Docs Should Compete for Patient Dollars, Not Political Influence, Economist Says

In this series, MedPage Today is asking healthcare economists and policy experts the same questions about the high costs of U.S. healthcare. They’ll discuss what they believe is working, what’s not working, and what else can be done to bring costs down.

In this interview, Brian Blase, PhD, founder and president of Paragon Health Institute in Arlington, Virginia, argues that the path to lowering healthcare costs is less government intervention, fewer middlemen, more free-market forces, and more direct interaction between patients and physicians. “What we need is providers to be competing for patient dollars, not providers and plans to be competing for political influence,” he said.

What has been the greatest contributor to high healthcare costs in the U.S.?

Brian Blase: That’s easy. It is the rising prices of hospital services. We just did a paper a few weeks ago on the hospital cost crisis. The first figure in that paper shows price increases for major sectors of the economy since 2000. And the sector of the economy with the largest price increase by far is hospital services.

Hospital costs have risen three times faster than inflation and twice as fast as worker wages over the last 25 years. Really, when you look at that figure, any area where government has been heavily involved with regulations and subsidies — primarily healthcare services and education — you’ve seen escalating price increases faster than inflation. Where the government role is less significant and free-market forces function, you’ve actually seen much smaller price increases, and in some sectors of the economy you’ve had real price declines.

Has physician pay contributed to high costs?

Blase: Physicians are not compensated according to a normal market mechanism. There’s a lot of power involved with how Medicare compensates physicians. Physicians in the U.S. that are specialists tend to have more power on the committee that sets Medicare’s payment for physicians. And a lot of commercial payment is linked to the way that Medicare pays.

So, you do see distortions that favor specialists over general practitioners. Physicians in the U.S. earn a lot higher income than physicians do in other countries.

Have administrative costs contributed to high costs?

Blase: Administrative costs have been explosive. A lot of them flow from the complexity involved with government programs and with a payment system that has middlemen between the provider of care and the receiver of care.

Where you don’t have a lot of bureaucracy between the patient and the provider, administrative costs are lower, prices are more transparent, and costs have tended to come down over time. Unfortunately, there’s not that many examples in U.S. healthcare that are like that. You have LASIK eye surgery, where insurance doesn’t cover it, prices have come down, quality has gone up. Same thing with cosmetic surgery.

But we have an enormously complicated healthcare sector. With all of these rules, we run way too much through health insurance. Health insurance has all of these administrative costs and complexity. In our hospital cost crisis paper, there’s some estimates that half of spending at hospitals isn’t on direct patient care, it’s on overhead. So, I think there are too many administrative costs in healthcare, and a lot of that comes from the complications from government programs.

What is the best solution you’ve heard for lowering the cost of healthcare?

Blase: Well, it’s hard to give one specific solution. I look at the market in terms of, there’s a supply side of the market, there’s a demand side of the market. And you need reforms on both the supply side of the market and the demand side of the market.

So, what does that mean on the supply side? It means providers should be allowed to practice to the top of their ability. So, a lot of states restrict what nurse practitioners and physician assistants can do. I think we need … to allow people to practice to the top of their ability and have more competition.

The government discourages physician-owned hospitals. A big part of Obamacare was to limit Medicare payments for physician-owned hospitals. There are other distortions, like Medicare pays more for services done in a hospital than done in a physician office. That means there’s incentives for hospitals to acquire physician offices because they could bill more. So, we’ve got to address those distortions on the supply side and allow more competition.

On the demand side of the market, the big problem is that we don’t have a patient-driven healthcare system. The American [patient] is just not in control of the financing. Someone else is making the decision, right? It’s a government program or it’s a person’s employer. There is no other major financial product that people purchase that the employer chooses for them. It doesn’t make sense that an employer provides the health insurance plan that all the workers at a firm need to buy. Patients need more control and they also need more incentives to be cost-conscious. And I think those incentives come if we run less through third-party payment, less through health insurance where the costs are dispersed to other people, and more control like under the individual’s account. I’m a big proponent of expanding health savings accounts which give people incentives to get the best possible value for their spending.

Would having a single payer help control costs?

Blase: I think a single-payer system means more government involvement, and the government even more so picking winners and losers. And I think we need the exact opposite. We need more choice and competition in the market, not more resources allocated by lobbying.

We don’t want a healthcare sector where what is produced and what comes to market is determined by who has the best lobbyists. Increasingly, that’s what we have. Lobbying is massive in the healthcare sector. It’s by far the most lobbied part of the American economy. And if government assumes even more power and there’s one payer and that payer is determining what gets paid at all of the price points, then the competition is going to go even more into the political world and out of the market world.

What we need is providers to be competing for patient dollars, not providers and plans to be competing for political influence.

Would greater transparency in pricing help bring costs down?

Blase: It’s interesting. What other areas do we not have transparent pricing? Where do you not have the lowest-priced providers who want to advertise their prices? It clearly shows that we have a problem with healthcare markets where there is missing price information and it’s so hard for consumers — and employers because employers do a lot of this — to compare prices.

I think price information is really important. I don’t think, by itself, it’s going to fix the problems with our healthcare sector. I think what we need is price information, and then we need incentives to act on that price information. For employers, a big part of the incentive is if you can reduce costs from your plan, you can increase wages for workers.

There is some value to consumers, like knowing what prices are, being able to shop. But a large part of the way I think about the benefit of price transparency is to help employers monitor the insurer that they’ve hired to administer their plan and be able to set up models that incentivize employees to care about prices.

And there are models like that. My most famous study here is the California public employee and retiree plan. They set the payment rate for shoppable services — and some of these are expensive, like knee and hip replacements. You can think about this as a reverse deductible. The plan paid 100% up to a price point, and then above that price point, the individual was on the hook for any residual. What that did is cause individuals to shop. They didn’t want to have to pay more than what the plan reimbursed, and that caused the high-price providers to lower their prices. And I think that more transparent price information can make models like that more successful.

Will artificial intelligence (AI) be able to help the U.S. control healthcare costs?

Blase: I think it will. I think that there are reasons to suspect that it may not. AI right now can be leveraged by providers to figure out how to maximize billing. We’re seeing some of that, and I’ve heard some concerns about some of that. Like, you will have a recording of the medical visit and AI is looking for certain words so that they can have add-on fees to traditional billing. So, I am concerned about that.

However, I do think AI has potential with the ability to sort through massive data sets and look at trends and identify providers who are doing things that are … way outside the mainstream of what’s appropriate care. There’s a ton of fraud in healthcare [and that’s] really becoming apparent with some of the efforts of the Trump administration. But I do think AI’s ability to sort through big data is going to be able to get at the tremendous amount of fraud and abuse in our healthcare sector.

I should say one other thing about AI. I think AI has a potential to improve diagnoses, like looking at images. I think … AI has the potential to provide perspective based on thousands, tens of thousands, hundreds of thousands, millions of [data points] used to create the model to help improve diagnoses, which I think is really important. If you’re going to treat a condition, you first have to correctly diagnose the condition.

Other Interviews in This Series:

Price Controls ‘Inevitable’ in U.S. Healthcare, Economist Says

Hospital Prices Drive High Healthcare Costs, Economist Says

Single Payer ‘Hands Down’ the Best Way to Solve High Healthcare Costs, Advocate Says

AI May Drive Health Costs Up, Doc-Economist Says

Maybe Doctors Could Price Shop Services on Behalf of Patients, Economist Says

Here’s Why This Healthcare Economist Likes High-Deductible Plans