Healthcare prices continue to increase at a rapid pace and at great cost to consumers. With price competition virtually unheard of in the healthcare industry, there is little incentive for healthcare providers to operate in a more cost-effective manner. However, recent efforts to rate medical professionals and hospitals could provide some level of competition that will enable consumers to find better care at a reasonable price, thereby increasing consumer welfare.
Quality Care at What Price?
American consumers have a keen interest in the quality of their healthcare services, and rightfully so. The increase in government expenditures on healthcare services and consumer reliance on more comprehensive insurance for hospital services, prescription drugs and physician services have made consumers significantly less sensitive to the price of medical services. In addition, medical services have made major technological advances and there has been an increased demand for services, in part to changing American demographic factors – all leading to a sharp increase in both the cost and price for medical services.
While government, insurers and employers have asked consumers to start shopping for doctors the same way they pick out competitive products and services, like groceries, furniture and restaurants, the latter products and services have advertised prices, coupons and discount programs. There is little advertising in the medical profession, which means that consumers have limited information available when selecting a doctor or hospital. Doctors and hospitals, in turn, do not fear competitors will steal their business, and costs are free to rise without market repercussions.
The lack of competition has kept the industry far from cost-effective and created some odd incentives. As the industry becomes more productive, the savings feed to the bottom line, not to consumers in the form of lower prices. Barring malpractice and general guidelines, the fact is that the medical industry often gets paid when needless tests are administered, when misdiagnoses result in extra office visits and when there are complications that lead to more procedures. There is no direct link between medical payments and successful outcomes. Think about paying your auto mechanic for every misdiagnosis, defective part or improper installation. The truth is that we would scrutinize our auto repair or restaurant bill before we would scrutinize our hospital bill, though these costs pale in comparison.
Doctors Do Not Compete for Consumers
These factors and others have contributed to a stark absence of price competition among doctors and hospitals, which explains, in part, why the price of healthcare services continues to increase much faster than the rate of inflation and why consumers are paying the fare. From November 1997 to November 2007, the Consumer Price Index for all items increased by 30.1% (seasonally adjusted), while medical care services increased by 56.0%. During the same 10-year period, hospital services increased nearly three times faster than the general rate of inflation – an astounding 84.6%. The reality is that consumers have become insensitive to medical costs in large part due to the fact that they do not have sufficient information available to choose quality medical providers at a reasonable cost. In short, consumers can’t shop around. But, that might change soon.
Rating Your Doctor?
A number of online services have begun to develop information on doctors, and one recent announcement offers new hope that consumers will soon have more information to make better decisions about their health. WellPoint, through its Blue Cross network will begin a partnership with the Zagat Guides (best known for its restaurant ratings) to rate doctors in metro LA, Connecticut and greater Cincinnati and Dayton. It’s long overdue, considering that the typical doctor visit costs much more than a trip to the average restaurant. Yet, until now it seems like it’s been a lot easier to find information about a good restaurant than a good doctor.
This effort from WellPoint brings the country just part of the way towards developing the type of information that consumers really need. Consumers and insurers need to build on it in three ways — medical ratings should become at least as ubiquitous as restaurant ratings; consumers need to look for additional information beyond the type of data Zagat will collect; and consumers need to begin shopping for health care the same way they look for other products.
To begin with, consumer ratings work best when they draw large audiences and thus pressure service providers to improve quality and lower prices. Everyone knows about Zagat ratings’ 30-point scale and, for that matter, ratings by AAA and others. Medical ratings need to become at least as common. (WellPoint says it plans to expand its survey to other markets over the next 2 years.)
In addition, consumers need to use this and more information in making decisions about healthcare. While the Zagat effort focuses on doctors’ office environment, people skills and availability, many health insurers (including WellPoint) now collect information about cost and quality. Consumers need to use this data, and over time, there needs to be an improvement in the quality and scope of this data. Ratings are important, but consumers must also consider information about doctors’ medical skills, prices, treatment outcomes and, indeed, health plans themselves. Consumers won’t be able to make informed choices effectively until they have more data in hand. Although a half dozen companies have begun the process of trying to provide ranking data on the Internet, the quality of data remains low in all too many cases.
Finally, consumers will need to actually use the ratings data and start shopping for medical care. No amount of ranking and data collection will do much good if consumers don’t shop around with at least as much effort as they use in picking out a new television or finding a good place to eat.
There are other solutions that policymakers must consider, including increasing the supply of medical professionals, encouraging informational advertising, increasing use of paraprofessionals, creating incentive programs for both consumers and the industry, and so on. And, there are some of these new competitive ideas on the horizon, including online informational services, in-store clinics and remote patient monitoring. Include in these Zagat’s move into rating doctors and hospitals as an important step in the absence of real price competition. These ratings could eventually help consumers make better decisions about doctors and hospitals, heighten competition and yield consumer benefits. WellPoint has a good idea and it should hasten the day when finding a good doctor may prove as easy as finding a decent restaurant.