I blog about free markets in medical care and transparent pricing.
I am not an economist. I consider myself a student of the school of economics sometimes referred to as the “Austrian” school. Having said this, it is with some uncertainty that I write the following piece. Oh well. Here goes.
Everyone wants to be part of a “win-win” deal, don’t they? Mutually beneficial exchange is the hallmark of a free market and is absent in a coerced (“win-lose” deal) arrangement like government-provided services. In a free market, parties enter the arena of exchange in anticipation of which they hope to better their current circumstances. If no perceived future benefit is anticipated due to a proposed exchange, the exchange simply doesn’t occur in a voluntary and free market. Some folks are happy to be in a win-lose arrangement as long as they are on the “win” end. That is a subject for a future blog.
The “seller” wants the exchange to occur for something he values more than the goods with which he is willing to part. The value to the seller of the money or goods for which he is trading is greater to him than that which he already possesses, otherwise, no trade/exchange will occur. The buyer values the seller’s goods more than the money in his pocket, otherwise no exchange will occur. The job of the salesman is to highlight value and perhaps even introduce the concept of the scarcity of the buyer’s opportunity, an attempt at increasing the buyer’s time preference, a common strategy in many “sales” arenas.
One of the most miraculous things about this entire dance is that both parties are better off/improved having undergone this exchange. This is the basis for the formation of capital and the market activity that improves the standard of living of all people involved. This capital formation doesn’t occur in a government-coerced exchange as one of the parties is necessarily a loser, negating the other “winning” party’s gain.
One of the radical “Austrian” contributions to the field of economics is the idea of the “subjective theory of value.” Quite simply, a potential buyer’s assessment of the value of targeted goods is different from any other buyer. The goods don’t have an arbitrary value, only that assigned to them by a potential buyer and a function of a comparison to the next best alternative use of the buyer’s money. “It’s worth what someone will pay for it,” partially captures the meaning of the subjective value theory. This radical concept makes the whole concept of economic forecasting suspect, as the prediction of the actions of individuals based on changes in pricing or other variables, is different for each individual, making any assumption about future mass behavior difficult at best.
Since rocking chairs, Steinway pianos and French Bordeaux’s are valued differently by different buyers, the sellers have an incredible challenge. They must take into account their production costs, factor in a reasonable profit and find the “market clearing price” (that price that results in neither surpluses or shortages). If they get it wrong on the high end, little product is sold. If they shoot low, they can’t fill all of their orders.
The appearance of competitors keeps the sellers in a position of constantly re-evaluating various efficiencies and production costs in order to present a value to the marketplace and potential buyers.
What does any of this have to do with healthcare? I think that even a basic understanding of the above (and I confess to only a basic understanding) illustrates the futility of the role in which the central planners have placed themselves, engaging in price fixing, completely discounting the notion of subjective value. Some people have chosen a higher priority alternative to the purchase of healthcare, that choice now removed from them, however.
Also keep in mind that the lack of transparency in healthcare pricing is the equivalent of walking into a store of some kind that has turned its lights off such that none of the merchandise can actually be seen. The information necessary to determine value is not there, so there is no way to know if an exchange is mutually beneficial and hence no way to know if such an exchange is to the buyer’s advantage and whether such an exchange should even occur. Mises clearly showed that the absence of a rational pricing system spelled the doom for any socialist enterprise or government due to the lack of feedback this pricing information provided the producer and buyer, shortages or surpluses being the obvious result.
Inevitable shortages and surpluses result from central economic planning, the shortages in the healthcare arena meaning neglect or death. This is not my opinion. This is evident in every country where central planning has been introduced into the medical marketplace. The presence of government in any arena of exchange means that one or both parties want no part of the exchange on their own. If the parties saw an exchange as mutually beneficial, there would be no reason for the GUNverment (bureaucrat with a gun) to “enforce” the exchange….it would occur quite simply on its own if seen as mutually beneficial.
