The Market for Medical Care Should Work Like Cosmetic Surgery

The Market for Medical Care Should Work Like Cosmetic Surgery

      The Market for Medical Care Should Work
              Like Cosmetic Surgery
   Policy Report No. 349                       by Devon M. Herrick                                      May 2013

Every day, millions of American consumers go shopping. In the process, they compare
the prices and quality of goods and services ranging from groceries to cellular
telephone service to fast food to housing. But that daily ritual changes when it comes to
comparing prices for medical care. Health care is the only major sector of our economy
where consumers typically do not make decisions based on comparison shopping.
                                                                Executive Summary
                                       Cosmetic surgery is one of the few types of medical care for which
                                       consumers pay almost exclusively out of pocket. In health markets without
                                       third-party payers, doctors and clinics use price competition, package
                                       prices, convenience, and other amenities in order to attract patients willing
                                       to purchase their services. When patients pay their own medical bills, they
                                       become prudent consumers. Thus, the real (inflation-adjusted) price of
                                       cosmetic surgery fell over the past two decades — despite a huge increase in
                                       demand and considerable innovation. Since 1992:
                                        ■■ The price of medical care has increased an average of 118 percent.
                                        ■■ The price of physician services rose by 92 percent.
        Dallas Headquarters:            ■■ All goods, as measured by the inflation rate, increased by 64 percent.
     12770 Coit Road, Suite 800         ■■ Cosmetic surgery prices only rose only about 30 percent.
         Dallas, TX 75251
           972.386.6272                   Cosmetic services have become competitive for a variety of reasons: As
                                       more people demanded the procedures, more physicians began to provide
                                       them. Licensed medical doctors are free to perform any cosmetic procedure
        Washington Office:             they have been trained to perform, so there are few barriers to entry among
   601 Pennsylvania Avenue NW,         competing doctors. Physicians hire and train aestheticians and nurses to
     Suite 900, South Building
                                       perform some minimally-invasive cosmetic treatments — boosting capacity.
      Washington, DC 20004
           202.220.3082                Many providers increase efficiency by locating operating rooms in their
                                       clinics to reduce the cost of outpatient hospital surgery. Surgeons generally
        ISBN #1-56808-229-0            adjust their fees to stay competitive and quote package prices. New products          and procedures have also become available.
                                          Consider the ubiquitous deal-of-the-day emails where Groupon and
                                       Living Social offer subscribers goods and services at greatly reduced prices
                                       for a limited time. A quick Internet search of these discount websites will
                                       find numerous medical-related services offered to the public, including:
                                       Botox, corrective eye surgery, dental teeth cleaning, teeth whitening, laser
                                       hair removal, laser facial resurfacing, cosmetic fillers, spider vein and blown
                                       spot removal, and numerous other cosmetic procedures at highly discounted
The Market for Medical Care Should Work Like Cosmetic Surgery
The Market for Medical Care Should Work Like Cosmetic Surgery

    prices. For example:                                               price comparisons and acting like consumers because third
     ■■ The cost of having a physician administer botulism             parties — employers, insurance companies or government
        toxin averaged $365 in 2011, about the same as it was          — pay most of the costs of their health care. Consider:
        more than a decade earlier. Yet deals on Groupon and            ■■ For every $1 worth of hospital care consumed, a
        Living Social occasionally offer Botox for as little as            patient pays only about three cents out of pocket, on
        $99, with $149 quite common.                                       the average; a third party pays the other 97 cents.
     ■■ The price of liposuction has steadily increased in price        ■■ For every $1 worth of physician services consumed,
        from $1622 in 1992 to $2,859 in 2011, but deal-of-                 a patient pays less than 9 cents out of pocket, on the
        the-day web sites show physicians willing to perform               average.
        liposuction on one area for $999.                               ■■ For the health care system as a whole, every time a
     ■■ The cost of laser skin resurfacing was $1,223 in 2011.             patient consumes $1 in services, he or she pays only
        Yet, couponing websites have offered numerous laser                11 cents out of pocket.
        resurfacing deals for only $299.                                  When consumers pay only a small percentage of their
       Wherever there is price competition, quality competition        medical bills directly, they have little reason to discover
    tends to follow. Consider corrective eye surgery. From             or care about prices. Thus the incentive for patients is to
    1999 through 2011, the price of conventional Lasik fell            consume health care services until those services are worth
    about one-fourth due to intense competition. Eye surgeons          only 11 cents on the dollar, on the average.
    who wanted to charge more had to provide more advanced
                                                                          Prior to the advent of Medicare and Medicaid in 1965,
    Lasik technology, such as Custom Wavefront and
                                                                       health care spending barely reached 6 percent of gross
    IntraLase (a laser-created flap). By 2011, the average price
                                                                       domestic product (GDP). Today health care spending
    per eye for doctors performing Wavefront Lasik was about
                                                                       is 18 percent of GDP. In addition, medical prices have
    what conventional Lasik had been more than a decade ago;
                                                                       been rising at three times the rate of inflation over the
    but the quality is far better. In inflation-adjusted terms, this
                                                                       past few decades. The price of medical care has risen
    represents a huge price decline.
                                                                       about 2,700 percent of what it was in 1950. By contrast,
       By contrast, the market for medical care does not work          inflation has only boosted the prices we pay for consumer
    like other markets. In most markets, prices and quality            goods and services by about 800 percent. Although health
    indicators are transparent — clear and readily available           care inflation is robust for services paid by third-party
    to consumers. Health care is different: Prices are difficult       insurance, prices are rising only moderately for services
    to obtain and often meaningless when they are disclosed.           patients buy directly. Economic studies and common
    Most patients never learn the true cost of their care.             sense confirm that people are less likely to be prudent,
       Why do doctors and hospitals fail to disclose prices            careful shoppers if someone else is picking up the tab.
    prior to treatment? The answer is simple: because they             The contrast between cosmetic surgery and other medical
    do not compete for patients based on price. Patients are           services is important. One sector has a competitive
    largely insulated from the adverse effects of not making           marketplace and stable prices. The other does not.

