Health Care Lessons from Dr. Keith Smith

Russ Roberts
Nov 21 · 6 min read
Source: UW Health

This week’s EconTalk with Keith Smith of the Surgery Center of Oklahoma has provoked a lot of love and some not so much love from people on different sides of the health care debate.

The Surgery Center of Oklahoma provides a wide range of surgical procedures. All their prices are transparent, all-inclusive, and can be viewed online. They take no insurance. Their prices are considerably lower, often by many multiples, than the prices charged by hospitals. Smith claims they have not changed their base prices for 20 years. This is in a world where health care costs have risen relentlessly everywhere else. Patients of the Center seem to be very enthusiastic about their treatment.

You can listen to my conversation with Dr. Smith here:

https://www.econtalk.org/keith-smith-on-free-market-health-care/

There were two aspects of the conversation. The first was how the surgery center worked — the incentives it faces, the ability to offer a cash price that enough people can still afford to pay, how the surgeons are monitored for quality, how the surgeons reach out to patients and work with them, how surprises on the operating table are handled and so on. The second thing we talked about was how the rest of the health care system works — the fake prices, the incentives to inflate these fake prices, the bizarre interactions of hospitals and insurance companies, the lack of transparency and so on.

In short, the health care system we currently have is nothing like a normal market — the government distorts prices and distorts the feedback loops between patients and doctors in many ways that are opaque and that benefit many of the players in the system to the detriment of the taxpayer and the patient, especially the patient who is not covered by private insurance or Medicare or Medicaid.

Does the model of the Surgery Center of Oklahoma offer a viable alternative to the current system? (Here is my way-too-long essay on this question.) In this essay, I want to share some reactions from listeners and respond. One reaction was that one data point is an anecdote. I would say it’s more of a proof of concept — the Surgery Center of Oklahoma shows that you can sell surgery profitably in a world where prices are wildly out of whack everywhere else. It also shows that with discipline, prices need not rise steadily. It suggests that if there were lots of competition, with lots of customers spending their own money rather than that of other people, there might even be falling prices over time for some procedures. This is often claimed to be true of Lasik, for example, another area where there at least used to be lots of competition and people spent their own money.

Could a cash-based, private, market-based health care provider expand beyond surgery, where the product is at least in some sense, well-defined, as in, I will repair your hernia, I will replace your hip, etc? What about chronic care, oncology, and so on? Maybe. I don’t know if it would work the same way as a fee-for-service works in surgery. Maybe you would subscribe to some kind of service or institution or network of doctors so you could access health care. Maybe there would be insurance for some catastrophic outcomes but not others. The beauty of a market-based solution is that we don’t have to figure out how to structure the market, the market would structure itself.

But what about the poor? Some pointed out that even though the Surgery Center of Oklahoma has lower prices than other places, they are still out of reach for many people. One answer is that the current prices are what it takes to attract both customers and surgeons to the Center. If government did not subsidize medical care, prices and wages would probably be a lot lower as would any market alternatives that would naturally arise.

But what about the people who might still struggle to pay even these lower prices? Here is Keith Smith’s answer from our conversation:

The ‘what about the poor?’-question is a very frequent question. And I always caution people not to consider the poor in the aggregate. They are individuals; and I believe that individuals that do not have the means to secure care that they want or need should be treated as individuals — partly because, to consider them in the aggregate is to beg for a centralized solution that will fail them and ultimately will just ration to them.

So, one way to think about this is that, at current prices, we’re all poor. And the only way to bring — the only way to bring prices down without sacrificing quality in every other industry and market that is known to man is market competition.

So, we believe that as market competition is not thwarted but actually encouraged, or not hamstrung by the players in the industry now, and as there’s more market competition, prices will fall so dramatically that the number of individuals for whom a partial or complete lack of funds is an issue, it dwindles — it becomes very, very small.

For that group of patients, we believe the answer is to be charitable. We know that our ability to be charitable is strengthened because we’ve disintermediated our system. We could care less whether the Surgery Center of Oklahoma as an institution makes a profit on an individual that you and I would both agree and characterize as poor. And as physicians, we’re happy to waive our fees when that individual comes along. And I’m here to tell you: the cost of the supplies is just not that high. And we’ve seen GoFundMe efforts to cover that. We had a patient — we had a family drive over from South Carolina to have their child’s tonsils taken out with the proceeds of the church bake sale. And when we learned that that was the story, we just gave them all their money back, and said, ‘No, no; we’re not — ‘ you know, ‘We’ll do our part.’

Of course if the Surgery Center of Oklahoma offered reduced costs to poor people, they would be inundated with patients. They couldn’t afford to be charitable to everyone. But in a world without say, Medicaid, the Surgery Center of Oklahoma would not be alone in providing charitable care. I would assume that poor patients would get discounts from some surgery centers that would offer care to poor customers and foundations and charities would help as well. I like what Keith Smith said — under the current system, we’re all poor. Many cancer drugs are over $100,000 for a year of treatment. Almost no one can afford those. Those prices are sustained, to the extent that they are actually paid by someone, through third-party payments. If we had to pay out of our own pockets, I don’t think that price would be sustainable. Many other prices would come down as well.

The current US health care system is a Kafka-esque nightmare for too many people — opaque and convoluted with all kinds of actors — patients and health insurance companies and government bureaucracies — spending other people’s money rather than their own. It works pretty well for people who have access to insurance, private or public. It works poorly for everyone else and often torments those who do have insurance because of all the hoops you have to jump through, hoops that the current complex system encourages as a substitute for the natural feedback loops that work well in markets.

The transparency and effectiveness of the Surgery Center of Oklahoma suggest (not proves, but suggests) that a system where competition reigned and where both doctors and patients had more skin in the game might yield a much better system. Of course it would not be perfect. Neither is the current system. Far from it. My view is that we should move toward a world where people mostly spend their own money rather than other people’s money, a move away from top-down government-designed. systems toward one that emerges from the bottom-up.