What Part of “Market Failure” Don’t You Understand? Health Costs As Seen through the Blinders of Economism

In the process of trying to keep up with my continuing medical education, courtesy Primary Care Medical Abstracts as provided by Drs. Rick Bukata and Jerry Hoffman, I had my attention called to this article which seemed instructive in illustrating how economism has succeeded in distorting the everyday perceptions of Americans in most every field.

A group based at the University of Iowa (subscription needed to access article) decided to try to find out what it cost to have a common elective surgical procedure, hip replacement with an artificial joint. They called two sets of hospitals, large community hospitals in all 50 states, and top-ranked orthopedic hospitals according to the infamous scorecards in US News and World Report magazine.  They asked for the hospital costs of the procedure and the cost for the physician’s services.

The first thing they found was that it was like pulling teeth to get any cost figures at all. A handful of hospitals in each category right away provided them with bundled costs for the entire package. To get some of the remaining hospitals to cough up any cost figures required numerous repeated phone calls. The questions were never answered for almost half of the hospitals.

The next thing that they found was that (no surprise if you’ve been following media stories on hospital charges this past year) the charges quoted them were all over the map. They were told that the operation could be as cheap as $11,000 or as expensive as $125,000.

So what do we have here? This seems as stark as you can get in terms of evidence for a broken system. If you had ever heard of economist Kenneth Arrow’s classic theory, that health care represents an example of market failure, you’d nod and say “yup.”

So what do these medical authors conclude? They admit that to some extent they are looking at the data through rose-colored glasses. But they twist themselves into knots to try to make this out to be good news for those patients who are willing to be smart shoppers. Just look how much you can save, they say, if you end up having your new hip at one of the cheaper hospitals vs. one of the ritzy ones.

So what do they have to ignore to come up with this Pollyanna prediction? They have to assume that the average patient is going to be as diligent and as smart in extracting price data from unwilling hospitals as they were. They have to assume that the prices actually quoted have some relation to reality. They have to assume that having learned the range of prices, the average patient is then going to have the means and interest to relocate to a strange city or state to take advantage of the best price. Finally they have to assume that the patient won’t just say, “Oh, heck, I have some health insurance, let them pay for it and I’ll deal with whatever is left over later on.”

In short, being faced with a ton of evidence that the marketplace is currently doing a lousy job of addressing out-of-sight health care costs, those who willingly put on the blinders of economism assume there is one and only one right answer to any problem whatsoever—invoke the powers of the marketplace.

Rosenthal JA, Lu X, Cram P. “Availability of Consumer Prices from US Hospitals for a Common Surgical Procedure.” JAMA Internal Medicine 173:427-432, March 25, 2013.