Competition and health care costs

The Dallas Morning News has been running a great package on health care costs in Dallas as it is one of America’s costliest cities for health care.

They include a good explanation of research conducted at Dartmouth on regional variations in spending. And they explain how more competition drives up costs.

As most researchers understand, you have to place some limits on the supply of fancy medical technology that does not improve the quality of care. You can’t limit spending by requiring people to pay more out of pocket as some suggest.

After all, most spending is driven by high-priced procedures, and if you go to the doctor with coronary artery disease most patients will not base their treatment decision on out-of-pocket costs. If a doctor recommends bypass surgery most patients will not say they want to try a stent first and see how that works.

As the article notes:

In other businesses, competition tends to drive prices lower as companies jostle for customers. Not in health care, and not in Dallas. Competition drives up spending.

Dallas has seen an explosion of entrepreneurial medical investments for imaging centers, home health care and hospital outpatient treatments. But greater supply has not lowered the cost. Medicare spending in Dallas for these services is among the highest in the nation.

“The laws of supply and demand are not working,” said Darren Rodgers, president of BlueCross BlueShield of Texas. “We have lots of hospitals, lots of doctors and lots of demand.”

Since the early 1990s, Dallas has experienced a boom in hospital construction. Hospital administrators argue they are only trying to keep pace with a surge in the population. David Toomey, regional president for health insurer CIGNA HealthCare, says it’s an economic system turned upside down. “When you build it, they will come,” he said.

Comparative effectiveness research; coordination of care; bundled payment systems — these are the strategies that will hold down long-term health care spending.

5 Comments

  1. IBXer

    September 25, 2009 at 2:46 pm

    Dallas is a great example of the moral hazard created by perverse government incentives to order unnecessarily expensive treatments and procedures due to the market distortion caused by Medicaid and Medicare. There really is ne better example of what happens to healthcare when the government gets involved.

  2. Adam Linker

    September 25, 2009 at 2:50 pm

    It’s not government distorting the market. And all insurance creates a moral hazard. But, as I note, you can’t fix the moral hazard by requiring more cost sharing.

  3. Wellescent Health

    September 25, 2009 at 5:23 pm

    This would seem to be a problem of understanding needs versus wants and capitalism. Like food and water, health care for life saving procedures is not something that people have complete choice on. You need to eat and you need water so as prices rise, you may opt for cheaper foods and complain a bunch about the cost, but you can’t stop eating and drinking water altogether. When it comes to necessary health procedures, you need the procedure to maintain quality of life and will be already spending a lot of money in any case so trying slightly cheaper alternatives that may fail is not really an option. In the end, you pay what they ask because the alternative is not reasonable.

    Without the ability to reduce demand by foregoing procedures, there is no need for those providing the service to reduce costs. The prices can in fact be raised with little consequence to the business since people will continue to pay.

  4. Adam Searing

    September 25, 2009 at 7:47 pm

    What the series is raising is a pretty simple idea – the business interest of doctors and hospitals in making money through doing more procedures and tests drives up the cost of health care.

    Care delivered in Dallas is no better than that delivered in say, Durham, for the same condition – there’s just more testing and prodding of patients and it therefore costs more to treat exactly the same disease.

    Isn’t being efficient, effective and responsible with our health care dollars something we ought to do?

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