Commentary Magazine

How to Radically Reduce Medical Costs

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The state of Colorado is considering a new law, the Comprehensive Health Care Billing Transparency Act, which has the potential to profoundly affect the cost of medical care. As former senator (and physician) Tom Coburn explained in the Wall Street Journal:

If passed, the legislation would mandate that hospitals and other facilities disclose the base fees they charge for specific services “before applying any discounts, rebates, or other charge adjustment mechanisms.” Every bill sent to a patient would need to include an itemized list, which would allow patients to see if a service had been marked up. By making such information available upfront, the legislation would reintroduce competition to Colorado’s opaque health-care markets.

Once hospitals, surgical centers, etc., are forced to disclose their prices, free-market competition will ensure that those prices tend to converge towards the low end. Some opponents call this a race to the bottom. But, in fact, it’s a race to the market clearing price. In a free market, no one is going to provide a service at a below cost price, and no one is going to pay more than the lowest offered price. This will force hospitals that currently have little incentive to be more efficient to cut costs and meet the competition’s prices.

An example of what can be achieved is the Surgical Center of Oklahoma.  Its website gives the all-inclusive prices it charges for a wide variety of surgical procedures, including the fees of the surgeons and anesthesiologists. It accepts either direct payment by the patient or payment from companies that self-insure for their employees’ health care (that is to say, almost entirely very large corporations). It does not accept Medicare or third-party insurance.

Because it is owned by the doctors who practice there, there is every incentive to keep costs to a minimum.

Who would oppose making prices of medical services public, just as the prices of practically everything else are public? Hospitals, insurance companies and some doctors, that’s who. They are the beneficiaries of the current opaque system. Many “non-profit” hospitals, especially those that are part of a larger entity such as a university, are, in fact, extremely profitable. They want to keep it that way. Unfortunately, they have powerful lobbies in both state capitals and Washington.

But if Colorado passes this law, medical costs will go down in that state—substantially, over time–and that will force other states to follow suit.

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