In their 7/7/2015 Op-Ed “The Coming Shock in Health-Care Cost Increases”  Ezekiel Emanuel, one of the guiding forces behind the Affordable Care Act (ACA), and Tophor Spiro state:

Still, most analysts expect that the growth in health-care costs will rise without further action. And the latest data from the Census Bureau indicate this acceleration may be starting. The country is at an inflection point: Will we let our foot off the brakes, or will we permanently bend the cost curve?

Just a few years in and not fully implemented, The Affordable Care proponents are out giving dire warnings of uncontrolled rise in heath-care costs. Isn’t this exactly what the ACA’s opponents predicted?  Ah, Emanuel & Tophor have come up with a solution:

 Before it is too late, the Obama administration must focus on a reform that can be scaled. Medicare should lump together physician services, hospital costs, tests, medical devices, drugs and rehabilitation services related to common ailments—such as broken hips, heart stents and cancer treatments—into a bundle. It could then pay a medical provider a discounted amount for the whole array of services.

Wow, what a discovery!  Imagine common procedures sold as package or bundle at an all inclusive price. Why hasn’t anyone ever thought of this before?  Oh wait, in areas not commonly covered by insurance or government programs, package pricing has been the norm.  For instance, Cosmetic surgery, Lasik and many dental procedures  are ones that people pay for out of their own pockets  and are regularly priced as a package.  Google Lasik or breast augmentation and you’ll have offers covering what the whole procedure will cost.  Even if you were going to pay yourself for a hip replacement or stents by Medical Tourism, you’d be offered a package price covering everything often including transportation.  More importantly the cost history of any of these compares very favorably to areas where the Government and insurance companies dominate.  Taking inflation into consideration Lasik has had hardly had a price increase.  The same seems to b true of breast augmentation surgery.

So bundling or packaging of medical procedures is common in the open market and not a great Emanuel and Topher discovery but they are are quite right as seeing this as a way to better medical prices. The question is whether their plan of having the government arrive at the price of a procedure by some bureaucratic method or letting competition set the price produce better results

Since the authors brought up Hip Surgery, let’s use that procedure to make a comparison between their government command pricing and the approach advocated here by Dave’s Plan (for new readers, find the several posts describing the Plan under policy).  According to PT in Motion the average cost of a total hip replacement in 2015 was $30,124.  This is with  average costs ranging from $11,327 in Birmingham, Alabama to $73,987 in Boston.  Surprisingly there is no correlation between costs and outcomes.  We suspect the authors also found this to be true leading to their fondness of bundles.  But, by what method would the command economics of the authors arrive at a price for this procedure?  Would it be at the average price?  No savings there.  How about the Birmingham price?  In many areas such as Boston it suddenly might be hard to find medicare and medicaid providers.  What good is a low price if you can’t actually get the good or service?  This is always the problem in  a command economy.  If this wasn’t the case, the Soviet Union would’ve won  the cold war.

Dave’s Plan on the other hand would encourage the market to determine the price.  Let’s say that Charlie aged 55 needs the procedure.  The prospective patient would have a catastrophic policy to cover expenses over the deducible associated with their their Personal Benefits Account (PBA).  In order to keep the premiums down and more of their contributions going to savings, most reasonable people would opt for policies offering lower annual premiums in return for agreeing  to have certain surgeries and procedures provided from a list of approved providers that in fact offer competitive inclusive packages. As the Catastrophic Policies would be sold across state lines they would be national in scope or maybe even international in character leading to a wide range of providers. The policy holder gets more money going towards savings in their PBA, the insurance company  knows exactly what it’s on the hook for and efficient providers would gain market share which would lead to further economies of scale.  The market provides a good deal for everybody.

Compare this to what the authors are proposing.  They concede that the command pricing Medicaid and medicare has brought the country to “an inflection point” and then offer nothing other than more of the same.  On the other hand, Dave’s plan would bring forth market priced bundles that would be available to everyone not just medicare and medicaid patients.  Rather than low ball command pricing in these areas forcing participating providers to pass costs on to other patients, everyone would benefit from lower costs providing real system wide savings that could actually bend the cost curve.

How do we know the costs would go down system wide?  Hip Surgery costs $11,327 in Alabama and medical tourism costs for total hip replacement range between $7,000 and $15,000.  This suggests the market price for this procedure is closer to Birmingham Alabama.  An average market price of $15,000 would be half the national average and miles from the $73,987 in Boston.  But wouldn’t this mean that people might have to travel  out of their immediate area to get the procedure?  Maybe, especially early on before markets adjusted but unlike something the government ordered, the patient received a trade off in the form of lower premium and/or deductibles.  If the government ordered you to travel for a procedure, just imagine the outcry.  Here people agree to it because they received value in return.  Extend this across all the possible procedures that the Emanuel and Topher see as possibilities for bundling to everyone and we could actually get a handle on medical costs and actually avoid the dreaded “inflection Point”.  Dave’s plan offers other ways in addition to procedure bundling that achieve lower health care costs but this gave us a chance to compare and contrast our market based approach with the thinking behind the Affordable Care Act.

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