Future of Medical Specialists Under The Affordable Care Act

“..Japan, the land of $100 melons and tiny $10,000 per month apartments, all medical care prices are listed in a book, thicker than the Manhattan telephone directory. The prices set in the book are usually less than a third of those in the USA. An MRI that costs $1,200 in the USA costs $88 in Japan. Japanese insurance companies are private as are most doctors. Japan spends less than a third per capita on medical care than America. However, the Japanese are greater consumers of medical care than Americans. They visit doctors and hospitals more often, have much more diagnostic tests such as MRIs. They also have better health outcomes as measured by all metrics such as life expectancy. They also wait less for treatment than Americans do as Japanese doctors work much longer hours for their much lower incomes.

Japan’s explicit price controls are roughly emulated in other countries via the use monopsonistic systems. Monopsony, meaning “single buyer” is the flip side of monopoly. A monopolist sets prices above free market equilibrium. A monopsonist sets prices below free market equilibrium. It does not matter if there is an actual single payer or many buyers (or payers) whose prices are set by the government or by insurance companies in collusion with each other. More competition among sellers generally leads to lower prices. However, more competition among buyers leads to higher prices. In the health insurance industry the beneficial effects of more insurance companies competing for patients are far outweighed by the adverse effects of insurance companies competing for doctors and hospitals in their HMO plans. This was completely misunderstood during the recent debate on health care reform. With health care, more competition among insurance companies on balance results in higher prices.

Focusing attention on the insurance companies, which are simply intermediaries between the doctors and the patients, was a tragic error. It would like trying to solve a problem of high energy prices by focusing on gasoline stations. Only if the government sets prices can health care prices be controlled. Controlling prices does not automatically result in longer waiting times. Japan and Switzerland generally have shorter waiting times to see doctors than does the USA. Additionally, if prices were controlled there would be no such thing as “in-network” or “out-of-network” since all doctors would accept all insurance plans.

Price inelasticity in medical care stems not from the physical nature of its delivery as is the case of retail electricity. Rather, it is the dynamics of how medical care is delivered via the patient –doctor relationship. How many people have ever negotiated with a doctor over the price before undergoing necessary treatment? Have you ever met anyone who got up off an examination table and walked out because the doctor quoted too high a price? In theory, sick people could shop for the lowest price, but they don’t. An individual gasoline station faces elastic demand. People must buy gasoline, but if one station raises its price enough, customers will go elsewhere. When an individual doctor increases fees, most customers don’t go elsewhere. Thus, fees will continue to rise until prices reach the elastic portion of the demand curve.

In the USA we have attempted to deal with the combination of inelastic demand and unregulated medical care prices in various ways. One method of keeping medical care expense as a percent of GDP to “only” double that of other developed countries was to have a significant portion of the population uninsured and denied medical care in some circumstances. Obamacare will reduce the number of uninsured and untreated. However admirable this may be from a humanitarian perspective, absent price controls, it will exacerbate the cost problem. The existence of large numbers of uninsured (conscripts in the war against rising medical costs) did moderate the growth in health care costs. Now the number of uninsured and untreated will be declining and uncontrolled prices will be rising.

HMO’s were once thought to be a way of dealing with the inexorable price increases. The problem is that HMOs have to compete against each other for services of doctors and hospitals. As long as medical prices are set by market forces, the inelasticity of demand will force market prices inexorably higher. In a “mixed system” with both free-market and controlled health care prices like the USA, prices inexorably are driven upwards to the market level as long as demand is inelastic. Prices such as payments from Medicare that are “controlled” have to be increased continuously with legislation such as the “doctor-fix” to stay competitive with market prices. Medical prices can only be effectively controlled either by direct price controls as in Japan or with systems where everyone gets care for “free” from the government (Canada, UK, France). In those countries only the extremely wealthy can chose not to use the government paid health services that they have already paid for with their taxes and patronize the relatively small market-priced sector. In those countries, forgoing the government priced system is not an option for almost all doctors, as it is in the USA…”
http://seekingalpha.com/article/1647632