That GUNvernment has an even greater presence in the health care marketplace than ever before, with even more to be expected, the parties with a gun in their ribs will act differently, just as you would expect. Robbery victims don’t typically part with their property or service with a smile on their face, wishing their mugger a nice day. Surly, sullen and cursory. Neglectful, dismissive and dangerous. These are the words I’ve seen describe many physician encounters in medically socialized countries. I believe that we will see more and more of it here in this “country.” The idea that the behavior and actions of physicians will not change when a gun in at their head is yet another miscalculation and the predictable result of the arrogance of the central planners, those who relish in “making” people do things, rather than mind their own business.
G. Keith Smith, M.D.
I’ve been asked a lot lately some version of “how do you do what you do at your center for those prices and not cut corners?” “How can you be so much cheaper that the hospitals for the same thing?”
If you are a follower of this blog, you know that I am not the one that has some explaining to do. It is those charging 10 times what we charge from whom we are due an explanation. Furthermore, it is the myth of the mysteriously “high cost of healthcare,” a myth created by the big hospitals and insurance companies, that we have to thank for our latest government intrusion into the healthcare marketplace.
I’ll answer, nevertheless. We are cheaper for one simple reason. By virtue of our physician ownership of the facility in which we work, we have eliminated the most inefficient and greedy profit seeker in the entire healthcare equation: the big corporate hospital. You see, as physicians, we are happy to receive fair compensation for our professional fees, anesthesia and surgeon fees for doing the surgery, that is. If our facility makes a profit that’s great, too. We don’t need for our facility to generate a giant profit to fund sports teams and buy high-priced advertising and pay administrators and….well…you know the rest. We can operate the center at a small marginal profit, maintain fair physician compensation and underprice our hospital friends by a factor of 5-10.
Twice, in the month of September, patients came to our facility with no insurance with a surgical problem for whom a church was willing to pay their bills. I talked to the surgeon about his fee which he deeply discounted and I matched his discount on my anesthesia fee. For the facility fee, I basically charged for the cost (the real cost) of our supplies. The church was prepared, needless to say, for over 15 times what I had quoted them. And we didn’t lose money. Our facility didn’t make money, but we didn’t lose money either.
The lessons? The culprit for the high prices in health care (I didn’t use “cost,” on purpose) is the hospital. That the church expected a number 15 times the number we quoted is evidence enough of this. Physicians owning and controlling a facility allow for the accommodation of special circumstances like this much easier than a corporate hospital. No uncompensated care rebates will come to us for having done this. And finally, people tend, I think, to take care of other people in need without a gun in their ribs (a government program).
Ironic, isn’t it, that these churches sought us out rather than the many “faith-based,” “not for profit” hospital options in the area. I’d love to hear about any other lessons you think can be derived from this.
G. Keith Smith, M.D.
I first heard of Dr. Marty Makary one year ago while visiting with a congressional staffer. The staffer referred to Makary as Mr. Transparency and had a book coming out in which he was going to include devastating comments about hospital care.
I just finished his book, “Unaccountable: What Hospitals Won’t Tell You and How Transparency Can Revolutionize Health Care.” Suffice it to say that Dr. Makary is a salaried academician who has written a book on quality transparency, while extolling the virtues of the “free market.” I am going to blog extensively about his book (easily read in one evening) for several reasons. Part of what he has written is insightful and useful. I will comment on that and why I think some of what he has pointed out is important.
I will focus primarily on the outrageous shortcomings of his book, however. My extreme criticism of his book comes from his incredible inconsistency, his lack of understanding of anything having to do with the “free market” and this final point. Having declared himself a judge of quality, he has (probably successfully) established himself as one whose “stamp of approval” many will now seek. I have seen physicians take this “now that I have declared my own wisdom and greatness by pointing out other’s failures, it must be so,” approach in their practices and am afraid that is what we are seeing here. He will make a lot of money on this book and will be highly sought after as a quality guru, having declared himself to be a medical judge of all things, I predict.
I’ll dissect his book from the beginning and show where he adds to the current debate and where I think he falls shockingly short. I’ll leave you with this: he never mentions overcharging hospitals or price transparency in his entire book. I’ll get after this book with my next blog.
G. Keith Smith, M.D.
Lew Rockwell described the General Motors bail out as follows. Imagine that you have saved enough money to by a car. After doing careful research you decide that you want a Toyota. Uncle Sam says, “NO!” ”You must buy a Chevrolet!” The funds are taken out of your account and deposited in the General Motors account. The catch? You don’t get a car!
