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Home Publications Blogs Beat the Press Health Care Costs: Don't Blame the Free Market

Health Care Costs: Don't Blame the Free Market

Sunday, 02 June 2013 07:36

The NYT has a very interesting piece documenting how much more people in the United States pay for a wide variety of medical procedures and drugs. While the article provides much useful information, it badly errs in telling readers (in a quote from David Blumenthal, the President of the Commonwealth Fund) that the cost problems stem from a free market.

In fact, one of the main reasons that the United States pays so much for health care, including the items listed in this article, is precisely because it does not have a free market in large sectors of the health care industry. Of course it severely restricts the admission of immigrant doctors into the country, driving up the pay of physicians to two or three times what they would receive in other wealthy countries.

Perhaps more importantly, it grants patent monopolies to drugs and medical devices. These monopolies allow pharmaceutical companies and manufacturers of medical devices to charge prices that are many thousand percent above their free market price. Not only does this raise the cost for these items it also perversely is likely to lead to unnecessary procedures, like the proliferation of colonoscopies that are a main theme of the piece.

Because the equipment used in colonoscopies is subject to patent protection, hospitals and other medical facilities are able to charge exorbitant prices. Since colonoscopies provide large profits (which would not be the case in a free market), there is a strong incentive to push their use on patients in circumstances where they may not be needed.

This is a more general problem in U.S. medicine. Because drug companies can sell drugs for hundreds or even thousands of dollars per prescription, when they can be profitably sold for $5-$10, they have an enormous incentive to mislead the public about the safety and effectiveness of their drugs.

This is why we regularly see stories about drug companies concealing evidence that their drugs are ineffective or even harmful. That is a direct result of the enormous mark-ups that are provided by patent monopolies. If drugs were sold in a free market these incentives would not exist.

Patent monopolies are one mechanism to provide an incentive for innovation, however they are a tremendously inefficient mechanism. There are other possible routes for financing innovation (the government already spends $30 billion a year on biomedical research through the National Institutes of Health).

Of course the industry will fiercely contest any changes that threaten their profits, but no alternatives can even be considered until the public understands the nature of the problem. This piece missed a great opportunity to inform readers.

Comments (21)Add Comment
written by foosion, June 02, 2013 8:13
The piece essentially argued for price controls, which would be a reasonable way to bring down costs if done properly. I'd rather expand supply by, for example, relaxing patent protection and immigration and licensing restrictions and have cost controls, but one of the two is certainly better than our current system.
the system itself is a big problem
written by Jennifer, June 02, 2013 8:32
I completely agree with you on patents; however the procedures and situations under discussion are only tangentially related to that issue (it sounds like they are going to target drugs specifically in another piece, which is where patent issues are most significant).
The point of this article, which is just as important, was to describe how the current medical system is the worst of both worlds, protected in some aspects as hospitals hide/manipulate prices (what kind of "market" is it if you do not know the price?) but "free" in other aspects, as hospitals, MDs and vendors can game the system for profit.
This is turn favors procedures that are expensive and of questionable value.
Drugs are the most dramatic and obvious example of how medical items are priced not necessarily based on what they cost, but what the market can bear- other medical procedures work this way as well, even when patents are not a factor.
These points cannot be said enough, as many conservatives are fond of "market-based" solutions that are not feasible because the medical system is not like any other "market".
Health Care Costs: Don't Blame the Free Market
written by Kenneth Fingeret, June 02, 2013 8:36

There is one other major party missing from the Medical-Industrial Corporate Extravaganza (MICE). The hollowed out Corporate Dominated non-Judicial legal injustice (sic) system. The can keep harming people both medically and financially for decades with only minimal monetary payments after years of litigation. The "good" news is that society will not be able to endure this and other harmful things much longer without dissolving into chaos.
Americans are a bunch of suckers when it comes to paying for medical devices
written by Robert Salzberg, June 02, 2013 8:41
I attended a course yesterday taught by someone that ran and re-designed an orthopaedic OR in a Florida hospital. The following hospital price estimates for surgeries do not include the surgeon's or the anesthesiologist's fees.

What do you think is the single largest expense for a total hip replacement or total knee replacement in terms of the hospital bill? Would you guess the OR time or perhaps the room and board for the 3 day average hospital stay?

Would it surprise you to know that the itty bitty piece of metal, plastic or ceramic that was implanted in the the knee or hip is the most expensive single charge for a hospital stay?

The medical device manufacturers paid good money for lobbyists to get their fee bundled into the total hospital charge so if you get a $9000 knee implant instead of a $4,000 knee implant, the hospital has to eat the difference because their total reimbursement is set by procedure code. If you're a Medicare beneficiary, the total allowable fee for the hospital stay for a total knee replacement or total hip replacement in Florida, including the implant is around $11,000. (Assuming there are no serious complications which would add to the fee.)

