The first time I met with Brad Riggan and Andrew Harris (the principals of Liquid Media, the company that constructed our new website), I told them that I wanted to be able to edit all parts of the website. I wanted to be able to change prices, for instance, from my smart phone. Anticipating competitors in the space of medical pricing transparency, I wanted to be able to change our prices on the fly and as it seemed appropriate. I think it would be a good idea to describe some of my thoughts on prices in general.
As I’ve told people many times, we don’t know if our prices are right and we won’t know until others start openly competing with us. True and rational prices emerge from this type of activity, rather than result from the edicts of the arrogant central planners. It is important to understand that we won’t always lower our prices in response to competitors and the marketplace. If the desire for a certain procedure or price is greater than our ability to supply it, that will be a clue that our price for that service is too low. This brings to mind the old story about Ludwig von Mises at a busy restaurant. Having been told that there would be a two hour wait, Mises said, “..they should raise their prices,” the price this restaurant charged obviously not congruous with its ability to supply the customer.
We can either react emotionally to prices or we can grasp the fact that prices are signals, a seemingly high price meaning that the seller has a low or comfortable inventory or service capacity. At a car dealership a sales manager once quoted me $5000 more than another at a competing dealership for the same car. He didn’t want to sell that car as badly as his competitor, indicating to me that he was comfortable with his inventory or maybe even felt it was a little on the low side. He sent his message and I sent mine. I went to his competitor. In this example, the importance of the price transparency and the presence of a competitor cannot be understated. Medical care in this country is characterized by a lack of price transparency and vicious government-aided attempts to limit the presence of competitors in the marketplace with legislation like CON (certificate of need).
Years ago, Medicare sent me a check for $78 for an anesthetic I gave to a patient receiving a knee replacement. Months earlier they had sent me a $278 check for an anesthetic I gave to a patient for a difficult six hour open heart surgery. They sent their message and I received it loud and clear! I quit dealing with Medicare. Had I continued to work at these wages I would have sent the Medicare bureaucrats an incorrect message, one that indicated that I was a willing participant in this exchange, continued participation in which would have indicated that I had an almost infinite capacity to provide my service….a never ending surplus on my end. Continuing to work at these rates would have likely sent a tempting message to cut my reimbursement even further, a more aggressive attempt to find that price where I would walk away. Many physicians continued to work at these rates and sent corresponding signals. Many if not most cardiac anesthesia services are currently subsidized by various mechanisms, the true price paid to the anesthesiologist being below the going market rate.
At The Surgery Center of Oklahoma we don’t want to be the cheapest necessarily. We do want to offer the most extreme value, however. We will offer the highest quality we possibly can and be the best we can be at any given moment in time and price that service as near the market-clearing price as we believe possible. Remember that the market-clearing price is that price where neither surpluses or shortages exist, theoretically the best win-win deal possible. This price may not be the same from month to month or even from day to day. As a healthy and competitive free pricing market emerges in healthcare, this price “dance” will help ensure that patients are getting the best deal without running the risk of a shortage of physicians or facilities willing to supply the service. The resulting prices when they stabilize will more likely be within the reach of even a low wage earner, where these prices should have been all along. The access to care that will result from this price competition will dwarf any sort of access success achieved with “universal coverage,” a nightmarish utopia the Canadians and Brits and other ”universal care” countrys’ citizens are experiencing currently.
What is a tonsillectomy worth? What is a hernia repair worth? Is it worth more if a top tier surgeon does the procedure or should it be the same no matter? D.C. bureaucrats and many academicians fancy themselves smart enough to answer questions like these. This is a perfect opportunity to discuss one of the Austrian School of Economics’ guiding principles: the subjective theory of value. Very simply, “it’s worth what someone will pay for it”(and what someone will accept for it). A Mercedes Benz holds one value for an investment tycoon and yet another for a monk. This same luxury car has one value for the busy dealership and another for the one that is only rarely landing a sale. This is so obviously true that little else needs to be said. It follows that any individual, no matter how fatally conceited, who assigns a fixed price to a service or product, will be wrong. My apologies to Austrian economic scholars at this point for my oversimplification!
So how did we decide on our initial prices? I asked the surgeons how much they would like to be paid for the procedures you see on our website, each of them aware that if they shot too high, patients would be sent a signal, one that might run patients off. As an anesthesiologist, I basically bill for my time, so the anesthesia charges were pretty easy to figure. The facility charges (this is where the incredible savings lie) were basically time and materials. How much time in the operating room was needed and what supplies would be required? After adding what seemed like an appropriate profit margin and an allowance for equipment purchases and upgrades, presto! We had prices that were 1/6th to 1/10th of what many area “not for profit” hospitals were charging for the same procedures. We were half what Medicare paid these same hospitals (I have been told this by D.C. congressional staffers) and were even less than what Medicaid pays these same hospitals (Jim Epstein discovered this during his Reason documentary about our facility).
I have been asked “how did you come up with your prices” so many times that I thought some explanation was in order along with my thought processes. Hope you found it informative.
G. Keith Smith, M.D.