Health Care Costs: Is Medicine a Market?

There is an excellent article in The New Yorker comparing the production and quality control methods of the Cheesecake Factory to certain advances in “Big Medicine.”  It focuses on the savings available from large health systems through standardization and quantity purchasing. In reality, the problem with health care costs runs far deeper than that.

All businesses compete in a market. Health Care, at 18% of the Gross Domestic Product, is America’s largest business. Despite the trillions spent each year, however, our health care costs are not subject to the normal market forces that balance expense and delivery in other industries.

Here are three factoids. The number of physician jobs in America, according to the Federal Bureau of Labor Statistics, is just over 661,000. A study in the same year (2010) at the University of North Carolina showed 850,000 licensed physicians nationally. Simultaneous with these two studies, the American Medical Association said that the current number of practicing physicians was 954,000. (Wall Street Journal)

Physicians control virtually every dollar of the $2.6 trillion spent on health care in 2010. No hospital can admit a patient, no procedure can be ordered, and no drug can be dispensed without the approval of a physician. That means, even using the highest estimate, that three-tenths of one percent of the country controls almost one out of every five dollars in our economy.

To put this in perspective, let’s get 310 people in a room. Now pick one person (the physician) to stand in the middle, and separate 56 of those remaining to stand on one side. Those 56 people are dependent for all their earnings, and spend 100% of their income based on the decisions of the one person standing in the middle.

With all that economic power at their disposal, and considering that physicians are carefully licensed and regulated, how can three definitive counts of their numbers vary by almost 50%?

Having contracted with and for doctors, I know that many sign payment agreements with little notice of the rates. An insurance company simply claims “This is our standard contract” and most providers accept it. Health plans may pay a percentage of “usual and customary” charges, a term that has no specific definition. Medicare, the largest payor in the country, sets the benchmark for many other contracts, which may pay anywhere from 60% to 90% of the current Medicare rate. Again there is up to a 50% variation, often to the same physician for the same service.

Let’s stretch this national process to be the logic for a business. You provide services using independent contractors. You don’t know how many contractors you have, but they generate all of your revenue. Customers use the services and pay you, but you don’t really know which customers are using the services, or how much they are going to pay until their check comes in.

Your only viable strategy would have to be providing as many services as possible, priced with sufficient margin to be profitable no matter what the payment level was. To get away with that, you’d have to be in a business where customers were required to use you whether they wanted to or not.

Health care in the USA is a dysfunctional market. No amount of tinkering with costs can fix a system that can’t track them to start with.