Hip implants are around $3500 to $3700 while knee implants run from around $4000 to $9000 in the U.S.

EU countries pay around 1/2 of what Americans do for hip and knee implants.
Reimbursement info for surgeon and hospital for knee surgeries
written by Robert Salzberg, June 02, 2013 8:57
2012 CPT code 27445 lists the surgeon's fee for a knee replacement at $1,255.

DRG code 470 for the hospital stay for a total knee replacement without complications paid $11,750. (national average)

written by JSeydl, June 02, 2013 9:20
True that more competition for doctors' jobs and less patent monopolies would lower costs. But on the issue of more competition in the insurance market, I think the verdict is in that free markets create higher not lower costs. Arrow predicted this in the 1950s, and I think the success of many countries around the world which restrict competition in insurance markets vindicates his research.

Also note that "error" can only be used as a noun. The verb form is "err".
FDA might be a much bigger cost driver for drugs and med devices than patents.
written by Capt J Parker, June 02, 2013 9:36
I fully agree that the medical care market is not a a free market and patents on drugs and medical devices are part of the reason. But, why point out that barriers to market entry for doctors increase costs but skip over barriers to entry for drugs and devices by FDA? If colonoscopie devises are too expensive it is not because of parent monopolies. Devices used in that procedure have been around for more than 40 years. Patents play a tiny role in the cost structure of those devices. Far less, I would bet, than regulatory costs and regulatory barriers to entry.
Poster Robert Salsberg points to lower costs for the same devices in the EU vs. the US. The reason is the EU regulatory burden is lower. (Patent law is very similar in US and EU) EU requires proof of safety prior to market entry. FDA requires proof of safety and efficacy - a much higher hurdle. Is there data showing a benefit to US medical care consumers of this higher barrier to entry? Another hint that US consumers might suffer from too high a drug and device regulatory burden is the fact that EU consumers get the benefit of new technology much sooner than those in the US.
written by skeptonomist, June 02, 2013 9:40
Why do US economists have to defend "free" markets with such religious fervor? Do we have "free" markets in police, fire protection and military services? Certain services are best provided by governments, and long and wide experience has shown that health care is one of these types of service. What is known to keep costs down most is a single-payer system, or other system in which there is central control. What is generally considered to be a "free" market, patents or not, just doesn't work well for health care.
one of the main reasons that the United States pays so much for health care, including the items listed in this article, is precisely because it does not have a free market
written by AlanInAz, June 02, 2013 9:54
None of the other countries with lower medical costs have free markets so why is this only a problem in the US.
Using "however"
written by H. S, Rockwood III, Ph.D., June 02, 2013 10:09

I sincerely admire your work (especially your continuing attack on the fraudulent use of the term "free trade"), and I follow you daily, along with Krugman, Bernstein, and occasionally Ezra Klein. During the course of my reading, you consistently misuse "however," as in "Patent monopolies are one mechanism to provide an incentive for innovation, however they are a tremendously inefficient mechanism."

"However" functions much like a conjunction, in that it can be used to connect two independent clauses. One way to rewrite the above would be: "Patent monopolies are one mechanism to provide an incentive for innovation; however, they are a tremendously inefficient mechanism."

A more effective and graceful way would be to move the "however" into the middle of the second clause: they are, however, a tremendously inefficient mechanism."

I'm a retired Professor of English who tries to understand Economics.
Colonoscopy excess cost must be something more than equipment patents.
written by AndrewDover, June 02, 2013 10:45
You wrote:
"Because the equipment used in colonoscopies is subject to patent protection, hospitals and other medical facilities are able to charge exorbitant prices."

Is Switzerland's $665 average colonoscopy cost not subject to Patent protection? You need a unique factor to explain higher US $1185 cost.


And is there any the basis for your claim that colonoscopy equipment has patent issues?

Every Fool Knows Profits Come First
written by Ellis, June 02, 2013 11:20
When has there ever been a "free" market? Never! Business has always used the government to finance its operations, to unleash military violence to steal and protect markets and profits. The government has always been business's accomplice.

Today, the government uses every trick in the book so that business can mine health care for profit through thousands of tricks and scams. That means we pay for everything. But that's the way this economy has operated... forever.
weirdly off-topic
written by Peter K., June 02, 2013 11:50
I REALLY enjoyed the first season of the BBC America Sci-fi show Orphan Black, which just had its finale.

The protagonist discovers she's been cloned and the villains are corporate patent trolls who patented the clones.

The theme is big issue. Intellectual property verus Open Source. What is IP for? Innovation? Private profit and rents?
When "Free Markets" Can Work - And When They Can't
written by Last Mover, June 02, 2013 12:19
It would help to clarify some terms here:

Free Markets do not necessarily mean competitive markets in the common vernacular. For example it can mean markets are free to be a monopoly. When Dean Baker uses this term he clearly means competitive markets.

