Can Price Competition Work?

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"Can Price Competition Work?"

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Some bad news for the hope that price transparency will do a huge amount to slow the growth in health care costs:

The health care reform bill before the U.S. Senate would require hospitals to publicize their standard charges for services, but New Hampshire and Maine have gone much further in trying to make health care costs more transparent to consumers.

New Hampshire and Maine are the only states with Web sites that let consumers compare costs based on insurance claims paid there.

In New Hampshire, the price variation across providers hasn’t lessened since the Web site went live in 2007.

Tyler Cowen offers some theories as to why this may not be working. His option number four “Many local choices, especially in these states (somewhat rural, so-so road connections), don’t involve a lot of competition” is something that I think is worth emphasizing.

I went to the Maine version of this idea and decided to pretend that I was living at my dad’s summer house in North Brooklin, ME and was considering my hospital options. It turns out that the closest place to get a knee MRI costs $1,550 and is a 40 minute drive to Ellsworth. There are two slightly cheaper options in Bangor—$1,159 or $1,160—but that’s more like a 75-80 minute drive. So the competition in this market is not very fierce. Bangor is the second-largest city in the state; it’s not convenient to get there from Brooklin, and even there you only have two options. Possibly not the best test case for these ideas.

That said, I still do wonder how much this will work. In some contexts, people love bargains. If you can get a piece of brand-name clothing or electronics on a discount, then you snap it up. You haven’t bought a cheap suit, you got a great deal on a suit—the brand name and typical high prices serves as a anchor. But in other cases, the psychology is different. Do you want to send your kid to the discount pediatrician? In the absence of clear information about quality, I think information about price only gets you so far.

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