Finally, some good news for the government (and for our economy)

Finally, some good news for the government (and for our economy)

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The second failure was the launch of the $7.2 million Medical Cost Finder website, which set out to address spiralling out-of-pocket costs in private healthcare. These costs undermine confidence in private health insurance, and alongside higher premiums are driving thousands to drop their insurance cover.

The idea was that we could look up specialist doctors on the website and see what they charged for different medical procedures. This would out the so-called “greedy” doctors charging high fees and arm consumers with more information on the costs of healthcare. The website promised to end “bill shock” and help put downward pressure on costs.

It was a surprise, then, that when the website launched on December 31 it didn’t list the fees of any doctors; in fact, it didn’t list any doctors at all. Thanks to a lack of cooperation from doctors, the website only provides minimal information on average out-of-pocket costs by area.

While the government looks a little bit silly, this is actually good news. Based on the best available evidence there was a real chance that, if successful, the website would have made healthcare more expensive and lowered the quality of care.

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This is because healthcare isn’t like other goods or services. Where price transparency and competition is normally viewed as a great thing in economics, price competition in health has been shown, time and time again, to lead to higher costs and lower quality.

Part of the problem is that doctors know more about their own quality and effort than their patients. It can be very hard to judge, in the absence of easy-to-understand quality ratings, whether our doctor is any good or not and therefore worth the extra cost.

Complicating matters further there is a lot of uncertainty about the relationship between our doctor and our health outcomes. Two patients can be given the same treatment by the same doctor – one can get healthy and the other not. It can have nothing to do with the doctor but a combination of individual variation and chance. Or it could have something to do with the doctor. Notwithstanding gross negligence, the reason for different outcomes can be hard, if not impossible, to determine.

Price competition in such a scenario is dangerous because as consumers we have a habit of believing higher prices must mean higher quality. This is why restaurants tend to price the wine they want to sell quickly above the lowest-priced wine on their list – people think that because they are paying a bit more it must be better-quality wine, when there is often no difference.

This problem also exists in healthcare where there is often no relationship between what we pay and quality. So doctors increase price to “signal” they are higher quality, when they may not be – other doctors then feel they have to increase fees to show they are higher quality as well. You get price competition in the wrong direction, and everyone ends up paying more. At the same time no one is rewarded for providing quality care – and so quality has also been shown to suffer.

While the website may have shamed the worst offenders into reducing fees, across the board the research indicates that fees are likely to have risen.

A better idea is to limit price competition (ideally completely) and instead get doctors to compete on quality. Using data on doctors’ performance across all their patients you can tell which doctors generally do better than others, and choose accordingly. This approach, not pursued by the government, encourages doctors to compete on quality and has been shown to lower costs and increase quality of care.

Having endured a horrendous start to 2020 where their failure to accept climate change has been shown for the folly it is, the government will be hoping the self-help gurus are right – that failure helps us “grow” and is part of the path to success. As the fire season rages on, fuelled by climate change which could have been mitigated with earlier global action, the towns and ecosystems under threat like never before are counting on it.

Angela Jackson is an economist at Equity Economics.

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