Pricing irrationality in health care
February 06, 2015
The New York Times ran an interesting article about how prices in health care can be irrational. Medicare sets its own prices, rather than having the price determined by supply and demand, like most other industries in the US. As a result, some of the prices can seem odd to outsiders. The article points out that there are certain procedures that cost significantly less in the doctors' offices (in a clinic) than they would when performed at a hospital -- even though the procedure is the same and the setting makes no difference. The result? Hospitals have been buying up doctors' practices and then charging the hospital rates.
Mandated pricing often leads to distortions in the marketplace. For example, drugs that are sold at higher prices in the US might be smuggled across a border. In this case, Medicare may be accelerating a perverse cycle where larger and more expensive providers get even larger by acquiring lower-cost competition.
Not surprisingly, people representing the more expensive providers resist the idea of leveling the payments across both settings. The AHA executive who was interviewed raised the point about hospitals being more expensive to operate. In most other industries, suppliers don't get paid more for the same service simply because their costs are higher. Rather than trying to spread the higher costs of operating a hospital across all procedures, maybe it would make sense to pay identical services the same rate, and specify a higher price for the procedures that can only be done at a hospital -- that would help the market get closer to the true price of a procedure.