One of the coauthors of this blog recently had a knee operation, a bit of arthroscopy that put him on crutches for four miserable (but hopefully worthwhile) weeks. It gave us the opportunity to review bills and—uniquely—compare prices.
What made this price comparison possible is the website of Surgery Center of Oklahoma. This is the one place on the Internet where patients can find real price quotes, including anesthesiology, for outpatient procedures ranging from Achilles repair to Uvulopalatopharyngoplasty.
Surgery Center’s director, Dr. Keith Smith, recently appeared at a Council for Affordable Health Coverage event examining the role of competition in health markets—of which there is far too little these days.
The same meeting featured a presentation by Kerry Hicks, the Chief Executive Officer of HealthGrades, an independent service that ranks hospitals and physicians according to a variety of quality indicators. If you have read that you are 73 percent lower chance of dying at 5-Star Hospital A than 1-Star Hospital B, that useful fact probably came from HealthGrades.
For his part, Smith reports that Surgery Center’s posted prices average one-third those of nearby competitors. What is more, Smith’s customers confide that some local hospitals have begun offering special deals in a bid to keep business. Imagine that.
Like all upstarts, the Surgery Center at first faced consumer resistance. After all, doesn’t cut-rate medicine mean lower quality? Apparently not. Surgery Center’s rate of infection for 2009 and 2010 was .001%, compared to a national average of 2.6 %. Smith blames a cozy “cartel” of insurers and hospitals that directs patients to more expensive—and more dangerous—settings.
Like any clever entrepreneur with a better mousetrap, Smith went directly to the customers. He approached several large, self-insured employers whose savings on medical expenses go directly to their bottom lines. The employers soon began directing most of their outpatient surgery business his way, even their out-of-state employees. Since then, several insurance brokers have discovered Surgery Center. Among their clients have been 30 Canadians reportedly fed up with the infamous queues that plague that country’s single-payer health system.
According to Smith, business is up 40 percent over last year. His surgeons are busy almost all the time. They make good money, he adds—which brings us to the price comparisons.
Most Americans receive reports from their insurers when they incur medical expenses. These reports typically detail both the list price charged by the provider and the “allowed” amount, the pre-negotiated price that the insurer has negotiated on the patient’s behalf. In this instance, the list price for your correspondent’s arthroscopy was a whopping $15,044, while the amount allowed by the insurer was a measly $2,023.31. (The amount billed to the patient, fortunately, was zero.)
Smith’s Surgery Center, in contrast, charges $3,740. To save on paperwork, Surgery Center does not process insurance claims. Neither does it take Medicare patients, because, as Smith notes, Medicare (whose ballooning costs drive our budget deficit) pays too little. Essentially, Smith and his colleagues make a good living treating the uninsured, as well as individual and small-group plan participants who lack the market heft to ratchet down bloated list prices.
The surgery for your correspondent was surprisingly quick—about two and a half hours from admission to release. The surgeon spent less than half an hour practicing his trade, and made $1,030.31 for his labor. Even with big insurers demanding special prices, osteopathic surgeons make an average of about $442,450 a year, according a recent study. By all indications, Surgery Center’s osteopaths do at least that well.
Three lessons can be drawn from this admittedly limited comparison. The first is that Smith’s business model is replicable. Although Surgery Center has no plans to open franchises, it remains that millions of consumers in hundreds of local health markets would jump at the chance to take their business to providers offering a better deal.
The second is that the web can create a national market, where today there exists largely a collection of local oligopolies. In the process, it can bring the same kind of price destruction to health care that has made everything from cashmere to computers more affordable.
Surgery Center proves that one does not need a passport to engage in “medical tourism”. Perhaps it is only a matter of time before large, high-quality surgical centers team up with likes of Expedia or Priceline to offer truly attractive in-country medical travel packages. According to Smith, some 85 percent of surgeries are outpatient; the market is huge.
The third lesson is that Surgery Center could do with a dose of its own medicine. Keith Smith is indeed a hero of capitalism, but he is unique. There needs to be hundreds more Smiths, so that one day Surgery Center’s prices might themselves come under pressure.
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Editor’s note: Government can do more to foster a competitive environment. A good first step was PPACA’s CMS Data sharing provision. The law requires the release of CMS claims data to score the performance of providers. In health care, information is power. It provides the insights to help those with skill to improve. It also can help consumers select better, lower cost providers. When combined with commercial payer data, the CMS information holds potential to foster a new consumerism. Unfortunately, PPACA hampered the utility of the CMS claims data for the limited purpose of performance reports. The law should be revisited, and the data use should be expanded, so that consumers can more accurately judge the cost of the services they demand and receive.
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