• Priceless: Chapter 2

    Housekeeping: A few days ago, I finished reading all of John Goodman’s book Priceless and wrote forthcoming posts commenting on every chapter. Let me give you an emotional sketch: we will enter a dark period in which my posts are very critical. Then, about one-third into the book, things turn brighter; I agree with some of John’s ideas. After that, it’s a mix. All told, it’s a roller coaster. So, if you think I’m being too hard on John, just wait, it’ll change, and change again, and again, … Something for everyone.

    Also, by way of timing, my remaining posts will publish over the next four weeks, three posts per week collectively covering between three and five chapters. All posts to date are found under the Priceless tag, including those by Aaron. In the first one I wrote that I might round up reader comments for a post. I won’t. It’s too much work, and I’ve already done plenty to read and react to every chapter. However, you can read the comments to posts in place. Many are excellent.

    Reading Chapter 2 reveals just how large an undertaking this blog project is. I could easily write a half-dozen posts on this chapter alone. I won’t. Instead, I’ll pluck out a few points. Please raise whatever you wish relevant to the book in the comments. What I’ve just written in this paragraph probably applies to every chapter. I won’t repeat it.

    Comment 1: John is close to right in saying that when hospitals compete, they tend to do so on amenities (and technology). This is the medical arms race. What he left out is that the pace of this race depends in large part on the degree to which insurers have and exercise leverage (market power) to constrain hospital behavior.

    Comment 2: John is also right that there is no market clearing price for a health care service. Different payers pay different amounts, even for the same service from the same provider. He suggests that if the market were less constrained and patients paid more out of pocket, we’d see such a market clearing price emerge, as we do for other goods and services.

    But let’s be clear about what John is and is not talking about. He is also not talking about getting rid of all insurance, just about loosening regulations to open up the market for more catastrophic plans tied to medical savings accounts. Also, due to political constraints, Medicare is not likely to move very far in this direction. In light of these practical and sensible constraints on John’s ambition, I’m not sure how a market clearing price will emerge for all services. There will still be a lot of third-party rate setting going on, much of it by the government. Those third-party payers are not all going to agree to a single price.

    But there is another way to force them to do so. Just pass a law that each provider must list one price, available to any payer, for each service. Think of it as the shelf or sticker price. No haggling. The law does not dictate what the price(s) are, just that there can only be one per provider, per service. Variation across providers would still exist. There would still be price competition. In fact, there’d likely be more of it. But price discrimination and cost shifting (if any) would be gone. The prices could be listed in a book or on a website trivially. Consumers could look them up and know what they’d pay out of pocket or what their insurer (public or private) would pay on their behalf. Simple. Clear. Empowering? I would very much like to know what John thinks of this idea.

    Comment 3: John’s lesson about how rationing by waiting is potentially more costly than rationing by price is convincing. Just note that the amount by which it is more costly is driven by assumptions. It may not always be twice! I presume you read the chapter, so I’m not going to quote it. (See the section titled “The Cost of Non-Price Rationing”.)

    Comment 4: John works hard to convince us that health care is like other goods and services. He admits it is too different from supermarket products to make his analogy to them sound. But he thinks cell phones are an apt comparison. Sorry, no. When my cell phone is on the fritz, or my wife’s, it’s an inconvenience, but by no means a crisis. We can work around that problem easily, even if we can’t get our device fixed quickly. But, when (or if) I have a major health issue, or my wife or kids or any loved one, it’s a huge deal. I can’t think straight. I’m not really myself and far less able to function as a consumer. I don’t think its just me. And, just to be clear, I’m not talking about health issues that are addressed by LASIK or cosmetic surgery. Surely we can agree that what those procedures treat are not representative of the truly dreadful ailments that might afflict us.

    Comment 5: I really think John is half way on to something here:

    Everyone on the provider side should be encouraged to make Medicare a better offer. Medicare should accept these offers provided that (1) the total cost to government does not increase, (2) patient quality of care does not decrease, and (3) the provider proposes a reasonable method of assuring that (1) and (2) have been satisfied.

    However, can you imagine the bureaucracy required to accept and vet the sundry offers and monitor the implemented innovations? Maybe it is a smaller bureaucracy than otherwise would exist in Medicare as we know it, but that’s not ex ante obvious. Maybe the bureaucracy could handle what John is proposing in a way he’d find acceptable, even competent, but I really doubt it, given what he says (with mostly agreement from me) about Medicare’s inability to sensibly set prices. We can’t lament the bureaucracy that exists and then assume it away for the purpose of our policy proposal. This is the law of one bureaucracy. For all that, CMS is accepting proposals from providers under its Bundled Payments for Care Improvement initiative. Perhaps they are soliciting provider ideas in other areas too. One would have to get under the hood more than I have to know for certain.

