In recent years, Americans have enjoyed the glories of falling consumer prices. It's commonly called the Wal-Mart (WMT) effect: Huge retailers use their buying power to force suppliers to cut costs, then the retailers pass some of those savings on to their customers. Forced to stay competitive, other retailers follow suit. The result: The price of, say, a DVD player, plunges from $1,000 to $50 in just a few years. It is, for consumers at least, the sort of virtuous cycle that economists dream about.
And it has worked for everything from gizmos to food. But it hasn't worked in one corner of the market -- health care, which accounts for 15% of the U.S. economy and is growing. Why don't the same market forces that drive price competition for DVD players keep health costs from rising at double-digit rates?
BALLOONING PAYMENTS. To start, it's important to remember that two very different things are going on in health-care spending. The first has to do with the price of what the health-care industry calls "an individual unit of care" -- that one visit to the doctor's office or that bottle of pills. In 2003, unit-of-care prices rose by more than 3.5% -- twice as much as overall inflation.
The other issue is what's happening to total health-care costs, which rose by about 8% last year. Much of that increase results from more people using more care, not because the cost of each individual procedure is going up. Over the past decade, the amount each American spends on medical care has ballooned from about $3,400 per year to nearly $6,000.
In some cases, more care is used because the treatments are now easier. For instance, the number of cataract surgeries has exploded in the past decade, while the cost of the procedure has been stable. But instead of having major surgery and spending three days recovering in the hospital, you can have cataracts removed and be home in just a few hours. As a result, total spending for cataract surgery has boomed.
WHO'S PAYING? Sometimes, however, Americans use more care because they think it's free, or almost free. And that's one big reason why health care hasn't become Wal-Mart-ized. When you buy that DVD player, you whip out your credit card and pay with your own money. That makes you want to comparison shop for the best deal. But when it comes to buying drugs, consumers have little incentive to shop around. If you have good insurance, you're going to pay the same $10 or $15 whether you need the most expensive drugs or not.
A recent study that looked at drugs used to treat arthritis pain provides some insight. Arthritis sufferers can buy relatively inexpensive over-the-counter treatments, such as Motrin or similar generics, or much more costly prescription medications called cox-2 inhibitors, such as Celebrex or Vioxx. Both kinds provide equal pain relief, but the cox-2 drugs may reduce the chances of stomach bleeding or ulcers.
The study concluded that people with good drug insurance were twice as likely to get the more expensive drugs than those without insurance, whether they were at risk for bleeding or not. If someone else -- the insurance company -- is paying, price doesn't matter.
18TH CENTURY TECH. Another reason why the Wal-Marts of the world can keep retail prices down -- but the government and big companies can't on health care -- is technology. This is a truly strange situation. You'd probably think about a big boxy store as being technologically backward -- just a bunch of stuff piled up in a huge building, right? But in fact, modern retailers use very sophisticated information technology to maintain inventories. And their suppliers use high-tech gear to make the products the retailers sell.
Hospitals may appear to be centers of the slickest technology imaginable. But in the critical links with patients, many hospitals are stuck firmly in the 18th century. Think about it: paper charts hanging from the end of a bed, prescriptions written on scraps of paper that are carried by hand to the hospital pharmacy. Only slowly are doctors using devices such as personal digital assistants.
This unwillingness to adopt advanced IT is hugely expensive, and in some cases leads to unnecessary deaths. The result is huge added expenses that are, sooner or later, built into the price.
THE X FACTOR. That's not all. For example, there's no real link between quality and price in large swaths of health care. There's no mechanism to comparison-shop. Even if you wanted to find the best price, no one would tell you. And don't forget the emotional X factor: Americans equate the best care with the most care, despite the absence of evidence that the two have much of a link. These are all very tough problems to solve.
Modern health care is many wonderful things. But it isn't a market. And until it becomes one, consumers will have little chance to enjoy the same benefits of price competition they get at their local Wal-Mart. By Howard Gleckman in Washington, D.C.