                                                         About the Author
         Devon M. Herrick is a health care economist and senior fellow with the National Center for Policy
         Analysis. His focus includes 21st century medicine, patient empowerment, medical privacy,
         pharmaceutical drugs and health technology-related issues. He spent six years working in health care
         accounting and financial management for a Dallas-area health care system. Herrick received a Doctor
         of Philosophy in political economy and a Master of Public Affairs degree from the University of Texas
         at Dallas. He also holds graduate degrees in finance and economics from Amberton University and
         Oklahoma City University, as well as a Bachelor of Science degree in accounting from the University of
         Central Oklahoma.

The Market for Medical Care Should Work Like Cosmetic Surgery
Introduction                    advocates often cite Nobel Laureate         never make price comparisons, and
                                          Kenneth Arrow, who authored                 they do not behave like consumers in
Every day, millions of American           the classic 1963 journal article            a normal market. Consider:5
consumers go shopping. In the             “Uncertainty and the Welfare
process, they compare the prices                                                        ■■ For every $1 worth of hospital
                                          Economics of Medical Care.” 3 Arrow              care consumed, patients pay
and quality of goods and services         asserted that medical care does not
ranging from groceries to cellular                                                         only about three cents out of
                                          have many of the characteristics of              pocket, on the average; a third
telephone service to fast food to         other consumer markets, and that                 party pays the other 97 cents.
housing. But that daily ritual changes    patients do not respond like typical
when it comes to comparing prices                                                       ■■ For the health care system as
                                          consumers. For instance, while
for medical care. Health care is the      food or housing needs are relatively
                                                                                           a whole, every time patients
only major sector of our economy          constant, consumers go for years
                                                                                           consume $1 in services, they
where consumers typically do not                                                           pay only 11 cents out of pocket.
                                          requiring little medical care, then
make decisions based on comparison        suddenly become afflicted with a life         ■■ For every $1 worth of physician
shopping. This is unfortunate,                                                             services consumed, a patient
                                          threatening condition. Economists
because health care consumes                                                               pays less than 9 cents out of
                                          have often argued that a dying
about $2.7 trillion dollars annually                                                       pocket, on the average.
                                          patient’s desire for life sustaining care
— nearly one-fifth of our national        does not follow a normal demand                When consumers pay only a small
income.1                                  curve. Moreover, Arrow believed             percentage of their medical bills
                                          that patients are no match for savvy        directly, they have little reason to
  The Market for Medical                  doctors’ superior knowledge when            learn about prices — or care whether
         Care2                                                                        the service is a good value for the
                                                                                      dollars spent. Thus patients consume
   The market for medical care does                                                   hospital services until those services
not work like other markets. In most        “Patients pay 11 cents                    are worth only three cents on the
markets, prices and quality indicators                                                dollar, on the average. For the health
are transparent — clear and readily          out of pocket for each
                                           dollar of callout
                                            Insert            here.                   care system as a whole, patients have
available to consumers. Health care                  health care they                 an incentive to utilize everything
is different: Prices are difficult to                                                 modern medicine offers until the
obtain and often meaningless when
                                                   consume.”                          marginal benefit to them is only 11
disclosed. Most patients never learn                                                  cents out of the last dollar spent. And
the true cost of their care. Why do                                                   patients have an incentive to consume
doctors and hospitals fail to disclose    discussing the need for a treatment         physicians’ services until they are
prices prior to treatment? Because        or negotiating the price of a medical       worth only 9 cents on the dollar.
they do not compete for patients          procedure.4
based on price. Many public health                                                       For example: assume physician
advocates and health policy experts          Even when patients do know               visits costs an insurer $91, while the
have long believed that most patients     the prices, they usually pay only           enrollee only has a $9 copayment.
are incapable of assessing the quality    a fraction of the total cost; thus,         Insured patients with even trivial
and necessity of medical services, and    prices do not affect their demand           health complaints will schedule
that paying at the time of service is a   for medical services. For their part,       physician appointments until those
barrier to receiving the care patients    doctors often do not even know the          services are no longer even worth
need. Furthermore, these advocates        prices of the services they perform.        the $9 copay. A patient who paid the
believe medical care should not be        Doctors, therefore, do not compete on       entire bill directly would be more
allocated on the basis of price through   prices to attract patients or compete       price-sensitive and weigh whether or
a market system.                          with other doctors. Because the cost        not a $100 physician visit was worth
                                          of patient care is mostly paid by           the $100 cost, rather than whether
 Prices and the Demand for                third parties — employers, insurance        it was worth a $9 copayment.6
Medical Care. Public health               companies or government — patients          Moreover, if patients paid a larger

The Market for Medical Care Should Work Like Cosmetic Surgery
The Market for Medical Care Should Work Like Cosmetic Surgery

                                                                                                                    health care costs outpace the growth
                                                                    Figure I                                        in national income. Why? Because,
                                                              Health Care Inflation                                 when people enter the medical
                                                                                                                    marketplace, they are almost always
                                                                                                                    spending someone else’s money.
                                                                                          Medical Services
                    3000%                                                                                              Health Markets
     (% Increase)

