Why Prices Matter in Health Care

June 25th, 2012 by Leave a Comment

By John C. Goodman

John C. Goodman, Founder and President, National Center for Policy Analysis

The single biggest mistake in all of health policy is the belief that the best way to make health care accessible is to make it free at the point of delivery. This mistake underlies our entire approach to providing health care to low-income families in this country; it is the basis for the organization of the entire health system in most other developed countries; and it is deeply embedded in the Obama administration’s approach to health reform.

The major barrier to care for low-income families is the same in the United States as it is throughout the developed world: The time price of care and other non-price rationing mechanisms are far more important than the money price of care. The burdens of non-price rationing rise as income falls, with the lowest-income families facing the longest waiting times and the largest bureaucratic obstacles to care.

The Patient Protection and Affordable Care Act, by lowering the money price of care for almost everybody while doing nothing to change supply, will intensify non-price rationing and may actually make access to care more difficult for our most vulnerable populations.

As explained in a report from the Center for Studying Health System Change, middle class families are responding to bad economic times by cutting back on their consumption of health care. They are postponing elective surgery, forgoing care of marginal value, and making more cost-conscious choices when they do get care. This reduction in demand is freeing up resources, which are apparently being redirected to meet the needs of people who face price and non-price barriers to care.

During the recession the money price barrier to care actually rose among the uninsured, although the increase was not statistically significant. The number of uninsured people reporting access problems because they were “worried about cost” rose from 91.5 percent to 95.3 percent. (Translation: virtually everybody who is uninsured worries about cost.) Yet over the same period, the number of people experiencing access problems because of waiting and other non-price barriers was almost cut in half.

Here is something even more interesting. Suppose that in an attempt to increase access to care, we add one more doctor, one more nurse or one more clinic. Who is likely to benefit? The study implies that the higher your income, the greater the likelihood you will gain. Think (metaphorically) of a waiting line for care. The lowest-income families are at the end of that line. The longer the line, the longer they will have to wait. If you do something to shorten the line, you will be mainly benefiting higher-income people who are at the front.

Why is that? Many of the skills that allow people to do well in the market are the same skills that allow them to do well in non-market settings. High-income, highly educated people, for example, will find a way to get to the head of the waiting line, whether the thing being rationed is quality education, health care or any other good or service. Low-income, poorly educated individuals will generally be at the rear of those lines.

Another study suggests that even low-income patients are more deterred by non-price barriers than by price. Although most states try to limit Medicaid expenses by restricting patients to a one-month supply of drugs, North Carolina for a period of time allowed patients to have a three-month supply. Then the state reduced the allowable one-stop supply from 100 days of medication to 34 days and at the same time raised the copayment on some drugs from $1 to $3. Think of the first change as raising the time price of care (the number of required pharmacy visits tripled) and the second as raising the money price of care (which also tripled).

In a study of this episode, researchers discovered that a tripling of the time price of care led to a much greater reduction in needed drugs obtained by chronically ill patients than a tripling of the money price, all other things remaining equal.

If the study findings apply to a broad array of health services, it appears that the orthodox approach to getting health services to poor people is as wrong as it can be. It implies that everything we have been doing in health policy to make health care accessible for low-income patients for the past 60 years is misguided.

A third study found that enrolling children in the Children’s Health Insurance Program (CHIP, known as PeachCare in Georgia) does not result in their receiving more medical care. But when CHIP pays higher fees to doctors, the children do get more care. Suppose the state is strapped for money and can’t afford to pay higher fees? A common sense answer is to let the parents add to the CHIP reimbursement rate and pay a higher price. There is an obstacle to common sense, however: It’s illegal for parents to do this.

Contrast what we do in health care with the Food Stamp program (SNAP), which has about 60 million participants (most of whom are probably also Medicaid enrollees). Low-income shoppers can enter any supermarket in America and buy almost anything the facility has to offer by adding cash to the “voucher” the government gives them. They can buy anything you and I can buy because they pay the same price you and I pay. But we forbid them to do the same thing in the medical marketplace.

Consider the prices charged by MinuteClinic to the rates Medicaid pays in Dallas, Texas. In general, Medicaid pays less than half. That’s why MinuteClinics usually won’t accept Medicaid. If low-income families were allowed to add from $30 to $50 of their own money to the Medicaid rate, however, in one fell swoop we could make high-quality, very accessible primary care available to millions of people.

Several public policy changes follow from this analysis. First, wherever possible, we should encourage real markets in health care — with prices determined by supply and demand rather than by third-party payment formulas. Second, where real market prices exist, allow patients in public insurance programs to pay those prices, even if it means paying a substantial amount from their own resources. Third, the role of insurance is to make health care affordable, not to make health care free. In an ideal world, patients should pay the marginal cost for care — even for expensive procedures. Fourth, one way to empower patients in a real medical marketplace is to encourage completely flexible Health Savings Accounts that can wrap around any third-party health insurance plan.

Finally, we need not worry that rationing by price will result in unreasonable denial of care. The current system of rationing by waiting is never going to go completely away. It will always be there as a backstop.

(John C. Goodman is founder and president of the National Center for Policy Analysis and a Senior Fellow for the Georgia Public Policy Foundation.  Read the full article at http://healthblog.ncpa.org/why-prices-matter/.


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