I often hear the phrases ‘real price’ or ‘justified price’, for example, in the question of ambulances or hospitals. They make my economic hair stand on end. It reminds me of how deeply embedded healthcare is in the price thinking of planned economics.
Before 1989 in Slovakia, the whole economy was run on the principle of price. A manager in a company calculated the price of steel, plastic, and man-hours to produce one Škoda 120 car, for example. On the basis of this calculation, the factory was allocated resources for production by the state planners.
Great idea, except it does not work. It results in high inefficiency of production over time. The source of the problem is that no “real” or “justified” cost or price exists. Yet if you read Adam Smith, David Ricardo, or other greats of classical economics, you will find the idea of a “real” (they called it “natural”) price there!
It took another seven decades after Smith’s Wealth of Nations for economists to better understand the workings of prices. Only then, during the so-called Marginalist Revolution, did the trio of economists Jevons, Menger, and Walras independently describe a subjective theory of value. Thick books summed up in a few words: there is no one objective price, there are infinitely many prices here and now. Or to put it another way – things are expensive not because they cost a lot to produce. They are expensive because they are of high utility to a customer with a particular need.
Let’s illustrate this with the example of two doctor’s offices doing procedure X. One is located in a poor region, has mostly elderly patients with low health literacy, is housed in an old building with drafty windows, and is staffed by a doctor-nurse couple, both of retirement age. The other doctor’s office is in the capital, in a modern building with a receptionist, and is frequented mainly by middle-aged professionals, it has two nurses, and for direct payment, they can also do some quick cosmetic procedures for you if you wish. What is the “real cost” of procedure X? You can do the most complex costing, but at the end of the day you will come up with a figure that, at best, only a small fraction of doctor’s offices will be happy with.
Just because someone produces with costs this or that does not mean that those costs are spent efficiently and with maximum benefit to production. Let’s take another example. If, over time, a hospital bed occupancy rate drops from 75% to 50%, is the hospital still entitled to be reimbursed for the same amount of costs? If the same medical problem can be solved by both day surgery and inpatient hospitalization, should the cost of the inpatient hospitalization be reimbursed? If a hospital has purchased a CT scan at a disadvantage, is it entitled to reimbursement? If a hospital is located in an energy-inefficient building, should it be compensated for all the heat that escapes through its boarded-up windows? Such an approach would be a road to economic hell.
Managing healthcare solely by focusing on costs will lead to the same outcome as socialist economies – the perpetuation of inefficiency and stagnation. More costs mean more resources, therefore costs are automatically good. Conversely, any innovation means going off the charts and putting resources at risk. Conversely, the investment view is missing – a concrete cost is supposed to be a mirror image of concrete future returns.
The conundrum is what to do about it. In a market environment, we do not have to address it. A customer in a Škoda car showroom does not ask how much the company pays for steel and what the wages of its employees are. If his subjective assessment of the car’s parameters exceeds the amount on the price tag behind the windscreen, the price is right.
In most of healthcare, we cannot apply this principle and will not be able to for years to come. In socialized health care, price discrimination is minimized, the function of market prices is taken over by the plan (especially the programmatic regulation). Would it be possible to at least somehow simulate prices in the plan?
It is this dilemma that the concept of managed competition in health care attempts to address. It was pioneered 30 years ago by economist Alain Enthoven and has been the theoretical basis of Slovakia’s health care legislation since the 2004 reform. In it, the periodic renegotiation of reimbursement between provider and payer “simulates” supplier-customer contact. It gives both parties the opportunity to constantly wrestle with arguments (size of production, regulatory changes, economic developments) and to react to changes in the environment. It is also an opportunity for cooperation, for example in the search for common quality indicators.
Is it annoying? Yes, it is. Does it require effort? Yes, it does. Does it make everyone happy? No, it does not. But that is the way it is supposed to be. Competition hurts, and even simulated competition must hurt. Conversely, moving ever closer to official prices is a way of deepening inefficiency.
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