    Comment 6: Readers, what do you think of this claim?

    We cannot find a single institution providing high-quality, low-cost care that was created by any demand-side buyer of care. Not the Centers for Medicare and Medicaid Services (CMS), which runs Medicare and Medicaid. Not BlueCross. Not any employer.

    Comment 7: Toward the end of the chapter, John seems to confuse a few things. First, he notes the work of Cutler that shows that health spending is worth the price. Then he points out that there is a lot of waste in health care. As I’ve written before, both things can be (and are) true. John makes it sound like one refutes the other. It doesn’t. Think of it this way, suppose you purchase a car for $20,000, but you’d have paid $25,000. (In other words, you would not resell it for any price below $25,000.) You value it at $5,000 more than it cost you. It was well worth the price to you! Suppose then you learn that in the next town over you could have bought the same car for only $15,000. You got a bad deal! You wasted $5,000. But you still got a car for less than its value to you. Money wasted and a product worth its price can coexist. Health care explains half of longevity gains, despite the waste.

    John also spends a few words on the variations literature, noting that variations in health care spending have little correlation with mortality. But, in my view and reading of the literature, he is not right to imply that we can simply cut (in a crude sense) and not affect health. I’ve already explained this. Bottom line: there is waste, but we don’t know where it is. John has not (yet) convinced me a consumer spending his own money could find and avoid it. But I’ve only read through Chapter 2. Onward!

    I will post on Chapter 3 on Friday.


    • Fair summary. But, you missed the point about the iPhone. Of course the emotional impact on the buyer side of the market will not be the same. I would rather my cell phone go dead than my heart!

      But why is the behaviour of the supply side so different? Why can I stop in a phone repair site and get service at the drop of a hat. The wait to see a new doctor is three weeks. The wait at the Parkland Hospital emergency room is 4, 5 or 6 hours depending on the day. Why will the cell phone folks come to my home, while the doctor will not? Why doesn’t the repair shop try to sell me unnecessary services? If it owned an MRI, would they try to convince me to run the phone thru the donut hole? I don’t think so.

      It’s hard to escape this conclusion: The cell phone is bought and sold and repaired in a real market with real prices and entrepreneurs know they can get rich if the figure out a better way of meeting our needs.

      In health care there is no real market, no real prices and the only way providers can boost their incomes is by maximizing against third-party reimbursement formulas.

      • Um, maybe the supply side is so different because an iPhone is smaller, has fewer parts than a human, and is easier to diagnose with fewer tools required, and less training required of the diagnoser?

        My mechanic won’t come to my house to diagnose/fix my car because he needs the fancy equipment he has in his shop. And a car is less complex than the human body.

        And yes, I’ve had mechanics try to sell me unnecessary services.

      • John. […] In one small chapter, you compare healthcare to a Blackberry, assume that “poor people have the same amount of time as rich people” (ever watch Real Housewives?) and venture that patients should be able to decide for themselves whether to get 25,000$ proton therapy (who has that kind of money!?)” […] I’m going to force myself to finish your book, but it is not off to a good start at all.

        (ed. note: Ad hominem deleted. Keep it clean and respectful, folks.)

      • I wont come to your house because there isnt much I can do when I get there. It really isnt like the old days when we showed up with the black bag and a bunch of meds, that largely did not work. With every electronics purchase I make they try to sell me the unnecessary extended warranty.

        The thing I found most wrong with this chapter was the Lasik example. It is a real reach to include Lasik among the mainstream of medical procedures. It is done for cosmetic purposes. It is completely elective. There is a real substitute. This describes few other things in medicine, except for cosmetic surgery. I think John has this backwards. It is not that this can be extended to other areas of practice because it is an example of markets working. Rather, it is that out of all areas of medicine, the market has found the few areas where it can readily be effective.

        This is why I wish more physicians would participate in health care policy discussions. How many medical procedures or treatments, how much care, is really completely elective?


        • @Steve
          “Rather, it is that out of all areas of medicine, the market has found the few areas where it can readily be effective.”

          Most of medicine is not an emergency. Time is available to think things through.

          • “Most of medicine is not an emergency.”

            Never even used the word emergency. Never implied it. What I am talking about is substitution and necessity. In the case of Lasik, you have a substitute, glasses. In the case of cosmetic surgery, it is not needed. It is elective. When you are practicing medicine correctly, that is not true for your chemo, AVR or obstetrical care.


