Healthcare and the Free Market: Does Competition Work?

Professor Roy Benaroch, M.D.

Imagine running a grocery store where sometimes you had to give the food away.

healthcare billing paperwork, with a pen, calculator, and stethoscope
How do you compare prices that you don’t know?

Competition often works. Competing dry cleaners or donut shops must either improve the quality of their product or keep their prices low, or customers will go somewhere else for their cruller fix. In time, the better businesses—the ones that provide tastier pastries at a lower price,—will thrive, and less-good, more-expensive businesses will go away. In the long run, all customers benefit from competition between businesses.

That’s how it’s supposed to be in the American marketplace. But the reality in health care is that it’s not a free market, and it can’t be a free market, and we cannot rely on competition to keep prices down. One big reason: health care prices are a secret.

This article originally appeared in Professor Roy Benaroch’s blog, The Pediatric Insider.

 You know how much a donut costs. If it’s too much, you’ll take your business elsewhere. Or eat a croissant, or (God forbid) a gluten-free muffin. But can you shop around to find  better health care costs?

A quick story: I use a CPAP machine at night. (Apparently, if I don’t, I stop breathing. I’m told that’s bad.) I get billed $140 a month from the CPAP company, which is magically transformed into $42 a month on the insurance statement, which I pay towards my deductible. I called today to find out from the CPAP company what the total cost will be (it’s a rent-to-own deal, and eventually the machine will be paid off.) They wouldn’t tell me the total, but suggested I call my insurance company. Who also wouldn’t tell me the total, but assured me that if the CPAP company went over their “contractual rate”, the insurance company would stop paying. (How this helps me, I don’t know, but isn’t it nice to know that my insurance company won’t overpay? I might get hosed, but thankfully the good people at Aetna are protected from CPAP price gouging.) That “contractual rate”? It’s a secret (their computer knows, I was assured, but they can’t tell me.)

Even if I wanted to shop around for a less-expensive CPAP device, I couldn’t, because no one will tell me the price. Not that I would shop around, honestly—after those two phone calls, I’d rather poke a fork in my eye, or just stop breathing at night and let my wife shake me awake (which has always worked before. Maybe I need to start paying her that $42 a month.) Secret pricing and means that competition and comparison shopping just aren’t possible for many medical services.

There are other reasons that health care doesn’t abide by free-market principles:

Hospitals and emergency departments have to provide care to everyone, even if they can’t pay. Imagine running a grocery store where sometimes you had to give the food away. To stay in business, you’d have to jack up the prices on the paying customers to cover the non-payers. Now: emergency departments are not grocery stores, and I agree that it is morally unacceptable to turn sick people away. But someone has to pay for this. Emergency departments cannot be run like an ordinary competitive business.

The “barriers to entry” are too high to ensure competition. If a donut shop offers crappy, expensive donuts, another shop can open up across the street. But opening up a hospital is very expensive—and requires government clearance for a “certificate of need” and all sorts of other hoops. Pharmaceutical companies, device manufacturers—these are also very, very expensive companies to start up, and that stifles competition. Legal wrangling also gets in the way. There is no fair playing field to even out or control prices for the biggest-ticket medical expenses.

On the other hand, it’s relatively inexpensive to open up another walk-in or urgent care center—that’s why there’s one on every corner. At least in wealthy neighborhoods. You’d think that would create competition and lower prices—but that won’t happen, not unless their customers can comparison shop for price and quality. (By the way: judging the quality of medical care is also fraught.)

Many people don’t pay their own health care bills. We’ve come to expect health care to be covered by insurance (though that’s changing, with more high-deducible plans and cost-sharing). Many of us don’t even think to comparison shop. But if no one cares about the prices charged, “competition” doesn’t work.

Health care is often “purchased” under duress. When you’ve got crushing chest pain, you don’t call your insurance company to find an “in-network” hospital or ambulance service. And you shouldn’t have to.

The biggest problem with health care is that it costs too dang much. Providing better access to insurance and doctors is morally the right thing to do, but—and this is important, here—better access does not control costs. Competition, alone, won’t work. We’d better come up with some better ways to get costs under control, or there won’t be any money left over for those tasty donuts.

Professor Roy Benaroch, M.D. is Adjunct Assistant Professor of Pediatrics at the Emory University School of Medicine
His lecture series Medical School for Everyone: Pediatrics Grand Rounds is now available to stream on The Great Courses Plus.
This content is for informational purposes only. Communicating via this post does NOT create a doctor-patient relationship. If you have a medical concern specific to your child, contact your own pediatrician.

1 Comment

  1. I sent an email to my son-in-law and my own primary care physician just this morning. They are both young internal medicine MDs, only a few years out of residency. I had shared the International Health Care Profiles 2017 report, published by the Commonwealth Fund. I believe it is credible. My physician wrote this;

    “1) Transparency in pricing—I think we are the only industry where we offer a service and tell you we have no idea what your cost will be. This leads to enormous dissatisfaction, even when the absolute dollar cost of a service is not terribly significant. One of my partner’s patients called from his yacht to complain about a $20 co-pay that he didn’t think he should be responsible for. I don’t think it was the $20 he was concerned about, but simply the unexpected and unexplained nature of the cost.”

    The report shows a similar result to earlier results published by the OECD. The United states spends much more as a percent of GDP than any of 17 other developed countries, 17.2% vs runner up Denmark at 11.8%. On an equivalent U.S. dollar basis, we spend more than twice as much as most other countries. In spite of much detail, the report doesn’t seem to allow the reader to tease out the effect of price transparency.

    Before anyone jumps to the conclusion that the U.S. should adopt the system of one of these other countries, ask three questions;
    1) Are there any areas in the realm of healthcare where there is price transparency?
    2) What is the effect on prices there?
    3) Why does this pertain to only a few areas?

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