The first reason for strong healthcare pricing power is behavioral. People do not want to change doctors unless they have a bad experience. That is why President Obama was criticized so much when his statement “If you like your doctor, you can keep your doctor” turned out to be false. Most of us prefer to stay with someone we are comfortable with, and we will not switch for a lower price. That means the doctors have some pricing power.
The next reason is the patient is usually not the person paying the bill. Although we end up paying as the cost of health insurance keeps increasing, unless we have a high-deductible plan, our insurer pays for each transaction. When our insurer pays, our cost is limited to our co-pay and we do not have any incentive to compare prices among different providers. Once again, that gives pricing power to our provider.
Related to the “someone else pays” point is the fact that it is very difficult to compare prices even if we want to. If prior to scheduling a service, you ask a doctor, hospital, or other medical provider how much something costs, they are unlikely to be able to answer. They will tell you it depends on the contract with your insurer. Similarly, if you ask your insurer how much something will cost before you schedule it, they will tell you it depends on the billing code used by the medical provider. So to compare prices, you must call each provider and find out which code or codes they use, then call your insurer to get the prices. For something major it may be worth the effort to track down all that information, but for most things it would be time-consuming and unpleasant.
You might expect health insurance providers to do the work to compare prices and use their negotiating power to keep medical costs down. They do so to some degree, but if they are competing with other insurers for your business, their biggest selling point is the amount of discount they get. The insurers focus on obtaining large discounts from list prices for you, recognizing that you expect big price increases each year. It really is not hard for them to pass those increases on to you, as they explain they are not the ones causing the price hikes, and they are obtaining big discounts.
Another reason for pricing power is the inclusion of Essential Health Benefits as mandated by the Affordable Care Act. In other industries, including most insurance industries, providers can offer lower-priced alternatives by removing features. I call that descoping the product. Unfortunately, under the ACA, that is not allowed. Someone might be willing to purchase health insurance which did not cover smoking cessation programs, substance abuse treatment, or gender reassignment, preferring to accept the risk if any of those are needed. Under the ACA, insurers are not able to descope their products other than the size of the deductible. This gives them more pricing power.
Limited supply is another factor creating pricing power. In many states there is only one health insurer. Although each state has an insurance regulator who is supposed to hold premium increases in check, they are not very effective. Since the passage of the ACA, most health insurance premiums have increased by double digits each year. The regulators do not want the insurers to pull out of their states and have limited power to stop the increases in premiums.
In addition, the number of doctors is limited. There is a finite number of medical schools, and they have limits on how many med students they will accept. Each year, many qualified candidates with college GPAs above 3.5 and strong scores on their MCATs are denied spots in med school. The result is fewer people become doctors than perhaps could, and our supply is limited. That gives increased pricing power to the doctors.
The last factor I will comment on is politics. Our elected officials all agree that our healthcare costs are higher than most countries for outcomes that are not better, and they all want to do something about it. However, they do not take the time to analyze the root causes of the problem, they jump to their favorite conclusions, and they often make things worse. The choices politicians make usually align with their party stances and only address a small part of the problem.
As I have listed above, there are many factors affecting health care, all of which create pricing power for the provider. If we want to lower our costs of medical care and provide access to everyone, we must address all of the issues.
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