You never hear the term ‘price discrimination’ in the debate about restructuring U.S. health care financing, but it is a key issue. One manifestation of price discrimination is the recent news story about Scott Hawkins, a California State College-Sacramento student who was killed by a roommate. Hawkins did not die immediately but survived only five minutes in the emergency room at the University of California-Davis hospital. Hawkins’ parents subsequently got a $29,000 bill for those five minutes of ER treatment.
It turns out the hospital assumed Hawkins had no insurance and was indigent, so his parents were charged the full sticker price for his brief treatment. He did in fact have coverage through Kaiser Permanente, which will pick up the bill. But as a large HMO with substantial bargaining power, Kaiser Permanente will pay thousands of dollars less, though the exact sum is undisclosed.
Charging different prices to different buyers with different “elasticities of demand” when there is no underlying difference in the cost of the product is price discrimination. Elasticity of demand technically refers to the degree to which the quantity demanded of some good or service varies with price. Buyers of an essential service like health care who have little bargaining power have inelastic demand. Buyers with more bargaining power have more elastic demand.
Such price discrimination is rampant in modern U.S. medicine. But that is no different than for many other products.
Grocery coupons, children’s meals, cheaper air tickets with 14-day advance purchase, college financial aid, senior citizen discounts and coffee-bar punch cards all are examples of price discrimination.
Health system professionals will retort that in the Hawkins case, there is a difference in underlying cost. On a per-patient basis, it costs less to collect from a large insurer with millions of patients than to bill a single individual. True, but the difference is tens of dollars, or at the most hundreds, not thousands.
They also may retort that the rate of defaulted payments on individual billings is much higher than for insurer billings. That also is true. But the fact that individuals are charged so much more than insurance companies contributes to such defaults. And there is the larger question about how broadly the cost of absorbing unpaid bills should be spread.
Sellers discriminate on price because they get higher revenues if they do so. This is not new. Giving senior citizen discounts or charging less for matinee movies produces higher profits than charging a uniform price across the board. A century ago, general practitioners who charged their customary fee to small-town bankers and lawyers but forgave part of the bills of poor farmers were thought to be nice guys. But they were also maximizing profits, just as UC-Davis does by charging Permanente less than an individual.
Don’t blame naked greed, however. There is more competition in some aspects of health care than people commonly believe. If one provider shuns price discrimination while all competing providers use it, the one that abstains will be at a competitive disadvantage, just as a one-price breakfast cereal manufacturer would be, relative to competitors who market with coupons.
Medical-sector price discrimination also shows up in drug and medical-device pricing. Drugs are cheaper in Canada because that nation uses its sovereign power, including the threat of breaking pharmaceutical patents, to secure lower prices than in the United States. The same is true for European national health systems that can bargain system-wide for cheaper pacemakers and heart valves than can U.S. hospitals.
Nor is it limited to provider-patient pricing. It is ubiquitous in the pricing of health insurance. An employer with 5,000 employees gets better rates than a small business with 20. A fraternal group may get better rates than its individual members could on their own.
The fact that there are fundamental economic reasons for price discrimination does not reduce the fact that people least able to pay often are charged the highest prices.
The national-level insurance exchanges proposed in current legislation would be a modest step to give individuals, small businesses and voluntary associations somewhat better bargaining power in buying coverage and thus render them less vulnerable to adverse effects of price discrimination.
Many other countries that have broad national coverage while preserving private ownership of health providers and insurers simply ban price discrimination. Switzerland is an example. You can choose your insurer and health provider, all of which are nongovernment. But insurers cannot charge anyone different rates for the same basic coverage, and providers all get paid the same amount for any treatment or procedure.
If we don’t want price discrimination to occur here, we need similar government action to eliminate it. Lacking that, free-market incentives will continue to make it ubiquitous.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.