The fundamental problem with the economics of medical care in our country is that, in accordance with government policies over many decades, we've relegated payment to third parties. The result has been high prices, reduced quality of services and stifling of service innovation. I'd like to provide some concrete examples in the next few posts. I'll start by inserting a section from an essay I wrote 3 years ago:
In Japan medical services are completely private but prices and fees are strictly controlled by the government and are set very low. The average price for an MRI of the head in 2009 was set by the Japanese government at $105 as opposed to over $1000 in the U.S. At such prices one might have expected producers to have limited interest in these tests but in fact Japanese manufacturers responded to the market by producing compact machines at a much lower price[1] and are producing these machines for export. As a result consumer demand increased markedly and Japan now has far more MRI machines and does far more MRI tests per capita than any other advanced country[2] resulting in both decreased cost and increased diagnostic capacity. Contrast this situation with that of Canada where funds for medical services are centrally controlled and availability of MRI machines is limited by budgetary constraints. One finds there long waiting periods for all but the most urgent MRI tests[3] and therefore marked decrease in diagnostic capacity.
[1] Reid, T. R. (2010-08-31). The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care (pp. 92-93). Penguin Group. Kindle Edition.
[2] MRI scanners per capita http://www.oecd-ilibrary.org/sites/health_glance-2011-en/04/ 02/g4-02-01.html?contentType=/ ns/StatisticalPublication,/ns/ Chapter&containerItemId=/conte nt/serial/19991312&itemId=/con tent/chapter/health_glance-201 1-30-en&mimeType=text/html
[3] Waiting list for MRI in Canada http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2653696/#__sec7t itle
I quote this section not to endorse the Japanese system or to suggest the correct utilization of MRI scans but simply to show the large elasticity that exists in the use of medical technology and how such technology is dependent on economic stimuli.
Many people have the idea that medical practice is cut and dried, that there is only one right way to treat each case, and that therefore the market forces of substitution or alternative choices cannot operate such as for example when buying a refrigerator or a television. This is far from true. If a patient comes with shoulder pain there are multiple diagnostic and treatment options. MRI gives the most definitive anatomical diagnosis but is not needed. After all there was a time when there was no MRI. A cost of $100 vs $1000 makes a great deal of difference as to whether it is selected.
In Japan almost all have insurance. There is a fee for service system and the patient pays a portion of the cost, usually 30%. All medical facilities must be operated by doctors. The government carries on negotiations with doctor representatives to set prices. I believe that it would be better to have a market based system in which the patient makes cost decisions which would result in lower prices and more innovation. However the point is that the price was forced down. Hitachi and Toshiba innovated by producing a new line of compact, inexpensive MRI machines costing around $150,000 - a fraction of the price of the bigger machines then used in the United States resulting in a much larger MRI market.
In our system the orthopedist demands an MRI which leaves no diagnostic ambivalence. The cost to the patient is either zero or some small co-pay. The third party payer has little justification to refuse. All it can do is put up roadblocks, demanding a lengthy frustrating procedure to obtain permission. Canada with it's government run system faced the high cost MRI problem by limiting the availability of MRI machines. MRI facilities in Canada have a substantial wait list problem, with some centers reporting wait times of up to one month for urgent scans and up to several years for non-urgent scans.
The U.S. has 4 times as many MRI scanners as Canada and Japan has many more than both countries. Japanese patients have many more MRI scans than in the U.S. and far more than in Canada. In the U.S. because of third party payment there is little market pressure on cost and technical innovation tends toward higher cost refinements rather than lower cost advances. Technology is the lifeblood of medical advances. However, for third party payers technology that increases cost is a liability and is resisted. The Canadian government payment system follows suit and therefore a system intended to assure medical care for all by putting the government in charge ends up by restricting its availability.
MRI is an essentially harmless way to investigate the body's anatomy. Originally it was developed with brain and spinal cord diagnosis in mind. However it has now revolutionized orthopedic diagnosis. I read recently that prostate MRI is equal to needle biopsy in localizing cancer. Who knows what other uses might be found in a mass market, but it's use is restricted by payers. MRI price is obviously far higher than it needs to be, even for insurers. The real price would be discoverable only in the free market in which consumers rather than third parties paid. Direct payment would put market pressure on price, would not restrict the market but would expand it and would lead to innovation based on cost and efficiency just as it did in the computer market.
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