I don’t like the use of “bail out” as a phrase that indicates a rescue of sorts. I prefer to think of “bail out” as ejecting from a burning airplane leaving everyone else on board to fend with the mess. Isn’t this what the GM bailout really was? ”What was seen” was GM continuing to operate. What was not seen was the robbery of the taxpayers and the ruin inflicted on those holding GM’s bonds.
“Bail out” can also mean scooping water out of a sinking ship or vessel. The key to understanding this use of the phrase is that the ship is sinking.
I think it would be more honest to start using the phrase “bail in.” This phrase would be more useful in that Uncle Sam’s role might be more clear as the distributor of money stolen from taxpayers to political or corporate favorites. Solyndra is a great example of a “bail in.” Your money and mine was “bailed in” to that poorly conceived black hole. We have involuntarily participated in countless “bail ins” for big banks over the years, institutions deemed “too big to fail.”
I have begun to think of Medicare as a “bail in” effort. Rather than declare this Ponzi scheme a disaster, voters over the years have tarred and feathered anyone suggesting even the slightest change in this program. ”Don’t touch MY Medicare!” ”I have paid in to this for many years and now I want my benefits!” The current Medicare beneficiaries receive their “benefits” not from money they paid in, but rather from money others currently pay and even money that future generations will pay. Medicare is being “bailed out” by bailing young people’s money in.
If a private company had Medicare’s balance sheet, it would be declared bankrupt, broken up and sold off and those that had put money into the organization would take their lumps, recognizing they had contributed to a failed enterprise and learned their lesson. However, as a government institution, Medicare has the power to bail the money of future generations in to this financial abscess, only to make the boil even larger. Cries from Medicare beneficiaries continue and the politicians respond just as you think they would, maintaining or increasing the benefits to this powerful voting bloc.
Some politicians paid a big price for voting for the various bailouts. I don’t see the difference between that and political promises to “save Medicare.” Placing Medicare in to receivership won’t be easy and can’t be accomplished quickly as too many folks have come to count on this program to provide funding for their health care. That said, I believe it is irresponsible and immoral to continue to present future generations with the current health care bills of today’s Medicare population. Is it possible to end the confiscatory “bail in?” Is it possible for a group of the elderly to endorse the end of the robbery of our young, and those struggling to make their own ends meet?
G. Keith Smith, M.D.
I had the honor to appear on the Lew Rockwell Show recently. You can hear the podcast here. It is podcast # 276. This interview has brought our free market surgery center to the attention of liberty lovers (and haters) far and wide. What an exciting time for me personally, to correspond with so many that are like-minded. Thanks to all of you for your encouragement and support. We continue to be encouraged and humbled by the power and beauty of the free market and what adherence to these principles has meant to our patients and to our group of dedicated physicians and staff.
G. Keith Smith, M.D.
KOCO TV, here in Oklahoma City, did a story on our facility and the center’s transparent and packaged pricing recently. You can view it here. In response to the question ..”how can you be so much cheaper than the hospitals..” I said, “..we didn’t have an administrator in a $3000 suit.” While this is true, there is a better answer, I think, to this question.
The question posed presumes that the prices charged by the hospitals are reasonable and legitimate, when in fact, they are not. The question is not, “how can you be so much cheaper, ” but rather, “how can they justify charging ten times what we do,” as is the case, much of the time. Starting with the notion or idea that hospital charges are legitimate is a mistake. The lack of the free market in medicine (well…except for places like The Surgery Center of Oklahoma!) has guaranteed the absence of rational pricing. Mises made this point in his brilliant book “Socialism.” Economic systems without rational pricing are always doomed to fail as the feedback to producers and consumers is faulty, resulting in inevitable surpluses or shortages. I have told people recently that we won’t really know whether our prices are “right” until we have competitors displaying their prices, bringing about the price competition that is so sorely needed in healthcare. I think that 1/10 of the hospitals’ price is a great starting place though!