                    2500%                                                                                            without Third-Party
                    2000%                                                                            Medical Care
                    1500%                                                                                              To examine a medical marketplace
                    1000%                                                                                           where third-party payment is all
                                                                                                                    but absent, consider the cosmetic
                      500%                                                                          All Goods
                                                                                                                    surgery industry. Cosmetic surgery
                        0%                                                                                          is one of the few types of medical
                                                                                                                    care for which consumers pay almost
                                                                                                                    exclusively out of pocket. Even so,
                    Source: U.S. Bureau of Labor Statistics                                                         the demand for cosmetic surgery has
                                                                                                                    exploded in recent years. Estimates
                                                                                                                    vary, but according to the American
    share of the cost of their medical care,                        prices of other goods and services              Society of Plastic Surgeons (ASPS),
    they would ask about alternatives                               for decades. Indeed, the price of               1.6 million cosmetic surgical
    prior to ordering an expensive                                  medical services has risen about                procedures — and another 13.0
    diagnostic scan, and likely look for                            3,300 percent in a little over 60 years.        million minimally-invasive cosmetic
    the best price if it is needed.7                                The price of medical care in general            procedures — were performed in
                                                                    has risen about 2,700 percent what              2012.12 The American Society for
       Wages and the Cost of Medical                                                                                Aesthetic Plastic Surgery (ASAPS)
    Care. Economists have long known                                it was in 1950. By contrast, inflation
    that workers themselves bear the                                since 1950 has only boosted the                 has a slightly lower estimate of
                                                                    prices we pay for consumer goods                the market for elective cosmetic
    entire cost of employee health                                                                                  procedures — about 12.6 million.13
    benefits indirectly, in the form of                             and services by about 800 percent.
    lower take-home pay.8 Health benefits                           Thus, medical prices have been                     Even that number is more than
    are a form of noncash compensation                              climbing at more than three times               10 times the number performed
    in lieu of cash wages — mostly                                  the rate of inflation.10 [See Figure            two decades ago. And the market
    because employer-sponsored health                               I.] Not only are health care prices             continues to grow. One estimate puts
    coverage is tax free. In addition,                              soaring, health care spending is rising         the number of cosmetic procedures
    the health plan premiums workers                                as well. Health care expenditures               that will be performed in the United
    ultimately pay are a function of                                over the past 50 years rose as the              States in 2015 at 55 million — four
    medical claims paid.9 As a result,                              proportion of health care paid for by           times the number performed in 2005.
                                                                    third parties increased. Prior to the           Surgical procedures are growing
    workers who receive medical care
                                                                    advent of Medicare and Medicaid                 at nearly 8 percent annually, while
    unknowingly pay indirectly for
                                                                    in 1965, health care spending barely            minimally–invasive cosmetic services
    services they would deem a waste of
                                                                    reached 6 percent of GDP. Today that            are growing 28 percent each year.14
    money if they had to pay the costs
                                                                    figure is 18 percent.11 [See Figure II.]
    directly.                                                                                                          Free Market Medicine: Cosmetic
                                                                    Tax-subsidized employer spending on
       Health Care Costs Rise When                                  health care has also increased. These           Surgery. Though health care inflation
    Others Pay. Prices for medical                                  factors, rather than the cost of new            is robust for those services paid
    services have been rising faster than                           technology and drugs, explain why               by third-party insurance, prices

The Market for Medical Care Should Work Like Cosmetic Surgery
are rising only moderately
for services that patients buy                                                             Figure II
directly. For example, the real                                                 U.S. Health Care Expenditures
(inflation-adjusted) price of                                                              (Percent of GDP)
cosmetic surgery fell over the                                                                                                              18% of
past two decades — despite a                  18%

huge increase in demand and                   16%
considerable innovation. [See
Figure III.]
   Cosmetic Surgery Prices.
Despite the huge increase in            10%
demand, cosmetic surgeons’               8%
fees have remained relatively
stable. Since 1992, medical
care prices have increased an            4% 5.2% of
average of 118 percent and the           2%
price of physician services rose
92 percent. [See Figure III.] The        0%
                                            1960       1964    1968       1972    1976     1980 1984   1988   1992   1996   2000   2004   2008   2012
price of all goods, as measured           Source: U.S. Department of Health and Human Services.
by the consumer price index
(CPI), increased 64 percent. Yet,
cosmetic surgery prices only rose             them. Licensed medical doctors are                         cost of health care. But in cosmetic
about 30 percent. While medical care          free to obtain training and perform                        surgery, innovation often lowers the
prices generally rose almost twice            the cosmetic procedures they feel                          cost. Take facelifts, for example.
as fast as the CPI, cosmetic surgery          qualified to perform. Physicians also                      Surgical fees for facelifts increased
prices went up less than half as much.        hire trained aestheticians, or hire                        about 50 percent between 1992 and
Thus, while the real price of health          or partner with nurses or physician                        2012 (just slightly less than inflation),
care paid for by third parties rose, the      assistants to assist with minimally-                       according to data from the ASPS.
real price of self-pay medicine fell.         invasive cosmetic treatments. Thus,
                                                                                                            Cheaper, minimally invasive and
                                              entry into the field is not restricted
   In addition, Figure III shows that                                                                    nonsurgical procedures that diminish
                                              to board-certified plastic surgeons.16
during downturns in the economy,                                                                         the appearance of aging have helped
                                              A third reason is efficiency. Many
consumers become more price-                                                                             hold the cost of facelift surgery in
                                              providers construct operating rooms
sensitive and providers respond                                                                          check, including laser resurfacing
                                              in their clinics — a less expensive
accordingly with more competitive                                                                        ($1,113 to $2,222), botulism toxin
                                              alternative to outpatient hospital
prices.15 Note that this did not occur                                                                   injections ($369), collagen injections
                                              surgery. Surgeons generally adjust
for medical care or physician services                                                                   ($428 to $529), chemical peels
                                              their fees to stay competitive and
paid by third parties.                                                                                   ($712), dermabrasion ($1,262)
                                              usually quote patients a package                           and fat injections ($1,604). These
   Keeping Costs Down. What                   price. Absent are the gatekeepers,                         less invasive (and less expensive)
explains the price stability of               prior authorization and large medical                      procedures are attractive, compared to
cosmetic surgery? One reason is               office billing staffs needed when                          a facelift costing $6,630 in surgeons’
patient behavior. When patients pay           third-party insurance pays the fees.                       fees alone.
with their own money, they have               A fourth reason is the emergence of
an incentive to educate themselves            substitute products. (See below.)                             Cosmetic surgeons also have
— to become savvy consumers. A                                                                           incentives to find new products for
                                                   Cosmetic Surgery and
second reason is supply. As more                                                                         their customers. Whereas the volume
                                              Innovation. People commonly
people demanded the procedures,                                                                          of surgical procedures increased 80
                                              assume that innovation increases the
more surgeons began to provide                                                                           percent during the past 15 years,

