Medical Cost Confusion
Friday, October 29th, 2010Recently I needed an MRI for a sprained ankle to see if I’d torn a ligament or not. I decided to use this as a project to figure out how much an MRI costs. (I was inspired by the excellent podcast episode of Planet Money: ”Shopping For An MRI“.)
I had a choice of two MRI facilities, one was the local hospital and the other was an independent MRI/x-ray/sonogram company. When I called the hospital it was clear that cost wasn’t a common question. After twenty minutes on the phone talking to several people and being on hold I found I needed a diagnostic code to find the cost. But it wasn’t clear where to get that code.So I called the independent place instead, they were more helpful. They had two offices locally about five miles apart and the cost at one was $1200 and at the other was $500. That’s $700 difference for similar equipment and the same staff. After some discussion I found the real difference was some competition near the cheaper one.But wait! This wasn’t the cost that I faced. I have insurance and these costs are the “self-pay” costs for those without insurance. However, no one really pays these self-pay costs. If you pay up front they discount it 40%, if you pay in installments they discount it 25% I’m told.
Also the insurance companies contracting with the facility to pay a certain rate for each service. Different insurance companies may pay different amounts if their contracts are different. Without a long and tedious discussion with the billing department I wouldn’t be able to find out what my insurance company paid or what my co-pay amount was.
The usual rules of the free market fail here miserably. To recap those rules: We have to have roughly equal sized sellers and buyers so that no one unduly controls the market. Second, the prices and services in that market have to be known and similar. Here the medical and insurance companies in this market are much larger than I - I have no ability to negotiate on anything like equal terms. The insurance company is supposed to do that for me, but I’m locked into one particular insurance company at work and can’t easily change so there’s no real competition there either. And, as we see, price information is essentially unavailable. I also have a limited ability to compare the quality of the service since I’m not a medical expert.
The optimizing abilities of a free market don’t apply here since it’s not a free market in the economic sense of the words. Besides, do you really want to price-shop for the cheapest doctor? Yeah, me neither. In the absence of market competition there’s no price control. Some sort of regulation is necessary as the usual mechanisms don’t work. That, I hope, was the original point behind the health care bill. We’ll see how well it works out now that it’s passed through the partisan meat-grinder of Washington DC politics.
And that ligament? Yup, it’s torn. I’ve got a “boot” on to prevent me from moving that ankle, and there’s to be no running or hiking this fall for me.
