From Mark Perry. That competition and consumers paying the cost can keep prices in check.
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Between 1998 and 2014 the price of medical care services in the US (as measured by the BLS’s CPI for Medical Care Services) has increased by 88.5%, or more than twice the 45.8% increase in consumer prices in general over that period (data here),
see bottom of table above. On an annual basis, medical care costs in
the US have increased more than 4% per year compared to an average
inflation rate of only 2.4% over the last 16 years. Probably the only
consumer product or service that has increased more than medical care
costs over the last several decades would be college tuition and fees,
which have increased more than 7% annually since 1998.
One of the
reasons that medical care costs in the US have increased almost twice as
much as general consumer prices since 1998 is that a large and
increasing share of medical costs are paid by third parties (private
health insurance, Medicare, Medicaid, Department of Veterans Affairs,
etc.) and only a small and shrinking percentage is paid out-of-pocket by
consumers. According to data from the Census Bureau,
almost half (47%) of health care expenditures in 1960 were paid by
consumers out-of-pocket, and by 1990 that share had fallen to 20% and by
2009 to only 12%. It’s no wonder that health care costs have risen as
the share of third-party payments has risen to almost 90% and the
out-of-pocket share approaches 10%. Consumers of health care have no
incentive to monitor prices and be cost-conscious buyers of medical
services when they only pay 10% themselves, and the incentives of
medical care providers to hold costs down are greatly reduced knowing
that their customers aren’t price sensitive.
How would the market
for medical services operate differently if consumers were paying
out-of-pocket for medical procedures in a competitive market? Well, we
can look to the $7.5 billion US market for elective cosmetic surgery for
some answers. In every year since 1997, the American Society for Aesthetic Plastic Surgery
has issued an annual report on cosmetic procedures in the US (both
surgical and nonsurgical) that includes the number of procedures, the
average cost per procedure (starting in 1998), the total spending per
procedure, and the age and gender distribution for each procedure and
for all procedures. Here is a link to the press release for the 2014 report, and the full report is available here.
(Note: Interestingly, there is a huge gender imbalance for cosmetic procedures – women accounted for 90% of the 10.6 million cosmetic procedures last year.)
The
table above (click to enlarge) shows the top five most popular surgical
procedures and top five most popular non-surgical procedures for 2014,
the number of each of those procedures performed last year, the total
expenditures for each procedure, the average price per procedure both in
1998 and 2014 (in current dollars), and the percent increase in price
since 1998 for each procedure. Here’s what’s interesting:
1. For the top ten most popular cosmetic procedures last year, none of them has increased in price since 1998 more than the 45.8% increase in consumer price inflation
(the price for the hyaluronic acid procedure wasn’t available for
1998), meaning the real price of all of those procedures have fallen
over the last 16 years.
2. For three of the top five favorite non-surgical procedures in 2014 (botox, laser hair removal and chemical peel), the nominal prices have actually fallen since 1998 by large double-digit percentage declines
of -23.6%, -31.2% and -30.1%. That is, those prices have fallen in
price since 1998, even before making any adjustments for inflation.
3. Most importantly, none
of the ten cosmetic procedures in the table above have increased in
price by anywhere close to the 88.5% increase in medical care services
since 1998. The 33.7% average price increase since 1998 for
last year’s top five most popular surgical procedures, isn’t even close
to half of the 88.5% increase in the cost of medical care services over
the last 16 years.
4. For the other dozen or so cosmetic
procedures not displayed above, but for which there are prices both in
1998 and 2014, there were only three procedures that increased in price
by more than the 45.8% increase in general prices, but the price
increases were all below the 88.5% increase in the cost of medical
services: chin augmentation (+69.7%), upper arm lift (+65.3%) and
buttock lift (+46.7%).
MP: The competitive market
for cosmetic procedures operates differently than the traditional
market for health care in important and significant ways. Cosmetic
procedures, unlike most medical services, are not usually covered by
insurance. Patients paying out-of-pocket for cosmetic procedures are
cost-conscious, and have strong incentives to shop around and compare
prices at the dozens of competing providers in any large city. Because
of that market competition, the prices of almost all cosmetic procedures
have fallen in real terms since 1998, and some non-surgical procedures
have even fallen in nominal dollars before adjusting for price changes.
In all cases, cosmetic procedures have increased in price by less than
the 88.5% increase in the price of medical care services between 1998
and 2014.
Question: If cosmetic procedures were
covered by insurance, Medicare and Medicaid, what would have happened to
their prices over time? Basic economics tell us that those prices would
have most likely risen at about the same 88.5% increase in the prices
of medical services between 1998 and 2014. And perhaps another economic
lesson here is that the greater the degree of market competition, price
transparency and out-of-pocket payments, the more contained prices are,
in health care or any other sector of the economy. On the other hand,
the greater the degree of government intervention, opaque prices and
third-party payments, the less contained prices are, in health care or
any other sector of the economy."
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