The Market for Medical Care Should Work Like Cosmetic Surgery
The Market for Medical Care Should Work Like Cosmetic Surgery

                                                                                                                                                          In most areas of
                                                              Figure III                                                                               medicine, physicians
                                                     Nominal Health Care Inflation                                                                     find little incentive to
       120%                                                                                                                  Medical Care              repackage, reprice or
                                                                                                                                  118%                 bundle their services
                                                                                                                                                       in patient-pleasing
       100%                                                                                                                                            ways, because doing so
                                                                                                                                                       would not increase their
                                                                                                                                        Physician      revenue. When demand
                                                                                                                                           92%         or technology changes or
                                                                                                                                                       new information becomes
        60%                                                                                                                                            available, individuals in
                                                                                                                                         64%           every other profession
        40%                                                                                                                                            have incentives to
                                                                                                                                                       rebundle their services and
                                                                                                                        Cosmetic Services              charge a different market
        20%                                                                                                                     30%                    price. For example, the
                                                                                                                                                       growth of information
         0%                                                                                                                                            technology has had a
               1992                      1996                   2000                      2004                      2008                     2012      profound effect on the
          Note: Cosmetic Services is a 3-year moving average.                                                                                          way intellectual property
          Source: Devon M. Herrick, National Center for Policy Analysis. Author's calculations using data from the American Society of Plastic         is shared and distributed.
          Surgeons; and Consumer Price Index, U.S. Bureau of Labor Statistics, U.S. Department of Commerce.                                            Yet, because most health
                                                                                                                                                       plans refuse to reimburse
                                                                                                                                                       for telephone or email
    the volume of minimally-invasive                                Medicaid, and every health plan or
                                                                                                                                          consultations, most doctors will
    procedures (such as Botox, laser                                third-party payer provides slightly
                                                                                                                                          not consult with their patients this
    skin resurfacing, skin rejuvenation,                            different payment rates.
                                                                                                                                          way. New opportunities, such as
    laser hair removal) increased by                                     Physicians         are   arguably       the   only               information technology, are critical
    461 percent.17 Substitute procedures                            professionals in our society who                                      to accountants, lawyers, engineers
    such as laser hair removal and body                             do    not    commonly          disclose      prices                   and, architects when competing
    contouring are now commonplace.18                               to their customers or compete on                                      for customers, but the health care
       The Market for Physician                                     price. In a very real sense, doctors                                  industry ignores them.
    Services. Americans see their doctors                           (and hospitals) do not compete for
                                                                                                                                               During any discussion about why
    more than a billion times each year.                            patients at all — at least not in the
                                                                                                                                          doctors and hospitals do not discuss
    They make another 136 million                                   way normal businesses compete for
                                                                                                                                          prices prior to providing services,
    visits to hospital emergency rooms                              customers in competitive markets.
                                                                                                                                          participants invariably claim that
    and 96 million visits to outpatient                             This lack of competition for patients
                                                                                                                                          price comparison is impractical.
    departments annually. Patients rarely                           has profoundly affected the quality
                                                                                                                                          Indeed, the medical community
    discuss price in advance of receiving                           and cost of health care. Long before a
                                                                                                                                          insists that surgical procedures
    medical care — or know the cost                                 patient enters a doctor’s office, third-
                                                                                                                                          are not homogenous services that
    after the service is provided. In fact,                         party bureaucracies determine which
                                                                                                                                          can be treated like commodities
    the doctors who perform medical                                 medical services they will pay for
                                                                                                                                          or priced alike. For instance, if a
    procedures often do not know how                                (and how much), and which ones they
                                                                                                                                          patient needing coronary bypass graft
    much they will be paid for their                                will not. This practice has created
                                                                                                                                          surgery inquires about the price, he
    services to a specific patient. Provider                        a highly artificial market which
                                                                                                                                          is generally told the price cannot be
    fees are negotiated in advance                                  departs in many ways from how other
                                                                                                                                          determined in advance, because each
    with networks or set by Medicare/                               markets function.
                                                                                                                                          patient is different and may require

