What economic lessons about health care costs can we learn from the competitive market for aesthetic plastic surgery?

By Mark J. Perry.

"Between 1998 and 2021 prices for “Medical Care Services” in the US (as measured by the BLS’s CPI for Medical Care Services) more than doubled (+132.2% increase) while the CPI for “Hospital and Related Services” (data here) more than tripled (+230.4% increase), see the bottom two rows of the table above. Those increases in the costs of medical-related services compared to only a 66.2% increase in overall consumer prices over that period (BLS data here). On an annual basis, the costs of medical care services in the US have increased 3.6% per year since 1998 and the cost of hospital services increased annually by 5.1%. In contrast, overall inflation averaged only 2.1% annually over that period. The only consumer product or service that has increased more than medical care services and just slightly less than hospital costs over the last several decades is college tuition and fees, which have increased nearly 5.0% annually since 1998 for four-year public universities.

One of the reasons that the costs of medical care services in the US have increased more than 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 of health care costs are paid out-of-pocket by consumers. According to government data, almost half (47.1%) of health care expenditures in 1960 were paid by consumers out-of-pocket, and by 2020 (most recent year available) that share of expenditures has fallen to only 9.4% (see chart above). It’s no big surprise that overall health care costs have continued to rise over time as the share of third-party payments has risen to more than 90% and the out-of-pocket share has fallen below 10%. Consumers of health care have significantly reduced incentives to monitor prices and be cost-conscious buyers of medical and hospital services when they pay less than $1 themselves out of every $10 spent, and the incentives of medical care providers to hold costs down are greatly reduced knowing that their customers aren’t paying out-of-pocket and aren’t price sensitive.

How would the market for medical services operate differently if prices were transparent and consumers were paying out-of-pocket for medical procedures in a competitive market? Well, we can look to the $14.6 billion US market for elective cosmetic surgery for some answers. Every year since 1997, the American Society for Aesthetic Plastic Surgery has issued an annual report on aesthetic 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. The 2021 report was released in April and is available here.

The table above (click to enlarge) displays the 16 cosmetic procedures that were available and reported in both 1998 and 2021, the average prices for those procedures in each year (in current dollars), the number of each of those procedures performed in those two years, and the percent increase in the average price for each procedure between 1998 and 2021. The procedures are ranked by the number of cosmetic procedures last year. Here are some interesting findings from this year’s report and the table above:

• Only four of the 16 most popular cosmetic procedures (tummy tuck, eyelid surgery, facelift, and male breast reduction ) increased more than the overall 66% increase in the CPI between 1998 and 2021, while the other 12 procedures increased less than overall consumer prices. That means that four of the procedures increased in real inflation-adjusted dollars and the other 12 decreased in real, inflation-adjusted constant dollars.
• For four of the most popular nonsurgical procedures in 2021 – botox injections, laser hair removal, laser skin resurfacing, and chemical peel — the nominal prices in current dollars have actually fallen over the last 22 years, by 3.5% for botox injections (from $424 to $409), by 24.7% for chemical peel (from $821 to $618), by 63% for laser hair removal (from $452 to $167) and by 47% for laser skin resurfacing (from $2,276 to $1,199). When a price in nominal, current dollars is lower in 2021 than in 1998, that means that the real prices of those procedures have decreased significantly. For example, the cost of laser hair removal in 1998 ($452) expressed in 2021 dollars ($753) means that the price last year of only $166 was 78% lower adjusted for inflation. Likewise, the real price of botox injections fell by 42.1% in inflation-adjusted dollars, laser skin resurfacing fell by 68.4%, and the price of chemical peel fell by 54.8%.
• The unweighted average price increase between 1998 and 2021 for the 16 aesthetic procedures displayed above was 31.3%, which is less than half of the 66.2% increase in consumer prices in general over the last 23 years. When the average procedure prices are weighted by the spending on each procedure last year, the average price increase since 1998 was 38.2%.
• And most importantly, none of the 16 aesthetic procedures in the table above have increased in price by anywhere close to the 132% increase in the price of medical care services or the 230% increase in hospital services since 1998. The largest aesthetic procedure price increases since 1998 is the 86.5% increase for facelifts, which is still way below the more than doubling of prices for medical services overall and the more than three-fold increase in the CPI for hospital services.
• The Aesthetic Society doesn’t provide a detailed breakdown of aesthetic procedures by gender, but it did provide the number of procedures for the top six most popular procedures for women (liposuction, breast augmentation, tummy tuck, breast lifts, breast implant removals, and eyelid surgery) that totaled just under 1.5 million and the top six procedures for men (liposuction, breast reduction, eyelid surgery, nose surgery, tummy tuck, and face lift) totaling 94,844. Based on those figures, women accounted for about 94% of aesthetic procedures and men only 6%, which is consistent with the gender breakdown in past years based on more comprehensive data (and also consistent with the gender shares highlighted in the report).

MP: The competitive market for aesthetic plastic surgery 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 typically paying 100% out-of-pocket for elective aesthetic procedures are cost-conscious and have strong incentives to shop around and compare prices at the dozens of competing providers in any large city. Providers operate in a very competitive market with transparent pricing and therefore have incentives to provide cosmetic procedures at competitive prices. Those providers are also less burdened and encumbered by the bureaucratic paperwork that is typically involved with the provision of most standard medical care with third-party payments. Because of the price transparency and market competition that characterizes the market for cosmetic procedures, the prices of most cosmetic procedures have fallen in real terms since 1998, and some non-surgical procedures have even fallen in nominal dollars before adjusting for inflation. In all cases, cosmetic procedures have increased in price by far less than the 132% increase in the price of medical care services between 1998 and 2021 and the 230% increase in prices for hospital services. In summary, the market for cosmetic surgery operates very much like other competitive markets with the same expected results: falling prices over time for most aesthetic plastic surgery procedures.

Question: If aesthetic plastic surgery procedures were covered by third-party payers like insurance companies, Medicare, and Medicaid, what would have happened to their prices over time? Basic economics tells us that those real prices would have risen over time, possibly somewhere close to the same 132% increase in the prices of medical services in general between 1998 and 2021. The main economic lesson here is that the greater the degree of market competition, price transparency, and out-of-pocket payments, the more constrained prices are, in health care or any other sector of the economy. Another important economic lesson is that the greater the degrees of government intervention, opaque prices, and third-party payments, the less constrained prices are, in health care or any other sector of the economy. Some important economic lessons to keep in mind as we consider various reforms for national health care, including proposals by Bolshevik Bernie Sanders for single-payer “Medicare for All” because “health care is a human right, not a privilege.”"