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Frances, this post by Karl Smith addresses a similar issue, but without an insurance component.

Essentially, he identifies a market where a cheaper competitor enters the market, thus creating high- and low-end options for consumers. But rather than see prices drop at the high-end vendor's store, consumers self-select into high-amenity and low-amenity groups. With the high-end vendor now dealing exclusively with customers who seek amenities, they can jack their prices up.

[The] story of [the high-end vendor] is that [the discounter] swept away the “elastic demanders” those who are sensitive to price. Allowing [the high-end vendor] to raise prices. However, we might be able to get a handle on what’s going on by looking at relative growth rates in sales.

Presumably [the discounter] cost [the high-end vendor] sales and we might be able to back out some sort of cross-price elasticity of demand from that.

Here is the further problem. The very existence of [the discounter] likely increased the amenity value of [the high-end vendor].


Well lets be frank. One thing that [the high-end vendor] shopper dislike is shopping next to lower income people. We might not approve of these preferences but they are real. [The discounter] drew away the poorer customers thus improving the shopping experience for those customers left at [the high-end vendor].

In a health services market where there is monopoly and insurance, this still translates into the comment I often hear from patients that "I want the best", meaning they are willing to burn up time and consults looking for irrelevant signals like hospital amenities, word-of-mouth, the presence or absence of students, etc. And if those with dental insurance want to use up more of their subsidy on amenities ("I can afford this because I have insurance"), rather than doing the more rational thing by extending their insurance across more and cheaper services, they will also tell providers they can jack up their prices at the high end, despite the arrival of competition.

This might also contribute to explaining why specialist services are considered to be among the least cost-effective components of the health care system.

Shangwen - thank you for your comments which are spot on as usual.

"And if those with dental insurance want to use up more of their subsidy on amenities"

This would be fine if people's choices only impacted their own insurance premiums. But every single person's decision to go for "the best" has knock-on effects for the insurance costs of everyone else in the system.

This is particularly true in Alberta, where there are no fee guidelines, and insurance companies reimburse patients on the basis on the average fees charged by all dentists in the province.

Another knock-on effect problem--in terms of rising expenditures with little health benefit--is the arms race to create new mid-level professionals or expand the scope of existing ones. This includes dental hygienists, nurse practitioners, physician assistants, etc. The biggest push for these changes often comes from health care systems and insurance companies, who want lower-cost options and presumably think that such occupations will slow cost-growth for the higher-end providers.

This looks good on paper--presumably you will not only reduce a backlog, but reduce it at a lower cost than if you had by adding more of the expensive resource. However, there are two problem effects: first, you stimulate increased demand; second, you have now established or strengthened an additional licensed occupation with lobbying interests. And, they will compete not on lower-cost services with wider net population benefits, but will go after the higher-paying services of the costlier profession. This is why you see nurse practitioner bodies in the US lobbying for the franchise to do minor surgeries, rather than the franchise to do online diabetes management; and why you see psychologists lobbying for the right to prescribe psychiatric medications (a truly frightening idea). I know someone who was a nurse in Canada but left to do a Master's in the US to become a nurse anaesthetist. His first job offer, before even graduating, was a 9-5 job that paid up to $250,000. Good for him and his licensing body, bad for the consumer once that waves starts rolling.

So the issue is that, while restrictive licensing rather than pro-competitive credentialing remains the norm, no one has any incentive to offer innovation at declining costs to the consumer.

"This would be fine if people's choices only impacted their own insurance premiums. But every single person's decision to go for "the best" has knock-on effects for the insurance costs of everyone else in the system."

Maybe, maybe not. Health insurance plans can be manually rated (based on the proprietary experience of the company), experience rated for the group who bought it (typically available to groups over 20) or Administrative-services only (uninsured but administered through a claims process, there are tax incentives to so this). Knock-on effects are most strong in manual rating, limited in experience rating and non-existent in ASO plans.

It also depends of the plan has a billing cap or not. I have a personally-owned plan that has such a billing cap, I try to ration it.

Shangwen - yes, yes.

" first, you stimulate increased demand"

But it is incredibly hard to convince the average person of the very existence of physician-induced (or, more generally, supplier-induced) demand. The typical reaction is something along the lines of: "how can you possibly say routine mammograms from age 30 are a bad idea, they might save lives"

"Online diabetes management."

Well, there was the clinic I went to who insisted on doing finger-prick blood tests every time I went. That is OK for Type 2's that don't test regularly, for a Type 1 like me who ate an hour ago and tests four times a day it is nonsense. The clinic's test has zero scientific merit that soon after eating.

The clinic staff didn't like my complaints about an unnecessary poke. Then they laid off the nurse who did those tests and eliminated her position. Looks like I was right.

I have a jaundiced view of diabetes management. The worst enemy is the patient themselves because it is a disease that is critically and inextricably linked to lifestyle. Further in the case of Type 2 Diabetes you have to break a lifetime of habits. Just look at the waistlines of your average Type 2. What you really need is a counsellor, not a nurse.