The Market for Medical Care Should Work Like Cosmetic Surgery
different levels of care. The attending   and LivingSocial finds numerous           multiple areas performed in the same
physician, hospital or surgeon cannot     medical-related services at highly        session; as a result, price comparisons
predict the exact amount of blood that    discounted prices. Among them:            are difficult. Yet, a review of deal-
might need replacing. The number of       Botox, corrective eye surgery, dental     of-the-day web sites found offers
sutures and bandages, or operating        teeth cleaning, teeth whitening, laser    from physicians willing to perform
theater time or recovery time could       hair removal, laser facial resurfacing,   liposuction on one area for $999.23
vary. The time required to convalesce     cosmetic fillers, spider vein and            Laser Facial Resurfacing. Deal-
until able to go home also varies from    brown spot removal, and numerous          of-the-day websites have launched
patient to patient. Indeed, doctors       other cosmetic procedures. The            another round of strong price
will insist they cannot compete for       prices defy conventional wisdom           competition between providers of
patients on price because no two          that a doctor would never advertise       laser facial resurfacing. According to
patients are exactly alike.               a bundled price — much less extend        surveys by the ASPS:
   However, the argument about            the offer to hundreds of thousands
                                          of random people, sight-unseen, in a        ■■ The average surgeon’s fee
patient diversity apparently does not                                                    for laser skin resurfacing was
                                          mass emailing. Yet these offers arrive
deter doctors who provide services
                                          in millions of email inboxes in cities         $2,556 in 1996, rising to nearly
that third-party payers do not cover,                                                    $2,800 by 1998 but falling back
such as cosmetic procedures and           across the United States every day.
                                          The competition is astonishing!                to $2,222 by 2007.
corrective eye surgery. In these                                                      ■■ During this same period,
health care markets, providers               Botulism Toxin. Consider                    some physicians introduced
behave much differently. Indeed,          botulism toxin injections, such as             less intensive nonablative
entrepreneurial physicians compete        Botox and Dysport. According to                (fractional) CO2 lasers to the
for patients’ business by offering        surveys by the American Society of             market, such as Fraxel® and
greater convenience, lower prices and     Plastic Surgeons (ASPS), the cost to           SmartXide® DOT. Newer
innovative services unavailable in        have a physician administer botulism           fractional lasers use a matrix of
traditional clinical settings. Consider   toxin ranged from $366 in 2000 to              tightly-packed laser dots that
the ubiquitous emails that deal-of-the-   $501 in 2007.19 Likely due to the              reduce the time required to heal,
day website subscribers receive every     recession — and competition — the              which has greatly increased the
day from firms offering goods and         price fell back to $369 in 2012, the           popularity of these less invasive
services at greatly reduced prices.       average cost a decade earlier. More            procedures.
                                          than 1,000 people commented on               In 2008, the ASPS began tracking
   Medical Services in the                their experience receiving Botox          nonablative (fractional) laser skin
                                          on the website over
     Information Age                      the past several years — reportedly
                                                                                    resurfacing procedures:
   So-called deal-of-the-day websites     spending an average price of $425          ■■ The average fee for nonablative
are Internet marketing firms that         per episode.20 Yet a recent review of         laser skin resurfacing in 2008
compete to attract price-sensitive        offers on Groupon and LivingSocial            was $1,359, falling to $1,113
                                          shows Botox deals occasionally                by 2012, with the actual price
customers with heavily-discounted
                                          offered as low as $99.21                      varying from doctor to doctor
goods and services for a limited
                                                                                        and by the size of the area
period of time. These daily deal offers      Liposuction. The price of                  treated.24
are emailed en mass to millions of        liposuction steadily increased from
subscribers. Discounted services range                                               ■■ According to consumer reviews,
                                          $1,622 in 1992 to $2,852 in 2012.             88 consumers paid an average
from restaurant meals to concerts to      Nearly 900 patients have written
sporting events — even health care.                                                     of $1,525 for SmartXide DOT
                                          reviews of the procedure on RealSelf.         fractional laser resurfacing;25
The firm Groupon is probably the best     com — reporting an average cost
known, but LivingSocial and imitators                                                ■■ Fraxel cost $1,750, on average,
                                          of $5,875.22 Liposuction can be               based on 592 reviews.26
have also begun to flood the market.      performed on more than one body
  A quick Internet search of Groupon      location at a time, with discounts for      In Dallas, numerous deals for

The Market for Medical Care Should Work Like Cosmetic Surgery

                                                                                                                                                SmartXide DOT laser
                                                             Figure IV                                                                          resurfacing appear
                                                        Average Lasik Prices                                                                    on both Groupon
                                                                                                                                                and LivingSocial, for
                                                                                                                                                $299.27 One of the
                                                                                                                                                sponsoring firms offers
                                                                                                                 Custom Wavefront
                                                                                                                     with Laser Flap
                                                                                                                                                memberships where
                                                                                                                                                Groupon and Living
                                                                                                                                                Social customers can
                                                                                                                                                be converted into spa
                                                                                                            Average Lasik Price                 “members.” The spa’s
      $2,000                                                                                                                                    $149/month one-
                                                  Custom Wavefront                                                                              year contract allows
      $1,800                                                                                                                                    members to choose
                                                                                                                         Conventional Lasik     among more than
      $1,600                                                                                                                                    two dozen different
                                                                                                                                                cosmetic services and
      $1,400                                                                                                                                    use any two services a
                                                                                                                                                month as a benefit of
      $1,200                                                                                                                                    membership.28 Laser
                  1999       2000      2001      2002      2003       2004     2005    2006      2007      2008      2009      2010      2011   skin resurfacing with
       Source: Author's tabulations using data from multiple published sources, including: MarketScope LLC, cited in Ha T. Tu and Jessica H.
       May, “Self-Pay Markets in Health Care: Consumer Nirvana or Caveat Emptor?” Health Affairs, Vol. 26, No. 2, February 6, 2007, pages
                                                                                                                                                the SmartXide DOT
       w217-w226; and Liz Segre, “Cost of LASIK Eye Surgery and Other Corrective Procedures,”, November 8, 2012.             laser counts as two
       Note: Dashed line represent estimated prices to replace missing data.                                                                    treatments. In other
                                                                                                                                                words, with a one-year
                                                                                                                                                membership, customers
                                                          Figure V                                                                              can purchase a $1,500
                                              Package Prices vs. Multiple Prices                                                                laser treatment for $149
                                                             (Laser Eye Surgery 2011)                                                           — about 90 percent
                                                                                                                                                less than the average
                                                                                                                                                physician fee in the
                                Multiple Prices                                                                                                 Competition:
                                Based on Technology /                             Single Price Charged for                                      Corrective Eye
                                Refractive Error                                  all Laser Procedures                                          Surgery. Wherever
                                          44%                                                                                                   price competition exists,
                                                                                          55%                                                   competition in quality
                                                                                                                                                naturally follows. In the
                                                                                                                                                Lasik surgery market,
                                                                                                                                                for example, patients
                                                                                                                                                can choose traditional
                                                                                                                                                Lasik or newer, more
                                                                                                                                                advanced procedures.
                                                                                                                                                From 1999 (when
                                                                                                                                                eye doctors began
                Source: 2011 data provided by independant opthamology analyst.
                                                                                                                                                performing Lasik
                                                                                                                                                in volume) through

