say 250 days per year, and assuming they are all Medicare, which is likely not the case, and assuming they are all 99213, which is definitely not the case, you bring in around $474,000 (my guess would be a bit more), and if your overhead is say 50% (likely less), you take home around $237,000 (likely more) before tax. Not quite infinity, but not too shabby either, particularly in a semi-depression. On the other hand, if you could collect your full billed amount, you would take home around $750K… Read more »

Dr. Mike
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Dr. Mike

Average Doc works 4 days per week – any more than about 100 patients is burnout. Have to take at least a week off for CME, Have to subtract vacation, holidays, etc. More like 4×47=188 days of patient care. In my area we get about $55 from Medicare for a 99213. 188x25x55= $258,500. Overhead is more like 65% in primary care, somwhat lower in larger group practices.
The only docs who receive what they charge are in direct pay practices.

Margalit Gur-Arie
Guest

There is no place within the US and all territories where the 99213 Medicare allowable fee is about $55. The lowest (in a small portion of a territory) is $61.97 for participating providers. The average is about $69 for par and $75 for non-par.
Are you leaving out the patient portion in the number you quote above?
Also, although 99213 may be the most common code (I haven’t checked this assumption), it is not the median. There are far more 4 and 5 being billed than 1 and 2, particularly by EMR users.

Dr. Mike
Guest
Dr. Mike

Yes, sorry, left out patient portion. In my state the participating provider reimbursement (inclusive of patient portion) is $66.04. I work 3 days per week in my clinic and take home $110K. Overhead is a killer when you don’t work full time. Half my practice is Medicare/Medicaid.

Incidentially, one of my friend’s son has just started Med school and has taken out his first of four $70,000 loans. I feel pretty confident in saying he won’t be going into primary care….

John McAshtin
Guest
John McAshtin

Doug: Thank you for your post. I work for a Regional PPO and confront your Payer Payment schedule from a different perspective. TPA’s and self-insured employers who need rental networks will do claims re-pricing comparisons between us and other local and national PPO networks to determine which network will provide the lowest cost of care (quality and quantity omitted). As an independent PPO our challenge has become competing with the national PPO carriers who now offer their networks to TPA’s. With your schedule not being far from what we see, we are at a significant disadvantage against the carrier networks.… Read more »

Health Policy Wonk
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Health Policy Wonk

George Halvorson offered a very elegant solution for this problem during his talk at the World Healthcare Congress this past May. As he put it, the US spends about 18% of GDP on health care, the OECD average is around 12%. If we just paid the same unit prices as that average, we could free up close to a trillion in GDP. Economists from Uwe Reinhardt to those writing in the current issue of Health Affairs have pointed out “it’s the prices, stupid.” There’s a relatively simple fix for this one–follow the lead of the rest of the developed world… Read more »

Peter1
Guest
Peter1

“I have the proff of my own experience with the shop” Just wondering how that worked. Did you have an accident in which you called insurance and their adjuster went to the shop and authorized fixing from shop’s estimate, then you went to the shop and said let me see the quote to insurance and how much if I paid cash/no insurance? And how much different was it and how did you know you were going to get the same job? So why is cash less, because body shops pad for insurance cause adjusters are stupid or don’t follow standard… Read more »

Peter1
Guest
Peter1

“The local autobody shop charges less for non-insurance repairs.”

Just an off the hip doc myth or do you have proof. In fact auto insurance companies use adjusters who tell the body shop what they will pay for and what they will pay, knowing that body shops are really good at padding the bill, the insured usually has no say, except to choose the shop. Have you ever asked a hospital what their non-insured price is? Look at the charge-master and see if docs/hospitals charge less than insurance will pay.

Dr. Mike
Guest
Dr. Mike

I have the proff of my own experience with the shop, and the reports of others. It is not about padding the bill, it was a different quote for cash vs. insurance work. I’m was not addressing hospital costs in my comment. I was addressing the statement asking why physician fees are so high. It is common practice for physicians to set as their fee for any particular service some amount that is slightly higher than what the “best” insurer pays, otherwise, as the consultants will tell you, “you’re leaving money on the table.” It is also common for most… Read more »