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November 23, 2004

Unleashing the power of markets in health care

Regular readers of this blog know of my skepticism that the costs attributable to America's reliance on third party payors in its health care finance system are commensurate with the benefits of paying for medical service in that fashion.

Following up on that thought, Alex Tabarrok over at Marginal Revolution notes in this post that one of the most popular types of medical procedure has declined in cost recently precisely because it is not generally covered under America's third party payor system:

Everywhere we look it seems that health care is more expensive: prescription drug prices are increasing, costs to visit the doctor are up, the price of health insurance is rising. But look closer, even closer, closer still. Don't see it yet? Perhaps you should have your eyes corrected at a Lasik vision center.

Laser eye surgery has the highest patient satisfaction ratings of any surgery, it has been performed more than 3 million times in the past decade, it is new, it is high-tech, it has gotten better over time and... laser eye surgery has fallen in price. In 1998 the average price of laser eye surgery was about $2200 per eye. Today the average price is $1350, that's a decline of 38 percent in nominal terms and slightly more than that after taking into account inflation.

Why the price decline in this market and not others? Could it have something to do with the fact that laser eye surgery is not covered by insurance, not covered by Medicaid or Medicare, and not heavily regulated? Laser eye surgery is one of the few health procedures sold in a free market with price advertising, competition and consumer driven purchases. I'm seeing things more clearly already.


Posted by Tom at November 23, 2004 8:22 AM |


While he has a good overall point, he's quite wrong that insurance does not cover the procedure. My health plan in 2000 certainly covered it at a more than cheap deductible.

Posted by: Dylan at November 23, 2004 10:34 AM

Dylan, that's a good plan! ;^)

Posted by: Tom K. at November 23, 2004 10:56 AM

I doubt the reduction in price of LASIK is solely attributable to a free market effect. If there's one thing pharmacoeconomics has definitively shown, it's that health care products have to be assessed according to the particular therapeutic segment they belong to. Not all drugs belong in the same market, nor, I'd suggest, do all surgeries.

Which doesn't mean the commentator's point is not a good one, because I think it is. I'm saying that even if the price differential is wholly caused by the operation of free market forces (a proposition I'm dubious of), I'm not sure how well that applies to different surgeries or different procedures altogether.

(I'm all for increasing use of free market forces in health care, but contrary to what the Republican sound bites suggest, IMO, that is NOT going to solve the American health care crisis).

Posted by: TP at November 23, 2004 11:11 AM

This is a great example of how market forces can work within medicine.

It seems to me that, by extension, this makes another strong argument for the more broad-spread adoption of Health Savings accounts, placing more of the responsibility of health care spending in the hands of the consumer, and taking it out of the control of the third party payors who administer "covered lives".....

Posted by: Jim Bob Baker at November 23, 2004 1:24 PM

TP, I agree that return to market forces alone will not cure the crisis in America's health care finance system. Moreover, I believe that insurance will always need to be a component of that system. However, until we reform the system to reduce reliance on third party payors for payment of all types of medical products and procedures, we will continue to struggle with inefficient application of resources in health care system.

Posted by: Tom K. at November 23, 2004 1:41 PM

The fallacy with Alex Tabarrok's argument is it's oversimplified. The problem is lasik surgery is for curing a life-threatening situation. A second problem IS related to health insurance and health care costs - and that's at the heart of his argument.

We need to keep in mind that life insurance was originally for covering costs in extraordinary health care situations - emergency and surgeries for life-threatening problems. When the cost of proceduers are too high, but we must have it because it threatens our health. If we had deductibles that we had to pay before the insurance kicks in, then you can bet everyone would be shopping around for better prices, while still guaranteering that we will be covered for life-threatening problems. For something like lasik surgery or cosmetic surgery, then, it's free market all the way.

With the proper kind of insurance with deductibles, it will reduce the amount of "unnecessary" health care costs, allow people with lower income to have access to proper health care, reduce fraud, and reduce health care costs.

Posted by: Wen at November 24, 2004 8:30 AM

Actually, Wen, health insurance in America started as a result of the wage-price controls of World War II. Employers used health insurance as a way to attract scarce labor in the face of wage controls. Health insurance before that era was quite rare.