            • Steve, I wasn’t questioning your remark about Lasik having a substitute and being an elective procedure. I was questioning your distinction that the market found Lasik to be one of the few areas where it (I assume the market) can readily be effective. The only reason why I could believe that would be true was the alternative, glasses, provided the time needed to make an informed choice. Since time is available in most of medical care why do you feel that this is just one of the few areas where the market works in health care?

      • There’s a ceiling on your iPhone repair — somewhere below the cost of replacing it. This price is well-known by consumers and providers. For most people, there’s no ceiling on the value of your life and aspects of quality of life.

        I’m at an age where I seem to be racking up recommended preventative scans, annual mammograms, periodic colonoscopies, thanks to a benign gallbladder polyp, I’m recommended to have regular abdominal ultrasounds. This stuff adds up in cost and I have a high deductible. Despite being well-educated and doing research, I can’t evaluate the value of these services.

        I can easily evaluate the value of any iPhone app I buy, or the value of certain features of a smartphone.

      • I’m not sure where you live, to have access to such rapid and inexpensive phone repair services. They are certainly not available where I live. Even Apple, on their support site, says “Service arranged through Apple normally takes three to five business days.” A far cry from “15 minutes.”

        It is clear that most physicians in the US believe that their time is more valuable than their patients’ time, and organize their schedules to reflect that. It isn’t that way everywhere in the world.

    • On Comment 6; VA?

    • On the idea of allowing providers to recontract with Medicare, most of this would have to be delegated to the Medicare contractors (Blue Cross, Cigna, etc.) They should have an economic incentive to rcontract successfully.

      But CMS can get the ball rolling from Washington by doing some obvious things with respect to practitioners and centers of excellence that have been studied again and again. For example, it could start by giving Dr. Jeffrey Brenner $1 million to make sure he keeps doing what he is doing — saving the federal taxpayers many millions of dollars. It could pay Geisinger something for its warranty. Pay Virginia Mason something for it’s more efficient approach to back pain, etc.

      Bottom line: Washington shouldn’t try to tell doctors and hospitals how to practice medicine. Medicare should let the providers tell it how they can save money and improve quality. if an offer makes sense, accept it. Will some new contracts fail to pan out? Of course. In business, not every thing you try always works.

      • In Medicare Advantage where many of the regulations that stifle competition in Medicare are suspeneded contractors can subcontract with provider organizations and as a result the provider organizations can package and price a set of services. The MA plan presents its contracted sets of services into a bid for the comprehensive set of services for a population that it hopes to win in the market place. If there are enough MA plans in the local market they indeed do compete both for membership and for package services from providers. In our market when the plans became giant out of town bureaucracies without a brain or a heart we put up our own plan and have reset the market in both quality and price competition. Markets do work in healthcare and we will all be healthier when they are allowed to flourish.

    • Comment 6: Readers, what do you think of this claim?
      We cannot find a single institution providing high-quality, low-cost care that was created by any demand-side buyer of care. Not the Centers for Medicare and Medicaid Services (CMS), which runs Medicare and Medicaid. Not BlueCross. Not any employer.

      What about this:


    • The sense I get from this chapter and the book is a tension between breaking out of the top down fee per service model and a patient-centred allocation of spend. And the idea that healthcare is too complex a system.

      But Goodman seems trapped in the model of acute procedures such as knee replacements. Healthcare is – or should be – more holistic. A person’s interaction with healthcare is not just for an illness service but for a wellness and preventive service, and also for a range of comorbidies that they may have – especially older people. People also want care that is local.

      This points to salaried professionals and planned provision of resources – and why should it be too complex? We know from say obesity trends that we should plan say for more diabetes services – there is nothing stopping Medicare funding that iPhone type advice, is there?

      As I said in an earlier comment, the ‘priceless’ quality that Goodman ignores is the security and holistic care that a GP-led system such as the UK NHS provides, and there is no evidence that this is likely to arise from a discussion that bottom’s out by talking about our old friend, LASIK, especially gven that a large number of people – older people – are uninsurable in the private market.

    • A comment on rationing by waiting. Yes, there are waiting and other non-price costs to accessing health services, and yes poor people have less of that sort of currency available, too. But insurance is not just how we pay for services; it is a ticket to enter the queue and to a means through which to get some voice about which queue to enter. So while expanding insurance may increase wait costs for those in the queue, it opens the queue to persons otherwise excluded from it. That’s a big deal. Now if the queue turns out to be unacceptably long, well, OK, let’s work on that, but no, not by excluding 15% of the people who might otherwise get in line with you, … and not by reconstituting the game so that money can once more trump waiting.