2011, the price of conventional                 had merely tracked inflation, the   become conservative, market savvy
Lasik fell about one-fourth due to              price would currently run about     consumers. Moreover, when patients
intense competition. Average prices             $2,850 per eye.                     pay their own medical bills, doctors
for conventional Lasik hovered               ■■ If conventional Lasik tracked       and clinics respond with price
just above $2,100 per eye in 1999               medical inflation, the price        competition, seeking innovative ways
compared to about $1630 per eye in              would have reached around           to attract new patients. The contrast
2011.29                                         $3,360 per eye by now.              between cosmetic surgery and
                                             ■■ However, conventional Lasik         other medical services is important.
    In patients with myopia (near
                                                was about $1,630 per eye in         One sector reveals a competitive
sightedness) the eye cornea is too
                                                                                    marketplace and stable prices. The
round; in hyperopia (farsightedness)            2011, with most people opting
                                                                                    other does not.
it is too flat. However, patients often         for the more advanced Lasik
have subtle differences in the shape of         surgery at an average cost of
their corneas that affects their results.       $2,150 per eye.                                    Endnotes
By the early 2000s, eye surgeons             ■■ Indeed, 95 percent of surgeons       National Health Expenditure, which was

had developed the ability to map the            surveyed report charging from       17.9 percent in 2012, is expected to climb to
shape of the cornea and customize                                                   19.6 percent by 2021. See “NHE Projections
the surgery to each patient’s unique                                                2011-2021,” National Health Expenditure
condition. Technology, such as                                                      Data, Centers for Medicare & Medicaid
Custom Wavefront (that customizes                “Cosmetic surgery                  Services, U.S. Department of Health &
the surgery to an individual’s specific            provides price                   Human Services, June 12, 2012.
eye characteristics) and IntraLase (a          Insert  callout  here.
bladeless surgery with a laser-created          competition  because                 See discussion in Devon M. Herrick and

incision) began to improve the quality         patients pay the bills.”             John C. Goodman, “The Market for Medical
of Lasik and achieve superior results                                               Care: Why You Don’t Know the Price; Why
compared to traditional Lasik. When                                                 You Don’t Know about Quality; And What
customized to the individual, a laser                                               Can Be Done about It,” National Center
can reshape the cornea to improve               $1,501 to $2,500 per eye for        for Policy Analysis, Policy Report No. 296,
vision often better than 20/20. Eye             Wavefront Lasik with a laser-       February 2007. Available at http://www.ncpa.
                                                created flap — most quote a
surgeons who wanted to charge more                                                  org/pdfs/st296.pdf.
                                                single price inclusive of all
began to demonstrate they provided
                                                services.31 [See Figure V.]          Kenneth J. Arrow, “Uncertainty and the
better quality.
                                               This change represents a huge        Welfare Economics of Medical Care,”
   By 2011, the average price per eye       decrease in the inflation-adjusted      Economic Review, Vol. 51, No. 5, December
for doctors performing Wavefront            price, along with a large increase in   1963. Available at
Lasik with a laser-created incision         quality.                                bulletin/volumes/82/2/PHCBP.pdf.
was $2,151 per eye.30 In other words,                                               4.
the nominal price of advanced Lasik
surgery (not adjusted for inflation)                   Conclusion                    National Health Expenditure, which was

is about what conventional Lasik               Both economic studies and            17.9 percent in 2012, is expected to climb to
cost more than a decade ago, but the        common sense confirm that people        19.6 percent by 2021. See “National Health
quality is far better. [See Figure IV.]     do not shop carefully and prudently     Expenditures by type of service and source
In inflation-adjusted terms, these          when someone else is picking up         of funds, CY 1960-2011,” National Health
costs reveal a huge price decline,          the tab. Thus, health care spending     Expenditure Data, Centers for Medicare
considering the cost of most other          has increased because third             & Medicaid Services, U.S. Department of
medical services has risen at more          parties — employers, insurance          Health & Human Services, 2012. Available
than twice the rate of general inflation    companies or government — pay           at
over the past few years. For example:       almost all the bills. When patients     Data-and-Systems/Statistics-Trends-and-
 ■■ If conventional Lasik surgery           pay their own medical bills, they       Reports/NationalHealthExpendData/