Shangwen, I think there's a difference between dental cleaning and a lot of other types of supplier induced demand in that regular periodontal work actually does have health benefits - bacteria goes from infected gums into the blood stream and from there leads to other nasty things (or so I've heard). Compare this with, say, PSA tests where false positives can cause all sorts of pain, psychological and otherwise.

Frances - yes, the concept of supplier-induced demand is one of those very simple and well established facts that lay people (forgivably) and many more informed people (unforgivably) deplore. But it is real, and one of the things that drives inefficient HC consumption (the other being its evil twin, inefficient HC provision). The example you cite--mammography--can be credited to the celebrated oncologist and billionaire, Dr. Oprah Winfrey. But there are also Avastin, PSA tests, and other things recently in the news.

But, the issue you identified in your post is that liberalization and quasi-competition are only effective if the consumption context (whether or not there are subsidies, regulatory capture, political meddling, or real insurance) will support it. If we went from a world of Premium Gas only to our present world of three grades at the pump, you would only see huge numbers of drivers shift to Basic if the immediate cost made sense. In a world where everyone was given tax breaks or subsidies to continue to afford Premium--because of mass hysteria about winter breakdowns, engine failure, children choking on fumes from "inferior" gas--few would buy it. Yet, even in that world car mechanics would still say what they say in reality--that there is little reason for anyone to buy Premium. In our relatively unregulated world where the value of Premium is undistorted, those mechanics are helpful providers of reassuring information. In an alternate-reality regime captured by Big Premium, they would be "murderers".

The Alberta issue--I guess that's another Alberta Advantage--points to another depressing reality. If you aren't going to have full-on liberalization, the next-best option is draconian central control with all its huge trade-offs.

Shangwen, that gasoline example is excellent, I'll use it. Yes, there are some cars, like finicky elderly Mazdas, that prefer a higher octane fuel, but even then the intermediate grade is usually sufficient.

Frances: Thanks! Karl Smith has a name for that: liberalization failure. And, in fact, we see that once a mid-level professional resource is established, the public and regulatory expectations immediately become that they should increase their training and be more restrictively licensed. Boo.

@ Determinant: sounds like you were that ever-unwelcome gadfly: the informed patient. Did you not read the memo directing you to adopt a posture of wide-eyed submission before parading your knowledge?

Your comment ties in to a related issue in Frances' post, namely innovation. You have a chronic illness that is often talked about as part of (if I can use the Globe's hysterical term) "the tsunami of chronic disease". Yet, the overall burden of chronic illnesses--morbidity and suffering, lost income and productivity, avoidable HC costs--is determined not by disease prevalence but by inadequate treatment compliance. Lots of diabetics and hypertensives in the Chinese Buffet. This happens not because those with chronic illness are illiterate, unthinking morons who place no value on life (as many of my colleagues and many lay people love to say), but because disease chronicity changes our time preferences and future health expectations quite significantly, and putting off the fried noodles today because it reduces the chance of amputation in 15 years by 0.1% is unfortunately not rational for many people.

In other industries, people have an incentive to innovate and create benefits for consumers even if they are benefits that weren't part of their original preference set. For chronic illness, that means innovations that incidentally stretch out people's time preferences--but if the providers or implementers of innovation only have an incentive to increase per-unit prices today, those innovations won't be forthcoming. This is why you see health care systems constantly resorting to patient-education programs, which do little other than preach to the converted, because that's all that's left in the toolbox.

In a more liberalized health care labor market, more providers would deliver good online diabetes management, and make a long diabetic life more pleasant to anticipate.

Frances: Thanks! Karl Smith has a name for it: Liberalization failure.

The manual for my car, a Toyota Corolla says that the manufacturer recommends 87 Octane fuel, that is Basic or Regular at the pumps. That is what the engine is designed for and higher grades are in fact harmful because they change the combustion characteristics in ways the engine was not designed for.

Ahem! If there's one topic guaranteed to start a flame war over on some of the car forums where I hang out, it's: "Is it OK to use regular gas in my Mazda 626/MX6?". Best steer clear of that example, if you want to avoid a riot from all the petrolheads arguing it out.

On "supplier induced demand", here's an opposing view, via Tyler Cowen:


Maybe not really an *opposing* view, just more "nuanced".

That Zocalo article is a perfect explanation of the need for a Power of Attorney for Personal Care, or Mandate in Quebec. It is the key to allowing our legal system to let doctors carry out your wishes but most people don't have one.

I have one but I've always been acutely aware that I am one bad hypoglycemic episode away from needing it. "Diabetic who had a low blood sugar and crashed his car" is common enough.

Nick - that's an interesting article, it exactly describes how my uncle, a doctor, approached his cancer.

There may be a story to be told there about patient-induced demand.

I suspect there might be a story to be told, too, about how patients-who-are-medical-professionals are treated differently within our (and the US) health care system from patients-who-are-not-medical-professionals whether that comes to wait times, information given to the patient, or the extent to which the patient's wishes are respected.