Competitive Markets do not necessarily mean efficient markets. For example the market for sex slaves and animal poachers is not normally considered efficient under any standard except by the players themselves. Neither is the market for medical devices, even though doctors "compete" among themselves to use them inefficiently. When Dean Baker says doctors should compete more with each other, that doesn't necessarily mean less use of inefficient medical devices, although it could.

Failed Markets means markets are not efficient absent government intervention whether through modification or complete replacement by government. It can also mean markets are inefficient because of government intervention itself, such as through the abuse of patents to undermine competition as Dean Baker constantly preaches.

When Kenneth Arrow established long ago that health care could not be produced and allocated efficiently with markets due to failure, he was focused on the third point above and only the first part about conventional market failure since all the rest advanced afterwards. Arrow was talking about the general failure of information between supply and demand that prevents price signals to transmit information necessary to make decisions associated with things like emergencies and the obvious necessity of doctors to make decisions rather than patients.

And Dean Baker isn't even talking about what Kenneth Arrow was beyond conventional market failure via lack of competition. Baker is going after the part of health care markets that could work better through competition, as a practical way to highlight what could actually get done since single payer is off the table anyway.

Of course what really burns the egos of strutting media pundits who clamor daily that health care markets could work if government would just get out of the way, is Dean Baker in their face yelling that they don't work precisely because government was specifically designed to be in their way - by the very players who abuse the rent-seeking privileges acquired.

And all this infighting is still a much lesser part of the bigger picture that includes the vast amount of the health care market that indeed remains a permanent market failure per Kenneth Arrow, for which no amount of "free market competition" can ever fix under any circumstances.
The health care market ain't Free, it's Expensive!
written by Bashera, June 02, 2013 1:27
I know marketeers would love for us to think that it's possible for their little market to live in its own little bubble, free of governmental context, but it just ain't so. And even the government takes over a market, it still relies on free-agent players to accomplish its goals. So first it would be good if everyone just admitted the complementarity and that getting rid of one or the other is not the only solution. There is at least one middle way; it's not easy, but the whole can be maintained in only that way. Otherwise the market fails, whether by the hands of government or the hands of the private sector.
Gross Charges vs. Actual Price
written by TVeblen, June 02, 2013 8:32
Did anyone notice the difference between the amount billed and paid? Gastroenterologist 83% discount from gross charge (179/1075), anesthesiologist 35% discount, facility fee 40%, total charge discount 45%. So it looks like the gastro MD gets $0.16 on the dollar while the anesthetist gets about $0.65 of their "true" value. So if the gross price signal is meaningless, how the hell can the average consumer have any impact on the transaction? Arrow's critique has been validated and why every other advanced economy uses a single payer system. Either we're going back to a largely cash-based medical care system (dentists are practically there; orthodontists are already there) or after Obamacare crashes and burns (like the HMO debacle of the early 1990s) maybe we'll get a Medicare-for-all option. By the way, my guess is that medical students are well aware of the "specialty" discounts and we'll likely lead to even greater shortages in key areas. A sad and tragic situation.
I take a daily medication
written by Alex Bollinger, June 03, 2013 1:25
And pay a $10/month copay in the US. Once, the pharmacy didn't have the generic and the copay on the name-brand was $40. The pharmacist told me the full price for the name-brand is $189. I don't know the full price of the generic.

A month later I was back home in France. The same medication would be free under the national insurance here, but, even at full price, was only 6 euro for the name-brand (the pharmacy I went to didn't even carry the generic, and for this medication the name-brand is better - I've tried both).
written by PeonInChief, June 03, 2013 10:59
The cost of colonoscopy has increased because doctors use anesthesiologists to administer the drugs, and anesthesiologists cost much more here. Medical practices that use nurse-anesthesiologists save lots of money, and there's no reason not to, as the drugs are pretty simple to administer. (You're much more likely to get a perforated colon than a drug reaction.)

Even if you're doing exactly the same procedure, it will cost less in Europe because they don't overpay for doctors.
written by Robert Weiler, June 03, 2013 11:03
One of the worst anti-citizen pieces of legislation ever enacted is the Bayh-Dole Act which gives patent protection to inventions funded by public dollars to private corporations including drug companies. In theory, the NIH has the ability to declare 'march in' rights when companies that acquire the patents engage in price gouging. In practice, they roll over and play dead.
written by run75441, June 03, 2013 3:41

Healthcare today is a service for fees cost model. They make their money by selling you the most exotic product(s) and service(s)they can regardless of outcome and a lot of it. Base the fees upon the outcome and watch the cost model change.
Price Controls are Tyranny
written by SouthOhioGOP, June 04, 2013 12:18
Sorry. I'd rather die under a free market than live in a socialist one, whether it is health care or anywhere else.

You can't fix capitialism by tearing it down.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.