In medical care, you have to get the diagnosis correct. But if you want to solve the problem, you’ve also got to get the treatment right. At the Vox website recently, reporter Sarah Kliff posted a blog titled: “Our Health Spending Problem is All About Prices.” That diagnosis is only partially correct.
In Holland, notes Kliff, that you can get prescription Nexium for $23, while the average American pays more than $200. However, that differential is not the result of other countries “negotiating” lower prices. Rather, these countries impose price controls on drugs, and are willing to deny those drugs to their citizens if manufacturers won’t accept the lower price dictated to them by the government.
Drug companies are willing to put up with that behavior in small countries. But if the U.S., the world’s largest market for prescription drugs, did the same the result would be catastrophic: new drugs—for anybody—as drug companies would lose both the funding and the incentive to develop new medicines.
Furthermore, few Americans are actually forking over $200 per prescription. Indeed, over the last 20 years, pharmacy benefit management companies have become excellent at negotiating discounts with manufactures and creating incentives for physicians and patients to more appropriately prescribe and use medicines. The PBMs’ track record of cost control is especially notable in the Medicare Part D prescription drug program, where they compete to offer plans directly to Medicare beneficiaries.
Yet, despite that success, liberals continue to propose replacing the competitive Medicare Part D market with direct government “negotiations” with drug makers for all Medicare beneficiaries. However, the Congressional Budget Office consistently (and correctly) scores such proposals as offering zero additional savings. What CBO understands is that the only way governments can reduce prices below the level negotiated in the market is by refusing to pay for the drugs if the manufacturers won’t play ball—thus denying those drugs to patients.
Kliff is on much firmer ground when she notes the differences in prices for medical procedures, such as her example of knee replacement surgery. Yet, she still misses the real source of the problem: For most Americans, a third party is actually paying the bills.
You wouldn’t buy a product or order a meal if you had no idea how much it would cost. Yet when you go to the hospital, you generally have no idea how much a test or procedure will cost you.
That’s because, for most Americans, a third party actually pays the medical bills. At the hospital, the patient may end up on the hook for a co-payment (a portion of the cost), but the prices listed on the hospital’s bill typically aren’t what either the patient or his insurance plan actually pays.
This is a crucial flaw in the healthcare system. “Consumers are price sensitive in health care, just as they are in every other sector of the economy,” wrote Heritage Foundation analysts James Capretta and Kevin Dayaratna last year. Yet Obamacare does nothing to deliver price information.
In fact, it could soon make the problem worse. Obamacare establishes an Independent Payment Advisory Board that will be charged with bringing down federal spending on Medicare. Yet the only cuts it is allowed to make would be to providers’ reimbursements. Such price controls are no way to improve health care.
Kliff implies that the solution is more government “negotiation” or regulation of prices. But existing government price regulations (such as Medicare’s fees schedules) have made the problems worse and further distorted health care markets. Indeed, the federal government already pays for roughly half the health care in the U.S. Under Obamacare. that amount will only increase.
The real answer would be to put consumers in charge of more of their own health care decisions. That way, they would have incentives to demand more health care price transparency. Give them price information and they’ll act on it.
“Rising prices for goods encourage producers to find ways of supplying more, while guiding purchasers to switch to cheaper alternatives,” Heritage Foundation analyst Christopher Pope explains. “Thus, the price mechanism encourages the productive and careful employment of scarce resources and directs innovative efforts where they are most needed.”
We’ll begin solving the pricing problem only when we understand what the price actually is.