The Market for Medical Care Should Work Like Cosmetic Surgery

     Downloads/                           “Economic Analysis of the Future Growth          After Photos, Results, Cost,”
     6.                                               of Cosmetic Surgery Procedures,” Plastic &       website. Accessed April 25, 2013. Available
       See Rexford E. Santerre and Stephen P.
                                                      Reconstructive Surgery, Vol. 121, No. 6, June    at
     Neun, “The Relationship between Health
                                                      2008.                                            reviews.
     Insurance and the Demand for Medical
                                                      15.                                              26.
     Services,” in Health Economics: Theories,          The income elasticity of demand varies           “Fraxel Worth It? Reviews, Photos, Forum,
     Insights, and Industry Studies (Chicago, Ill.:   by procedure. Some procedures are inferior       Costs,” website. Accessed
     Irwin, 1996), page 53.                           goods; some are necessities, and others          April 25, 2013. Available at http://www.
     7.                                               are luxury goods. See Lara L. Devgan   
      The price for a magnetic resonance image
                                                      and Robert T. Grant, “Is Plastic Surgery A
     scan (MRI) or a computed topography (CT)                                                           Groupon website, offered by SkinSpaMed
                                                      Luxury Good? An Economic Analysis of
     scan can vary from $400 at a free-standing                                                        Medical Spa & Laser Clinic, Dallas, Texas,
                                                      Income Elasticity of Demand for Commonly
     imaging center to more than $3,000 at a                                                           April 2013.
                                                      Performed Plastic Surgery Procedures,”
     hospital outpatient clinic.
                                                      Plastic & Reconstructive Surgery, Vol. 126,        SkinSpaMed Medical Spa & Laser Clinic

       Jonathan Gruber, “Health Insurance and         Supplement 4S, October 2010, pages 117-          website, Dallas, Texas.
     the Labor Market,” National Bureau of            118.                                             29.
                                                                                                          Data from MarketScope LLC, cited in Ha
     Economic Research, Working Paper 6762,           16.
                                                         This is especially true for minimally-        T. Tu and Jessica H. May, “Self-Pay Markets
     October 1998. Available at http://economics.
                                                      invasive procedures like Botulism toxin, skin    in Health Care: Consumer Nirvana or Caveat
                                                      rejuvenation, laser hair removal and so forth.   Emptor? Experience with LASIK, dental
       For a discussion of how claims can affect                                                       crowns, and Other Self-Pay Procedures
                                                        “Cosmetic Surgery National Data Bank:
     insurance premiums, see “Cost of the Future                                                       Reveals Key Barriers to Robust Consumer
                                                      2012 Statistics,” American Society for
     Newly Insured under the Affordable Care Act                                                       Price Shopping,” Health Affairs, Vol. 26,
                                                      Asthetic Plastic Surgery, 2013.
     (ACA),” Society of Actuaries, March 2013.                                                         No. 2, February 6, 2007, pages w217-w226;
     Available at       18.
                                                        American Society of Plastic Surgeons and       also Liz Segre, “Cost of LASIK Eye
     research-cost-aca-report.pdf.                    the American Society for Aesthetic Plastic       Surgery and Other Corrective Procedures,”
     10.                                              Surgery.                               , November 8, 2012.
       Consumer Price Index, United States
                                                      19.                                              30.
     Bureau of Labor Statistics.                       American Society of Plastic Surgeons              Liz Segre, “Cost of LASIK Eye Surgery
                                                      website.                                         and Other Corrective Procedures,”
       “NHE Summary Including Share of
                                                                                             , November 8, 2012.
     GDP, CY 1960-2011,” National Health              20.
                                                        “Botox Worth It? Reviews, Forum, Photos,
     Expenditure Data, Center for Medicare &          Costs,” website. Accessed           31.
     Medicaid Services, United States Department      April 25, 2013. Available at http://www.
     of Health and Human Services, 2012.    
       In addition, an additional 5.6 million
                                                        Groupon website, offered by Aesthetic

     reconstructive cosmetic procedures took          Medicine, Lake Oswego, Oregon, December
     place in 2012. “2012 Cosmetic Plastic            2012.
     Surgery Statistics,” 2012 Plastic Surgery        22.
                                                        “Liposuction Worth It? Reviews, Photos,
     Statistics Report, American Society of Plastic
                                                      Cost, Forum,” website.
     Surgeons, 2013.
                                                      Accessed April 25, 2013. Available at http://
       This number includes procedures      
     performed by non-physician professionals
                                                        Groupon website, offered by Heron
     performed under the supervision of a
                                                      SmartLipo Center, Maryland and Virginia,
     physician. See “Cosmetic Surgery National
                                                      April 2013.
     Data Bank: 2012 Statistics,” The American
     Society for Aesthetic Plastic Surgery, 2013.      American Society of Plastic Surgeons
                                                      website. Accessed April 25, 2013.
           Tom S. Liu and Timothy A. Miller,
                                                            “SmartXide: Is It Worth It? Before &

