I was once calling around for my local area trying to find a doctor to go get a regular checkup. It had been quite a while so I was convinced it was time to get a checkup. Being an entrepreneur there are times when I did not have health insurance because I couldn’t afford it, but at this time I actually did have it. But I didn’t feel like waiting 30 days for a appointment so I figured I can just pay for this one appointment cash, no big deal right?
So I started calling around to several area doctors only to find one thing, they did not accept cash patients!
Now since I am a entrepreneur I found this very odd. With 98% of businesses in this county if you call or walk in and offer cash they will gladly accept in exchange for products or services. But not with many doctors offices. Now yes I know that there are some clinics and doctors who only accept cash and while I think this is great it is definitely the minority of doctors who operate this way.
So I had to figure out what was going on. I did some reading and learn about the 3rd party payer system in which the doctors simply bill the insurance companies, medicare, or medicaid for their services.
Well I wish I could always bill 3rd parties for the services my company provides. This would be great! Why is this great? Well because they are not in the room or on the phone to object to the price I am going to charge so naturally as a business person trying to bring in more money for my family and my employees I will charge as much as I can get away with. No wonder why health care costs in America are insanely out of control!
Now this is where most people that have not been entrepreneurs or worked in higher level business positions lose me. But let me explain with a simple economics lesson.
There are 2 Major “market forces” that bring down prices to a reasonable level relative to the quality of service provided:
1. Competition between me and the other guys that do the same thing I do
2. Negotiations Enabled by Consumer Choices (freedom)
Competition works like this; if I am starting a business as a doctor and there are 10 doctors in my city I will do 2 things to determine what I will charge for my services. First I will do the math and figure out between all my expenses (office rent, medical supplies, employees, insurance, etc) how much does it cost me to see a patient. Then I will call around and research what my competition is charging for the same service. Lastly I will set a price that is lower then the competition because I want to take some of their customers/patients. Obviously price is only one factor that people decide on, others are, quality, relationships, customer service, etc. This is why I can only hope to take some of the competitions business not all. Now the next year another doctor opens a practice and lowers the price a little bit more hoping to take some of my business away. This forces all the doctors in the area to either, charges less, provide more care, or provide better care.
Negotiations enabled by customers choices are a byproduct of competition. If I live in Santa Ana and there are 20 doctors that offer similar services of a similar quality then I can talk to the doctor I like and prefer and see if he will come down and match the prices of the other doctors. If it is a monopoly and there is only one clinic or doctor then its his way or the highway.
Some say that these market forces don’t work in health care because of fundamental differences. One fundamental difference I was explained is that people need health care unlike other products that are not required to live a healthy life. Well people need food and food prices are not skyrocketing like health care prices because we have a food industry that is keep in check by market forces such as competition. Its the lack of these market forces that have contributed to the rising health care costs.
Anyway there are many other factors and regulations that limit competition and raise prices such as:
1. Limiting choices of insurance companies (instate)
2. Allowing health care equipment/supply companies to get slammed with excessive lawsuits and taking 100% of the liability
3. Giving the AMA a monopoly over many aspects of the industry such as licensing of medical schools
But that’s a whole other book!!
Check out these links for further reading: