John Locke Update / Research Brief

Lowering Health Care Spending Through Competitive Bidding

posted on in Health Care, Health Care & Human Services
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It’s no secret that Americans pay more for health care than any other industrialized country in the world. In 2017, health care spending reached $3.5 trillion or roughly $10,739 a person. The share of health care spending as a portion of Gross Domestic Product (GDP) reached 17.9 percent. The Centers for Medicare and Medicaid Services (CMS) projects health care spending will grow at a rate of 5.5 percent a year until the year 2026, where Americans will spend a projected $5.7 trillion.

Hospital prices have been a major point of concern for many patients and health scholars. Provider networks are one of the culprits. Facilities and physicians can either be “in-network” or “out-of-network.” The negotiations between network providers and insurance companies are among the factors that determine the final bill when a procedure is completed.

“Surprise” bills arise when private insurance providers, health care facilities, and physicians can’t agree on pre-negotiated prices for specific services or procedures. The customer bears the costs of those failed agreements.

What if insurance companies did not negotiate on behalf of the patient? What if patients were able to choose from a variety of doctors willing to perform the procedure? That is the idea behind an auction-based system of purchasing health care.

Auction-based systems place the patient in control of the purchasing process. Patients get to choose the doctor who will perform the procedure they require. In this type of arrangement, there is downward pressure on physicians and facilities to respond to the market demands of the patients. Instead of a guaranteed procedure through an insurance contract, providers would have to compete with each other to win the business of the patient. Patients are better off when there is more competition between providers to offer the highest quality procedure at the lowest cost.

Medibid is a pioneer in this type of medical purchasing arrangement. Medibid offers a platform for cash-paying customers to have licensed physicians around the world bid to perform procedures needed by patients. There are ratings for the physician and the facility, reviews of previous patients, and a real-time second opinion from another physician.  Often, these providers agree to rates that are less than the rates paid by Medicare for the same service.

The health care industry has some of the least transparent pricing procedures in the entire country. Few know what the true price of care because the price negotiation between insurers and providers, rebates, kickbacks, and other processes split the link between quality and price in the health care system. In an auction-based system, all this information would be presented to the patient before rather than after the procedure occurs.

A recent study published in Health Affairs concluded that hospital facility fees, not physician prices, were a more significant driver of increased health care costs in hospitals. The study also found that inpatient prices grew faster than outpatient prices. So, why are hospital costs rising?

One possible answer could be that in states like North Carolina, certificate-of-need laws insulate hospitals and other providers from competition. When there is no market competitor who offers the same service for a lower price, the incumbent providers have the power to charge their desired rates.

The rate and size of hospital mergers as well as hospital system acquisitions of independent providers may also be to blame. As a hospital system purchases additional facilities and practices, its share of the market grows. As its share of the market grows and competition decreases, its power to set prices increases.

By allowing licensed physicians to bid for their procedures, auction-based purchasing of health care could solve the pricing problem. This may not be an appropriate arrangement for all medical purchasing, but one can see how patients could benefit from the purchasing of larger medical procedures in this type of arrangement.

There are a few limitations to the proposed auction-based method of selecting physicians for a procedure. In metropolitan areas, there are large concentrations of hospital-dominated facilities. In cases like these, there may not be significant variations in the proposed prices offered to patients. This pricing uniformity may be common in major markets, so the patient may be in a similar position as they would be with insurer negotiating prices.

An auction-based method also would allow doctors from out of state to bid on a procedure they could offer for a lower price. The patient then would have the choice to travel for a medical procedure, that is, utilize a form of medical tourism. This presents another trade-off that patients have to make in this auction-based setting. Should a patient be compelled to schedule a procedure at a hospital down the road when an out-of-state facility offers it at a lower price?

Although there are some limitations to this proposal, the idea to have medical providers bid for services is a potentially disruptive innovation because Americans have trusted insurance companies to do the negotiating for them for generations. However, as stated above, when there is a break down in those negotiations, the result is often surprise billing and higher costs.

As policymakers attempt to address the systemic problems of high health care costs, they would be wise to keep in mind the market forces that have driven down prices for goods and service in almost every other industry. In the traditional third-party payer system, there are very few market forces. Future health insurance or facility pricing reform should try to incorporate principles that Medibid has incorporated into their business model: let the consumers have the power and increase competition between the providers. When providers compete for the scare dollars that are spent on health care, they are forced to respond to the market demands of patients.

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. After two years in the research division, he moved over to the government affairs team. Jordan now works with state decision-makers in the public and… ...

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