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The price of health care has more to do with the bargaining power of the medical practice and insurance company involved than it does with the cost of stethoscopes and throat swabs. Public domain photo by George Hodan, courtesy of publicdomainpictures.net.

How much of the price of health care is really what health care costs? That seems like a silly question, but it’s worth asking since it determines how much you end up paying. With medical costs rising, learning how prices are determined is the first step in keeping care affordable.

The price of health care, like the price of anything else, can be figured two ways. A popular conception is that someone totals up the costs involved with your medical visit and presents you with the bill. Some costs are obvious: the doctor’s labor, rolls of flimsy tissue for exam tables, throat swabs, and office rent. Some, less so: the janitor’s labor (you want those doorknobs cleaned!), malpractice insurance, break room coffee, and continuing education units. Tally these up, divide the overhead costs by the number of patients, and voilà, there’s the total.

Comparison shopping for medical care would be easier if providers posted their prices as gas stations do. However, prices are not as firm at doctors' offices and hospitals as they are at gas stations. The price of health care usually depends upon who is charging - and who is paying. Cropped version of an original photo by Daniel Christensen, courtesy of Wikimedia Commons.
Comparison shopping for medical care would be easier if providers posted their prices as gas stations do. However, prices are not as firm at doctors’ offices and hospitals as they are at gas stations. The price of health care usually depends upon who is charging – and who is paying. Cropped version of an original photo by Daniel Christensen, courtesy of Wikimedia Commons.

The other way businesses determine prices is by charging what the market will bear. For a retail business, this means marking items up (or down) to what the rest of the stores in the area are charging. For a medical practice, though, this number may have very little to do with the actual costs of the extra-thin tissue paper and billable doctor’s hours. In fact, the size of the medical practice (and the size of the insurance company) may have more to do with the price of health care than any other factor.

Smaller doctor’s offices often receive smaller reimbursements from insurance companies than larger practices, because they don’t have as much bargaining power. This means lower prices for insurance companies, but it may also mean that small-town doctors struggle to maintain their facilities and provide excellent care on a pittance. On the other hand, smaller insurance companies find themselves on the hook for larger reimbursements to care providers for the same reason.

In “free” markets for products from medical care to automobiles, the trading partner with the most clout sets the prices. Free market advocates prescribe “more competition!” as the curative for high costs, but remember, start-up competitors tend to be small and not have much influence in the market, and therefore end up being more expensive than the Mega-Medical Conglomerate in town. Competing with more expensive, smaller providers isn’t much of a threat. In fact, that’s why places like Wal*Mart kill local mom-and-pop shops. The big get bigger and the small sell out or get out. This is not a recipe for successful competition when the product is a relatively fungible commodity. Remember, the “free market” isn’t a guarantee of affordability.  If prices are free to fall, they are just as free to rise out of reach.

Alternatively, insurance companies merging with each other to form Gigantic Insurance MegaCompanies may provide a better deal for consumers, as they can negotiate the price of health care down to an affordable level, even if it means beggaring individual doctors and hospitals. This is why it was such a big deal when the GOP’s signature 2003 Medicare Part D legislation expressly prevented the government from using its clout to negotiate lower prescription prices for senior citizens. The ideological preference for “free market solutions” and keeping “government coercion” out of the equation made the price of health care higher than it had to be. (At least it funneled taxpayer money through pharmaceutical and insurance companies before turning it into campaign contributions, providing some jobs along the way, eh?)

The lessons learned from Medicare Part D are still relevant today as we face a post-Obamacare future (even if many Republicans and some Democrats refuse to heed it). Advocates for the repeal of the Affordable Care Act are correct in noticing that the ACA wasn’t powerful enough to keep costs down. But what did people expect from a “free market” based scheme that had been the Republican vision for health care reform since at least the Nixon administration? In reality, there is no such thing as a “free” market: it will always be controlled by the entity with the most clout. If the biggest insurance companies can wrangle the lowest prices, a “single payer” system could do that in spades, if we did it right.

Critics claim that negotiating prices downward means less innovation in health care, and rightly so. When margins are slim, there’s less room for experimentation, less money for research and development, and less of a profit motive for pharmaceutical companies to churn out new products. However, how slim are their margins, really?  And who benefits the most from expensive, cutting-edge care? We may have the best medical care in the world – for people who can afford it.

Not everyone can afford it. Let’s be honest. Would the vast majority of us benefit more if the price of health care were affordable for most of our routine and emergency needs, or if we pay extra for innovation so that a tiny percentage of us can have the whiz-bang techno-care of the future, like drugs that add a few (misery-filled) months to life at the cost of tens of thousands of dollars?

Every decision has costs and benefits. If we are broken by the high cost of insurance, the related benefit of pharmaceutical innovation and cutting-edge care for the very wealthy (or the very-insured) that the “free market” provides may no longer be affordable. Since the government (as the negotiator with the most clout) can lower the price of health care for all of us, perhaps the time has come for single-payer. If only we had a government we could trust not to screw it up. If only it weren’t about to be run by a party whose mission is to break government.

Sources:

It’s hard to be a small-time family doctor these days, new data shows
Cory Booker Joins Senate Republicans to Kill Measure to Import Cheaper Medicine From Canada
This Is Why Your Drug Prescriptions Cost So Damn Much
Small dealerships lack the clout and capital to compete
Nixon’s Plan For Health Reform, In His Own Words
$93K for cancer drug raises new ethics question
The Libertarian position on the price of health care

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