NATIONAL CENTER FOR POLICY ANALYSIS
Health Care Entrepreneurs:
The Changing Nature of Providers1
The market for medical care does not work like other markets. Providers typically do not disclose prices
prior to treatment because they do not compete for patients based on price. Payments are usually not
made by patients themselves but by third parties — employers, insurance companies or government.
And the amounts paid are not really market-clearing prices; they are “reimbursement” rates negotiated
with bureaucratic institutions and networks. Furthermore, when providers do not compete on price, they
usually do not compete on quality either. In fact, in a very real sense, doctors and hospitals are not com-
peting for patients at all — at least not in the way normal businesses compete in markets.
Executive Summary
This lack of competition for patients has a profound effect on the quality
and cost of health care. Long before a patient enters a doctor’s office, third-
party bureaucracies have determined which medical services they will pay for,
which ones they will not and how much they will pay. The result is a highly
artificial market plagued by problems of high costs, inconsistent quality and
poor access. In addition, critics complain about fragmented care, uncoordi-
nated care, failure to use simple technology (including the telephone, e-mail
and the Internet), lack of electronic medical records (EMRs), the absence of
safety-enhancing software, the lack of adequate patient education and prob-
lems related to rationing care by waiting.
Can the market for medical care be different? Interestingly, in health care
markets where patients pay directly for all or most of their care, providers
almost always compete on the basis of price and quality. And because they
are not trapped in a system that pays for predetermined tasks at predetermined
rates, providers are free to repackage and reprice their services — just like
vendors in other markets. It is primarily in these direct-pay markets that
entrepreneurs are creating many innovative services to solve the very problems
about which critics of the health care system complain. In fact, these
solutions are usually a necessary part of the entrepreneurs’ business models.
What follows are some examples.
Cosmetic Surgery. Cosmetic surgery is rarely covered by insurance.
Because providers know their patients must pay out of pocket and are price
sensitive, patients can typically (a) find a package price in advance covering
all services and facilities, (b) compare prices prior to surgery, and (c) pay a
price that has been falling over time in real terms — despite a huge increase
in volume and considerable technical innovation (which is blamed for increas-
ing costs for every other type of surgery).
Laser Eye Surgery. Competition is also holding prices in check for vision
correction surgery, and laser surgeons compete on quality as well. Recent
quality improvements include more accurate correction, faster healing, fewer
side effects and an expanded range of patients and conditions that can be
treated. For instance, rather than traditional Lasik surgery, patients can pay
$200 to $300 more per eye for the newer, Wavefront-guided Lasik.
Policy Report No. 318 by Devon M. Herrick December 2008
ISBN #1-56808-196-0
www.ncpa.org/pub/st/st318/st318.pdf
1This work/research was funded by the Ewing Marion Kauf fman Foundation. The contents of this publication are solely the responsibility of the Grantee, the National Center for Policy Analysis.
About the Author
Devon M. Herrick, Ph.D., is a senior
fellow with the National Center for
Policy Analysis. He concentrates on
such health care issues as Internetbased
medicine, health insurance and
the uninsured, and pharmaceutical
drug issues. His research interests
also include managed care, patient
empowerment, medical privacy and
technology-related issues.
Herrick received a Ph.D. in Politi-
cal Economy and a Master of Public
Affairs degree from the University of
Texas at Dallas with a concentration in
economic development. He also holds
an M.B.A. with a concentration in fi-
nance from Oklahoma City University
and an M.B.A. from Amber University,
as well as a B.S. in accounting from
the University of Central Oklahoma.
National Center for Policy Analysis 12770 Coit Road, Suite 800, Dallas, TX 75251 972.386.6272 www.ncpa.org
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