In 1946, the Radio Corporation of America unveiled a new 10-inch black and white television, boasting that the set offered “full thirteen channel coverage.” The price was $350, or $4,272 adjusted for inflation.
Today, for the same inflation-adjusted cost, an American consumer could visit the Best Buy website and purchase about nine 50-inch Sharp high-definition color flat screens, which could be used to access hundreds of channels, stream movies or play video games.
Examples of technological advancements lowering costs while improving quality extend well beyond televisions — to computers, transportation, communication and a litany of other areas. But one of the most important public policy debates concerns why the same trend hasn’t been true for healthcare, where scientific breakthroughs have been accompanied by rising costs for medical services.
A new study in the Journal of the American Medical Association demonstrates the potential for the U.S. to contain health costs by unleashing the American consumer.
Advocates for a consumer-driven approach to healthcare have long traced the problem of rising medical costs to the way government policy has distorted incentives and stunted the development of a free market.
Even before Obamacare, nearly all insured Americans obtained coverage either through the government or their employers. A World War II-era provision in the tax code has allowed health insurance to be purchased tax-free if obtained through employers, but only with after-tax money if bought directly by individuals.
When consumers believe that somebody else is picking up the tab, they have much less incentive to shop around for the best deal. If the market for televisions functioned like the healthcare market over the last 70 years — and individuals could buy new televisions for a small copayment — it’s highly doubtful consumers would have seen costs fall dramatically as technology advanced.
Given this, supporters of free market health care solutions have long pushed for changing the tax treatment of healthcare and encouraging Americans to move into health plans with higher deductibles, accompanied by health savings accounts (which allow individuals to make pre-tax contributions to an account that can be used to pay for qualified medical expenses).
The philosophy driving such proposals has been to give individuals more exposure to the cost of medical services so that they have more reason to shop around for the best care at the lowest price — thus signaling to providers that they had to drive down prices to keep customers coming.
Skeptics of this approach have countered that healthcare cannot function like a normal consumer market, because individuals facing medical emergencies aren’t in a position to shop around and have difficulty sorting through complex medical information.
One important element in this equation is that a functioning consumer market depends not only on having the right incentives, but on giving individuals the information they need to make an informed decision.
Medical pricing, however, has been a black box for American consumers. Even those with insurance often go to hospitals or doctors without an idea of how much anything will cost and what insurance will end up covering.
Encouragingly, the study appearing in JAMA found that when given the information needed to shop around, consumers spend less on medical care.
The study included more than 500,000 individuals who were covered by 18 large employers. The customers had access to a platform, Castlight Health, that allowed them to compare medical prices at providers either by phone or online.
Researchers found that individuals who used the platform had claims payments that were 14 percent lower for lab tests, 13 percent lower for more advanced imaging such as MRIs or CT scans, and a more modest 1 percent for doctors’ visits. The savings on advanced imaging translated into a dollar value of $125 per service.
There are, no doubt, limitations to the study. For one thing, not all medical services an individual may receive lend themselves to clear price information.
But the research does present compelling evidence of the potential for the healthcare system to function as a market if consumers are given the proper incentives and sufficient information.
