Three doses of competition to reduce the soaring cost of health care

The cure for the high cost of health care is competition. Three steps should be taken now to increase competition and reduce prices. First, build more medical schools and produce more doctors. The supply of doctors, especially in some specialties, is woefully inadequate. The number of medical schools in the United States has been kept too low. The government should create programs to subsidize medical school construction and medical school attendance. More doctors will mean more competition for patients, which will produce lower prices and better care for patients.

Second, we need more competition among hospitals. When hospitals compete, patients win. In many states a certificate of need must be obtained before a hospital can be built. These certificate requirements should be eliminated. In addition, state and local governments should encourage the opening of more hospitals. Most important, the government needs to more strictly enforce our antitrust laws against hospitals — both to prevent anti-competitive mergers and acquisitions and to break up existing anti-competitive health care systems. Many health care systems have grown too large and their size reduces competition and increases prices.

{mosads}Third, hospitals must be forced to compete meaningfully on price. Typically, when patients contract directly for health care with a hospital or other provider the patient does not know the price of the care they are purchasing. This is a crazy system that ultimately redounds to the benefit of hospitals because, long after the care has been provided, the hospital can send a bill for any amount it wishes.

Today, when a patient contracts for health care they’re essentially signing a blank check, and hospitals claim they are free to fill in any amount. Hospitals base this claim on the “Admission Agreement,” “Statement of Financial Responsibility” or other similar agreement that patients sign upon admission to the hospital. These agreements invariably contain a statement to the effect that “the patient agrees to pay the hospital at the hospital’s ‘regular rates’,” or similar open-ended language. Hospitals claim they are free to set their “regular rates” (list prices) at any amount they choose and to change them (without notice to the patient) as often as they like.

This ridiculous system needs to be corrected. Each hospital should be required to publish the average amount that it is paid by, or on behalf of, all of its privately-insured patients for the various types of procedures the hospital provides. This price information must be provided on a procedure basis, not an à la carte basis. Individual consumers can easily understand procedure-based prices and could compare these prices between hospitals if they were available. Ironically, procedure-based prices are common in health care except in agreements with individual patients. Private insurers, as well as government insurers such as Medicare and Medicaid, set their reimbursement levels based on procedure codes (DRG/APC) and not based on à la carte price lists.

Roughly 90 percent of the U.S. population has health insurance. As a result, hospitals most often are reimbursed for the care that they provide by insurers. However, there are many situations in which hospitals bill individual patients, including uninsured patients, out-of–network patients who are subject to balance bills, and accident victims who were treated for their injuries. In the case of accident victims, hospitals often refuse to bill the patient’s health insurance and instead bring a claim against the liability insurer or patient’s settlement.

Hospitals negotiate annual contracts with their in-network health insurers that include prices that will be paid for treatment of insured patients. These negotiations often represent the most functional free market for health care that exists. While hospitals choose whether or not to participate in the Medicare and Medicaid programs, these government insurers set their own prices, which many have argued are below most hospitals’ fully allocated costs.

Hospitals should be free to set their prices at any level they choose, just like any other seller. However, hospitals should not be free to unilaterally impose their list prices on individual consumers. That is, hospital list prices are not “regular rates” unless the marketplace accepts them. In the case of health care, this means that hospital list prices become “regular rates” only if accepted (paid) by in-network private health insurers. As a result, individual patients who have agreed to pay  “regular rates” should be liable to pay a price equal to the average price paid by, or on behalf of, privately-insured patients for the care received.

George A. Nation III is a  professor of law and business at Lehigh University. His recent research concerns health care policy with a focus on restoring competitiveness in the marketplace.