It’s (Still) the Prices, Stupid

Inefficient markets create price differentials for identical goods. These price differentials frequently occur among markets dominated by oligopolies. Taking advantage of market pricing inefficiencies is known as arbitrage. Commodity traders frequently arbitrage by buying low and selling high. In inefficient markets for perishable goods, such as airline tickets, hotel rooms, or medical imaging, there is no opportunity to re-sell these goods. Thus consumers of these goods, such as health insurance companies, will attempt to buy at the lowest possible price to maximize value. Today we see many apps and websites, such as Expedia, that engage in improving these markets in airline and hotel industries. Stroll Health is one company attempting to scale this behavior to medicine.

Our current Hospital Outpatient Department (HOPD) payment schedule is one example of an inefficient market where identical CPT codes are priced very differently based on whether they are provided in a grandfathered hospital outpatient department or a freestanding outpatient medical center. Hospital accountants will justify this higher payment schedule by attributing social expenses such as police and training programs. Other HOPD supporters will claim they deliver relative value through higher quality (outcomes) that justifies (often disproportionally) higher prices. Yet increasingly “illusions about value: that we know what it means and can measure it, that the same things matter to all patients” are being voiced.

If the value numerator (outcomes) in healthcare is increasingly viewed as subjective and difficult to measure, we are left with no choice but to default to quantifiable metrics such as price and access. Policy discussions along the dimensions of price and access tend to make academicians anxious, as they fear “commoditization” of healthcare; but ironically the academic bastions of board certification and Maintenance of Certification have already made healthcare fungible, fungibility being one of requirements of a commodity. While commoditization continues to be used inappropriately, it is time to accept that much of what physicians do is best differentiated by price and access, certainly not geography.

Hospitals, with support from organized medicine, are clinging to geographic HOPD structures in-order to boost their revenues. This strategy is not sustainable as markets and prices tend to be efficient. Sticky prices tend to equilibrate. Arbitrage often disappears.

Future healthcare strategy, or the creation of sustainable competitive advantage, must focus on customers; that is the needs of patients, providers, and payers. Access to compassionate and meaningful patient centered care, with respect for patients’ or their employers’ financial wellbeing is what the marketplace craves. The current trend of consolidation and monopolistic pricing practices from hospital systems may fail if patients become willing to travel or new competition enters a market. Thus, hospitals and medical societies who wrap their strategies around unsustainable market inefficiencies will face difficult futures as customers increasingly find value exclusively in price and access to services.

Yet as networks become increasingly narrow, access as an operational priority will fall away. Strategy will be distilled to price. To paraphrase political strategist James Carville “It’s the [prices], stupid.” Healthcare leadership can no longer ignore fundamental economics or our national mood of economically motivated political populism. Leaders who cling to grandfather’s HOPD business model will find themselves struggling as the working middle class becomes increasingly price sensitive in all markets. As the healthcare economy consumes a disproportionate amount of blue-collar employers’ and employees’ income, the sustainable strategy is to provide a fair price. Finally, because of narrow networks and limited substitution effect, any paranoia regarding perfect competition and a “race to the bottom” in healthcare is not likely to happen.

2017 was a hard year for retailers who could not match Amazon’s strategy of aggressive prices and ubiquitous access.   There is nothing special about hospitals and organized medicine that differentiates them from the failing brick and mortar retail sector. One hundred seven year old retailer L.L. Bean understood the central tenant of business, whether dealing in boots or biopsies, when he stated, “Sell good merchandise at a reasonable profit, treat your customers like human beings, and they will always come back for more.”

Seth Hardy is a practicing general radiologist in Lancaster, PA where he lives with his wife and two young children.

2 replies »

  1. We have to try some experiments: 1. Mimic as close as possible a free market using refundable vouchers. 2. Try somewhere making hospital (non-ambulatory) care a public good.

    Both of these would let us get rid of third part payers which many of us feel is our singular bete noire.

  2. Our nation’s ‘health spending’ is truly an enigma. As a portion of our national economy (GDP), we spend vastly more for healthcare than any of the other 34 OECD nations. And, we are the only one with a declining level of longevity. The “charges” issue is most succinctly explainable by the complexities of Parkinson’s Law, energized by the Medicare-Medicaid authorization in 1965. The “longevity” issue is substantially more complex. The pockets, large and small, of neighborhood poverty that exist in the urban, suburban and rural areas of every state are largely contributory. The solutions require a community promoted, State and Federally assisted process to improve the resiliency of each citizen’s family and their neighborhood, i.e., a Social Capital promoting strategy. Social Mobility for each citizen will not improve without it.
    I offer an advanced definition of Social Capital:
    “the Social Environment themes of TRUST, COOPERATION and RECIPROCITY
    .that occur more prominently within a community’s Social Discourse
    .for resolving the Social Dilemmas’ encountered
    .by each citizen during their participation in the community’s Civil Life
    .when generational Caring Relationships are increasingly prevalent
    .throughout the networks of the community’s citizens,
    .especially within the Neighborhood Network of each citizen’s FAMILY.”
    For an implementing strategy see the following: