Code Red: Two Economists Examine the U.S. Healthcare System

March 6, 2008

Please Participate in our Blog!

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:04 am

David Dranove: Let’s make this a community.

William White: I second the motion!


  1. As a physician I am naturally concerned with provider reimbursement. I’m sure this is politically impossible, but what about physicians being allowed to set their own prices with the patients being responsible for the balance of what their insurance doesn’t cover. This would certainly improve competition between physicians to provide quality care. It would also allow physicians to see less patients and perform better clinical exams. In my opinion, this would likely lead to less unneccesary and costly testing. To me the excessive use of imaging studies has to be a major factor in escalating health care costs.

    I often hear people complain of the quality of medical care they receive now compared to the days of the “Marcus Welby” physician. Well, in those days Dr. Welby was compensated by what fees he could command in the marketplace.

    Comment by Marc Hirsch — March 6, 2008 @ 10:32 pm

  2. Marc,

    You are calling for a return to the 1970s and earlier, with an important tweak. There wasn’t any competition to speak of back then, because insurance covered nearly all the bill. Provider prices escalated without restraint. “Command” is the right word—providers commanded whatever they wanted!

    Providers nowadays must compete for managed care contracts. Providers hate this, and think that low fees translate dollar for dollar into higher insurance industry profits. The reality is that all HMO profits put together represent a miniscule fraction of payments to providers. Nearly all of the fee reductions are passed along to enrollees. This is not to say that HMOs are faultless in the breakdown of our healthcare system.

    Your suggestion has considerable merit. If insurers capped reimbursement rates as you suggest, this might force providers to compete without further managed care intervention. And as you suggest, better quality doctors could raise their fees above the caps. But even this sensible approach has some issues:

    1) Only the wealthiest patients will be able to visit the highest priced providers. Not everyone will be troubled by this. I would.

    2) Insurers would still have to set fairly low caps, or providers would simply take the capped amounts and not bother to compete on price. This would continue to irk providers.

    3) Providers could reduce the caps further, resulting in substantial patient cost-sharing, thereby exposes patients to financial risk.

    4) Managed care is engaged in a serious effort to reward quality. I don’t know if patients would be more demanding. Providers don’t like having HMOs tell them about quality, but providers have only themselves to blame, having reacted negatively to well publicized reports of major quality problems.

    I am not sure if any of these issues is big enough to convince you to accept the status quo. I am not sure if they convince me!

    Comment by David Dranove — March 7, 2008 @ 9:32 am

RSS feed for comments on this post.

Blog at

%d bloggers like this: