March 11, 2006

Weekend Unanswered Question 1: On Medical Costs and the Potential Impact of Health Savings Accounts

Filed under: Economy,Taxes & Government,TWUQs — Tom @ 10:15 am

Why do people insist on seeing medical costs and fees as inflexible and unresponsive to market forces?

The subscription side of The Wall Street Journal had a great editorial yesterday on what has happened with an extremely technical and complicated “non-covered medical procedure” — i.e., one in which the government and medical insurance companies have no involvement in underwriting any of the costs.

Well, glory be. As time has gone by, the procedure involved (LASIK) has technically improved, but unlike virtually all costs for covered procedures, its cost in real terms has come down:

Another good example is LASIK, the revolutionary laser surgery that over the past decade has restored many former eyeglass or contact-lens wearers to near perfect sight. No doubt most readers have noticed the advertisements and aggressive price competition for the procedure in recent years. And it turns out competition works.

Lasik0306

(Note: Inflation is NOT considered in the cost
figures, so while other costs were going up,
LASIK costs were stable.–Ed.)

The ….. chart tells the story. In early 1999, shortly after LASIK was first approved by the FDA, the average price for the procedure was about $2,100 per eye. By the end of last year, it had fallen about 20% to $1,687. Innovators have also responded to the demand for the service by developing a newer and more precise LASIK technology called “wavefront-guided” LASIK. Naturally, they charge more for this better, more accurate technology, but not much more than the standard procedure originally cost.

In short, the existence of a real market for the LASIK procedure has produced rapid improvements in technology and stable-to-falling costs. Between 1999 and 2004, by contrast, overall annual health expenditures per person in the U.S. increased to nearly $6,300 from $4,400, and the increase is being felt acutely by employers and their workers.

What has happened with LASIK is what The Journal predicts will happen with many other medical procedures and services if Health Savings Accounts ever catch on — more competition, lower prices, and more innovation:

The LASIK experience also refutes the criticism of HSAs that individuals without comprehensive insurance coverage are likely to underconsume health care to their own detriment. If so many people are willing to ante up for optional procedures like LASIK, surely they’ll be able to get used to more direct spending on urgent medical needs as well. Just as surely, everyone stands to benefit from a health-care marketplace in which LASIK surgeons and dentists aren’t the only medical providers competing aggressively for business.

Proponents of government-run health care keep insisting that medicine is different from everything else in the economy in being immune to market forces. But the LASIK example shows that where a market in health care is actually allowed to function, with transparent pricing and incentives to spend wisely, the market works very well. The goal of public policy should be to make sure there’s such a market across the entire health-care industry.

While the “conventional wisdom” insists that the only way to rein in medical cost increases is to increase government and third-party involvement in paying for services, the LASIK experience shows that exactly the opposite is the case. The freer the market for medical care and services, the lower prices will be.

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