About the NCPA

                                                                                             A major NCPA study, “Wealth, Inheritance
 The NCPA is a nonprofit, nonpartisan organization established in                            and the Estate Tax,” completely
 1983. Its aim is to examine public policies in areas that have a                            undermines the claim by proponents of the
 significant impact on the lives of all Americans — retirement, health                       estate tax that it prevents the concentration
                                                                                             of wealth in the hands of financial
 care, education, taxes, the economy, the environment — and to                               dynasties. Senate Majority Leader Bill Frist
 propose innovative, market-driven solutions. The NCPA seeks to                              (R-TN) and Senator Jon Kyl (R-AZ)
 unleash the power of ideas for positive change by identifying,                              distributed a letter to their colleagues about
 encouraging and aggressively marketing the best scholarly research.                         the study. The NCPA recently won the
                                                                                             Templeton Freedom Award for its study
                                                                                             and report on Free Market Solutions. The
 Health Care Policy.                                                                         report outlines an approach called
 The NCPA is probably best known for                    NCPA President                       Enterprise Programs that creates job
 developing the concept of Health Savings         John C. Goodman is called                  opportunities for those who face the
 Accounts (HSAs), previously known as               the “Father of HSAs” by                  greatest challenges to employment.
                                                The Wall Street Journal, WebMD
 Medical Savings Accounts (MSAs).
                                                   and the National Journal.                 Retirement Reform.
 NCPA President John C. Goodman is                                                           With a grant from the NCPA, economists
 widely acknowledged (Wall Street                                                            at Texas A&M University developed a
 Journal, WebMD and the National                                                             model to evaluate the future of Social
 Journal) as the “Father of HSAs.” NCPA       Taxes & Economic Growth.
                                                                                             Security and Medicare, working under the
 research, public education and briefings     The NCPA helped shape the pro-growth           direction of Thomas R. Saving, who for
 for members of Congress and the White        approach to tax policy during the 1990s.       years was one of two private-sector
 House staff helped lead Congress to          A package of tax cuts designed by the          trustees of Social Security and Medicare.
 approve a pilot MSA program for small        NCPA and the U.S. Chamber of Com-                 The NCPA study, “Ten Steps to Baby
 businesses and the self-employed in 1996     merce in 1991 became the core of the           Boomer Retirement,” shows that as 77
 and to vote in 1997 to allow Medicare        Contract with America in 1994.                 million baby boomers begin to retire, the
 beneficiaries to have MSAs. In 2003, as      Three of the five proposals (capital gains     nation’s institutions are totally unprepared.
 part of Medicare reform, Congress and        tax cut, Roth IRA and eliminating the          Promises made under Social Security,
 the President made HSAs available to all     Social Security earnings penalty)              Medicare and Medicaid are inadequately
 nonseniors, potentially revolutionizing      became law. A fourth proposal —                funded. State and local institutions are not
 the entire health care industry. HSAs now    rolling back the tax on Social Security        doing better — millions of government
 are potentially available to 250 million     benefits — passed the House of Repre-          workers are discovering that their pensions
 nonelderly Americans.                        sentatives in summer 2002. The NCPA’s          are under-funded and local governments
    The NCPA outlined the concept of          proposal for an across-the-board tax cut       are retrenching on post-retirement health
 using federal tax credits to encourage       became the centerpiece of President            care promises.
 private health insurance and helped          Bush’s tax cut proposals.
 formulate bipartisan proposals in both the     NCPA research demonstrates the               Pension Reform.
 Senate and the House. The NCPA and           benefits of shifting the tax burden on         Pension reforms signed into law include
 BlueCross BlueShield of Texas devel-         work and productive investment to              ideas to improve 401(k)s developed and
 oped a plan to use money that federal,       consumption. An NCPA study by Boston           proposed by the NCPA and the Brookings
 state and local governments now spend        University economist Laurence Kotlikoff        Institution. Among the NCPA/Brookings
 on indigent health care to help the poor     analyzed three versions of a consumption       401(k) reforms are automatic enrollment
 purchase health insurance. The SPN           tax: a flat tax, a value-added tax and a       of employees into companies’ 401(k)
 Medicaid Exchange, an initiative of the      national sales tax. Based on this work, Dr.    plans, automatic contribution rate
 NCPA for the State Policy Network, is        Goodman wrote a full-page editorial for        increases so that workers’ contributions
 identifying and sharing the best ideas for   Forbes (“A Kinder, Gentler Flat Tax”)          grow with their wages, and better default
 health care reform with researchers and      advocating a version of the flat tax that is   investment options for workers who do
 policymakers in every state.                 both progressive and fair.                     not make an investment choice.

About the NCPA

 The NCPA’s online Social Security
 calculator allows visitors to discover their
 expected taxes and benefits and how                                  What Others Say About the NCPA
 much they would have accumulated had
 their taxes been invested privately.
                                                                                                     “The NCPA generates more analysis per
 Environment & Energy.                                                                               dollar than any think tank in the country.
                                                                                                     It does an amazingly good job of going out
 The NCPA’s E-Team is one of the largest
                                                                                                     and finding the right things and talking about
 collections of energy and environmental
 policy experts and scientists who believe                                                           them in intelligent ways.”
 that sound science, economic prosperity                                                             Newt Gingrich, former Speaker of the
 and protecting the environment are                                                                  U.S. House of Representatives
 compatible. The team seeks to correct
 misinformation and promote sensible
 solutions to energy and environment
 problems. A pathbreaking 2001 NCPA                                                                  “We know what works. It’s what the NCPA
 study showed that the costs of the Kyoto                                                            talks about: limited government, economic
 agreement to reduce carbon emissions in                                                             freedom; things like Health Savings Accounts.
 developed countries would far exceed                                                                These things work, allowing people choices.
 any benefits.                                                                                       We’ve seen how this created America.”
                                                                                                     John Stossel,
 Educating the next generation.                                                                      host of “Stossel,” Fox Business Network
 The NCPA’s Debate Central is the most
 comprehensive online site for free
 information for 400,000 U.S. high school
 debaters. In 2006, the site drew more than                                                          “I don’t know of any organization in America
 one million hits per month. Debate                                                                  that produces better ideas with less money
 Central received the prestigious Temple-
                                                                                                     than the NCPA.”
 ton Freedom Prize for Student Outreach.
                                                                                                     Phil Gramm,
 Promoting Ideas.                                                                                    former U.S. Senator
 NCPA studies, ideas and experts are
 quoted frequently in news stories
 nationwide. Columns written by NCPA
 scholars appear regularly in national
 publications such as the Wall Street                                                                “Thank you . . . for advocating such radical
 Journal, the Washington Times, USA                                                                  causes as balanced budgets, limited government
 Today and many other major-market                                                                   and tax reform, and to be able to try and bring
 daily newspapers, as well as on radio                                                               power back to the people.”
 talk shows, on television public affairs
 programs, and in public policy newslet-                                                             Tommy Thompson,
 ters. According to media figures from                                                               former Secretary of Health and Human Services
 BurrellesLuce, more than 900,000 people
 daily read or hear about NCPA ideas and
 activities somewhere in the United States.

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