    • On Comment 6:

      I’m not sure what the threshold for low cost is, but Kaiser Permanente surely meets the quality criterion. Kaiser was formed by the Kaiser industrial company (now defunct).

    • @ Bill Corfield

      Bill, the link you gave us is to a provider institution. I am asking if anyone knows of a third party payer (like Blue Cross or CMS) that has created excellence.

    • Kaiser is a provider. They employ doctors. They sell health care. BTW, their record is mixed.

      • Kaiser was a buyer of health care who set up their own supplier. And name me any health system in the history of the universe, supply or demand originated, that does not have a “mixed” record on “high-quality, low-cost health care”. It’s an absurd criterion given the multi-dimensional nature of quality, the plethora of services offered, and the multitude of prices and costs involved. Name me any organization, and I’ll find some area of care where they are not high quality or not low cost.

        • The fundamental problem in American healthcare is the third party payment system. The third party is the money. Collapsing it to two parties by reattaching the money to either the customer (patient) or the vendor (Dr, Hospital etc) is the solution. The economic tension of cost is critical to the provider-patient transaction as without it too much consumption happens which is most often unhealthy.

          Kaiser was a pioneer and poorly managed itself for decades but by reports is improving of late.

          The Great Cycle of Health Risk Transfer is turning again.

          HSA’s return some of the Health Risk (cost) back to the individual. Groups of individuals with HSA’s will bundle to together in small local pools of individuals similarly committed to health or not (Health Risk Transfer) to share shopping data and to share some of their costs. Leveling the tax favor of premiums will spur this trend.

          Self insured businesses representing the health risk of their employees are buying doctors to collapse the three parties to two.

          Insurers are buying doctors to collapse to two as well.

          I am a doctor who has become an insurance company to get to two.

          Hospitals are trying to get into the game and some will succeed though many are red-oceaned and will fail. (Not to worry, they need to fail and we will pick up the pieces nicely in a competitive market place)

          We need to stop taxing Health Risk Transfer Pools on their obligate reserves which will make it easier for new pools to emerge creating the competition necessary for a market to form among Health Risk Transfer Pools.

          Bureaucracy, government “stimulus” and taxation favor the oligopolies and stifle the wonderfully disruptive innovation of startups we see in the tech markets such as the deregulated telephone market.

          Repeal and Repeal some more please.

    • There was a program on our local NPR station today (and it’s syndicated to some other stations) on the lack of transparency in hospitals: http://thedianerehmshow.org/shows/2012-09-19/dr-marty-makary-unaccountable-what-hospitals-wont-tell-you-and-how-transparency-can From my perspective and I’ve been involved in this issue ever since the initial Jackson Hole meetings 20 or more years ago is that transparency is missing across the board. We have no way of knowing which services are good, bad or indifferent but according to recent reports about 30% of the services rendered are not worth it (and this applies to all technologies). Think about that. What other industry would tolerate a 30% inefficiency rate? If we could just deal with this ONE thing cost would come down close to what other countries are paying without doing anything to the existing system (though that needs fixing as well).

    • One more thing. I think its important to realize that Mr. Goodman is not shooting for any sort of health “system” which could be evaluated for effectiveness or equality to be established. To him, any health related goods or services provided by entrepreneurs is to be welcomed considering that it preserves “choice” and is not “social engineering.” Since the fundamental premises are so different between him and most anyone interested in reform, I don’t expect much benefit to come from this exchange. He will only be happy when medical commodities have been fully submitted to the cash nexus.

    • Bottom line: there is waste, but we don’t know where it is. John has not (yet) convinced me a consumer spending his own money could find and avoid it.

      The classic RAND Health Insurance Experiment found people can reduce spending by 30% when exposed to significant cost-sharing. I’ve seen numerous examples of what consumers can do when they put their mind to it. My girlfriend recently needed a CT scan. Her doctor’s office manager initially referred her to a hospital conveniently located near her house. The “list price” of a CT was >$8,500, while her negotiated cost would have been $2,600. I checked a couple places online and quickly found the service for $407. She was aghast that the price varied that much from one place to the next. Granted, this wasn’t heart surgery. But if more people routinely had to shop around for services like this, the task of comparing prices would become easier. And the ranges of prices would likely narrow. Moreover, anything that boosts the overall price-sensitivity of medical consumers might help create a culture where providers advertise their price and compete on price. The question I have: why don’t insurers help patients locate the cheapest price since it would us all save money?