I have been approached by insurance companies that offered payment contracts to our facility based on a super-percentage of Medicare. ”We will pay you 125% of the Medicare rate.” You should see the looks of consternation I get when I tell these executives that Medicare rates mean nothing to me, that these numbers are arbitrary, capricious and not legitimate. But “Medicare” pricing, which is completely illegitimate, is the standard. Why? Because most have weakly accepted it as such. My point here is that hospital charges should command our scrutiny, not represent some mysterious standard.
Everyone complains about the cost of health care. How is it that few are connecting the dots, asking whether the costs are related to what the hospitals charge and that these charges might not be legitimate? Why is the question put to me to justify my low charges instead of spotlighting those who have been fleecing the sick for years?
Kudos to KOCO TV for airing a piece that may help more people begin to challenge the health care giants whose prices have been foolishly trusted for so long. Many thanks to the patient in the piece, Paul Freeman, for traveling to Oklahoma City for the interview and to Jay Kempton, as well, for his contribution and insight.
G. Keith Smith, M.D.
Check out this 2 minute video of Dr. Donald Berwick, outgoing head of the CMS (Medicare, basically). This video interview by the insufferable Dan Rather illustrates Hayek’s “fatal conceit” very succinctly and clearly. Berwick laments the lack of a coherent “system.” He says that parts of the health care “system” are the best in the world, but the overall “system” is flawed by virtue of its disorganization and lack of coordination.
He says that the elderly woman with congestive heart failure and diabetes feels like a number, that the doctor doesn’t really know who she is and that the hospital doesn’t know what meds she is on. Wow! If only the government had more data and power! What we could do for this woman!
Where does this lack of coordination come from? Why does this woman feel so disenfranchised? Why was the same woman 50 years ago the object of a caring and accountable personal physician? What has changed?
The disastrous care the woman above will likely receive (if she can find any at all) is precisely the creation, the spawn, of men like Don Berwick. The arrogant notion that a medical system can be managed from the top, down, is the dream of the statist planner, a wannabe tyrant, and the nightmare of those subject to this insanity. Do you think there is any relationship between the “lack of coordination” of the system and the price controls and too numerous to list or comprehend rules and regulations that go along with Medicare? Having had a hand in creating this maze and web, isn’t it insane for Berwick to decry its complexity and recalcitrance to “coordination?”
The new tyrant in charge of Medicare will be the same. Just taking a job as head of CMS is indication that one subscribes to Hayek’s “fatal conceit.” Meet the new boss, same as the old boss. There is only one answer: block grant Medicare to the states for them to unravel. Any CMS head that advocates any solution to Medicare other than “fade back and punt,” as I’ve written before is infected with the same hubris that Don Berwick has shown.
Medicaid block grants are on the table. Why not do it with Medicare, now, as well? What a great opportunity to unwind this bankrupting mess.
G. Keith Smith, M.D.
I just want to be sure that readers connect the dots between the salary paid to the nun running the Catholic Hospital Association and your hospital bill. Any Catholic hospital that belongs to this mafia-like organization (that would be virtually all of them) has to pay for membership. The money that they use to buy this membership came from…well…it came from you, if you were ever a patient at a Catholic hospital.
How many people have been bankrupted by medical bills from these outfits? Don’t you think those who have been unnecessarily financially ruined by these so-called “not for profit” hospitals would be troubled by the nun millionaire?
Also keep in mind that the CHA and Catholic Charities receives massive federal funding. Since we all know that the government has no money that it didn’t first take from us at gunpoint, that means that another source of the funds required to make a nun millionaire came from taxpayers.
Once again, if you want to know one of the primary reasons health care is so expensive, look no farther than your local “not-for-profit” hospital. The unholy alliances they have made with the government and certain insurance companies have resulted in a cartel-like model of doing business, nothing resembling a business model disciplined by ruthless market forces.
Thugs like this nun pushing for Obamacare only have enriching their clients in mind. There is no altruism in a habit-less millionaire nun, whose clients make a regular and daily habit of shaking down the sick for money.
Try to remember that her million dollar salary would not be possible were it not for the taxes you pay and the $100 aspirin and $30 Kleenex on your hospital bill.
G. Keith Smith, M.D.