Mr. Tabarrok would not argue that catastrophic health insurance or that some sort of subsidized health insurance for the poor are good ideas. His point is that the market dysfunction caused by universal third party paymaent of health care costs makes the health care system less responsive to consumers of health care. The Lasik Eye surgery phenomena is but one example of how even health care products will react well to market forces.

Posted by: Tom K. at November 24, 2004 8:57 AM

The problem with this line of reasoning is that Lasik procedures are an optional procedure that many people still can't afford. Yes, market forces can bring health care costs down. But without any kind of subsidies you will have people who can't afford care. If the care is Lasik, that's not a big problem. If the care is childhood vaccinations, regular checkups, emergency care, etc. you have a problem.

The Economist (hardly a bastion of socialist though) did an excellent survey of worlwide health care financing earlier this year that tried to map costs to outcomes. The outcome they chose was longevity, assuming that living longer indicated better health care. Not a perfect measure but a reasonable one. The conclusions was the US healthcare is far more expensive (in terms of dollars for outcomes) than that of most western nations with their socialized health care.

The free market is a great tool, but there's a social policy decision here: do we want citizens to have health care? If we do, our current system is a pretty bad approach, in that it discourages preventive care, creates a rationing system in which some people have excellent care and others get poor care that costs taxpayers a lot (through public hospitals), and leaves us with a public health situation that is shockingly bad for a nation this wealthy. If, on the other hand, we are willing to accept that poor people will get poor care and die younger, a pure free market system is the way to go. As a society we've been very good at avoiding dealing with this decision.

Posted by: John Whiteside at November 24, 2004 9:28 AM

Aside: What crisis in health care? Is there a crisis in the private jet market because not everyone can afford one? I've never understood why the fact that science discovers a million dollar procedure to prolong life for two years means everyone is entitled to it.

I believe it was a past commentator here who said he always asks people if they'd rather have the government give them $100k for a college education at 20, for a sports car at 40, or a heart operation at 65. Exactly. You're going to die regardless. It's not obvious why other people must pay to extend that a little bit if they don't have to put you up in luxury in your healthier years.

Posted by: Dylan at November 24, 2004 1:56 PM


I think the fact that tens of millions of people in this country have no real access to health care constitutes a crisis.

The comparison between affordability of private jets and that of basic health care is as preposterous as it is flippant. One is a luxury, and the other, even if not an entitlement (and I don't necessarily think it is), is at the very least, important, and in many cases, is a prerequisite or condition to life itself.

Now, we can certainly debate the merits of various proposals to mollify the situation, but anyone who thinks the current situation is tolerable from an economic and/or fiscal perspective, if not an ethical, social, and legal one, is not paying attention, IMO.

Posted by: TP at November 24, 2004 3:16 PM

This comments to date reflect some of the problems involved in discussing issues relating to health care and health care finance in America.

On a threshold basis, one must distinguish between America's health care system, which is quite good, from the health care finance system, which is a real mess.

Second, addressing issues that will make the health care finance system better do not necessarily require one to address broader societal issues, such as universal entitlement to health care. That's not to say the two issues are not related -- indeed, the outcome of an improved health care finance system might well be universal health care. But we do not need to decide the latter issue before overhauling the health care finance system.

My sense is that medical insurance -- such as for catastrophic coverage and some type of subsidized product for poor folk -- will need to be a part of an overhauled American health care finance system. But unless that system takes advantage of market forces for the large numbers of citizens who can afford and desire to make their own health care decisions, then the system will continue to be plagued with the type of dysfunctional allocation of medical resources that one can now view any day of the week by walking into the nearest E.R.

Posted by: Tom K. at November 24, 2004 5:05 PM

I recently used mambo to set up my personel rochesterlasik blog. I am very happy and wanted to show it off. amoung Rochester doctors i am the only one with a lasik blog.

I am a rochester lasik surgeon and did this lasik blog on my own!

Please feel free to syndicate my lasik blog.

Posted by: allan robbins md at May 12, 2005 3:31 PM

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