      • My point was not that consumers can’t shop for lower prices (given certain conditions are met), but that consumers can’t always tell when a service is even needed. Even a great deal on bloodletting is not worth the money.

        • @Austin
          ” consumers can’t always tell when a service is even needed.”

          Austin, doctors face the same problem. That is reality. We all have to live with reality.

      • Goodness – what kind of society is it that would encourage people to shop around for a potentially dangerous dose of ionising radiation? This is madness – if a CT scan is clinically necessary an integrated health service should take care of it. And I wouldn’t go anywhere near the lowest cost provider of high energy radiation.

        • @Marc Brown:

          Why? At least in my area some of the top centers will give the lowest price to those who aren’t insured. They consider it found money. Even physicians use these places for their own family whether insured or uninsured.

    • “Those third-party payers are not all going to agree to a single price. …” (comment 2)

      Austin, why do you seem to accept that third party payment should be the rule of the land? Is it not simpler to end the tax policies that created third party payer? Wouldn’t prices more easily emerge if the purchase of insurance didn’t go through a third party or at least the individual had a legitimate choice to buy traditional 2 party insurance where the choice of insurer was his?

    • Austin,

      I tried to post this on your Part One post but apparently you had closed the comments, so I’ll try here. Also I thought you were going to do your postings on Wednesday, so missed some.


      Bravo for your demand that we base policy on evidence. Unfortunately that would be an entirely new development. We have spent decades whip-sawing the health system back and forth on nothing more than bumper sticker slogans, starting with “Roemer’s Law” and all the way to most of the provisions of the ACA such as case management, pay-for-performance, and Health IT. John’s blog included a recent posting on the $1 trillion that we are currently wasting on HIT. See http://healthblog.ncpa.org/a-1-trillion-mistake/ Why should we be surprised when the Brits already showed us that massive HIT efforts are likely to fail?

      In between there have been ideas such as National Health Planning (repealed), State hospital rate setting (repealed in all but Maryland), a bunch of state “universal health” initiatives (repealed in all but Massachusetts), and on and on and on.

      I am happy to join you in demanding that new initiatives be based on things that have been shown to work

    • Correct me if I am wrong. Third-party payers are those insurers paid by third-parties such as employers. If the employee was permitted his own choice of insurance (including the insurance offered by the employer) don’t you think the added competition would create a preferable price structure? Perhaps you don’t feel that way as you suggested a law to solve the problem rather than considering increasing competition as a possible solution.

    • Here’s an example of the dysfunction of the current system. A friend’s son is a second year grad student at a major eastern university in a program affiliated with the medical school. Last year, he went on to the university-sponsored insurance plan that is managed by one of the biggest insurance companies. There was a big surprise the other day when he went to pick up a prescription to find out that he no longer had coverage even though he had followed the directions to reenter all the information on the insurance company website for this coming school year. A call to the insurance company resulted in shuffling the student off to three people and the third finally told him that the university had not yet paid the premium for this coming school year. Neither the insurance company or the school ever informed the student of the fact that lapsed coverage would be a problem. The student ended up having to pay $230 for a necessary prescription.

      The student went to his school account website and saw that the tuition for this year had already been paid (he is taking out a loan for the masters degree) but that the health fee had not yet been assessed. Here are the questions that have with regards to this:

      1. Since the insurance company had a record that the policy was only in force during the school year, why didn’t they notify the student or at least make an attempt to sell the student a new policy in the even he was finishing up his study? Insurance companies theoretically want to sell their product.

      2. Since the student was enrolled in school during the summer as most graduate students are, he expected that there would be a seamless transition of health care coverage. Why didn’t the school notify the student that there might be a problem.

      3. The school has a policy of making sure that all students are covered. If they do not supply a waiver showing that they have alternative coverage (usually on a parent’s policy), they HAVE to purchase the university-sponsored policy. Presumably, the student’s new policy covering this current school year will be retroactive to September 15 (the previous policy lapsed on 9/14) but can the student be sure this is the case? What happens in the event of a major health care crisis in the interim, is the student covered?

      4. This problem was apparently not unique to this school as the pharmacy told the student that there was a similar problem two weeks ago at one of the neighboring universities where graduate students were also caught without insurance coverage. Since, both of these universities are very highly ranked and have medical schools, why can’t they do a better job of managing health care for their students?

      It would be interesting to know if this is a common problem.

      Sorry if this is not especially relevant to the Chapter 2 thread but it did seem timely to post it, given a lot of students are going back to school. It makes me thankful that I’m now transitioned to Medicare!!