OK OK...I give...I know nothing about cars and gas. But that is what I have heard from mechanics and read on car websites. All I know is that Ford Sync is awesome.

It is generally true that, like in any situation where someone has "inside" knowledge, they will behave differently if it is a situation where information is very difficult to get. My mother, a nurse, was in hospital briefly a few years ago, and she knew exactly what dressings needed changing, what kind of pain was normal and what was not, what tone her skin should have, etc.; she knew exactly what to watch and had no hesitation asking clearly for it, because she knows how things work. Unfortunately, the guaranteed way to get good health care is to get a job in the health care system. Note that, from an informed viewpoint, good health care does not necessarily mean more care, more desperate interventions, etc.; it means better communication and better risk management.

An important question implicit in Frances' post is: what is real innovation in health care? Most people, and many lobbyists, will tell you it is more technology, new drugs, fancier degrees pinned to staff, new buildings, or electronic charting. But that is a minor or even incorrect part of the story. The best innovations for the benefit of the patient are organizational capital: getting a clinical team to buy into a set of procedures unanimously, finding ways to make information more transparent to consumers, reducing wait lists, and so on. But those do not serve the interests of the guilds. A few people recently have been lauded for advocating that doctors and nurses use checklists before starting surgery; we have gone gaga over Atul Gawande for supporting this. Well, the Bablyonians invented checklists 3000 years ago, and we are just catching on and reacting as if it were a Malcolm Gladwell book funded by the Gates Foundation. Depressing.

To answer the question in the post's title: Yes, it will make root canals more expensive if the change involved in deregulation is not apparent to the consumer; it will make it more expensive if consumers, as a decentralized mass, cannot use their decision-making power to incentivize more innovation at lower costs.

Shangwen - no, the point about gas is a good one. The debate that Nick is talking about is between the regular and the intermediate grades, i.e. 87 v. 89 octane. I don't think anyone is saying that 91 octane is necessary. And Mazdas do seem to be particularly fussy on this - my 323 insisted on a higher octane level towards the end of its life. Toyotas, as Determinant points out, do fine with regular.

The thing is - sometimes a higher grade of fuel is necessary, and not just for sports cars. A rusted out Mazda 323 might only be able to cling to life because of having a higher grade of fuel.

But that *doesn't mean* everyone should be using high octane fuel for every vehicle.

Otherwise - yes, absolutely, another brilliant and insightful comment. "Malcolm Gladwell book funded by the Gates Foundation" made me laugh.

It all comes down to control, though, and the doctors-as-priests phenomenon. My guess is that computer-assisted diagnosis would improve care immensely, for example - symptoms could be recorded cheaply and accurately, without the patient having to feel rushed or pressured, and it would be easy enough to create an app that would remind people to create a symptom diary - but that would totally destroy the mystique, the image of the all-knowing, wise and powerful doctor.

It's amazing how dentists can be portrayed as evil people. I mean, everyone thinks banks, corporations, business people are evil and it's not like the masses complain about it.

One of Shangwen's comments from 2 days ago is stuck in the spam filter. I can't get it out.

Had a root canal and crown done the other day. Almost $3,000 when all was said and done. Thank God for my employer-provided coverage, but even still I'm out of pocket by about $500. These prices are crazy. For people without insurance, 'dental tourism' to a low cost country is an attractive option. Alternatively they could go to one of the 'basement clinics' offered by foreign dentists that immigrated to Canada and are unable to legally practice here. I wonder how many are choosing these options already. As employer-provided coverage goes the way of the Dodo (at least in the private sector), I can eventually see Dentists being forced to drop prices even for root canals and crowns.

Nick, I can't find that comment, perhaps Stephen already posted it?

wjk - especially in winter, when Costa Rica starts to seem really appealing...

I've never heard of basement clinics - perhaps they're more common in the bigger cities? But it shouldn't surprise me - we've talked about a similar phenomenon in veterinary medicine on this blog before. The Canadian Community Health Survey has information on access to dental services, I was thinking of taking a look at it. Unfortunately (and this is where Stats Can is lagging behind reality) it doesn't distinguish between visiting a dentist and visiting an independent hygienist - or a basement dentist for that matter.

Yes, I rescued it when I saw Nick's comment.

Just like other industries, root canal treatments can be made cheaper by dental clinic competition. Dentists would strive to provide the best services at the most affordable prices, just to attract customers.

Fred: "Just like other industries, root canal treatments can be made cheaper by dental clinic competition. Dentists would strive to provide the best services at the most affordable prices, just to attract customers."

This is what ECO 1000 predicts would happen *if* consumers are fully informed about both the quality of the product offered and the prices charged. But just try getting information about dental prices - it's like pulling teeth. ratemydentist.com solves some information problems, but it's far from perfect.

The Alberta experience suggests that changes that look like they enhance competition, i.e. getting rid of fee schedules, can actually end up making things worse, i.e. increasing prices.

When CEO compensation were made public, it just started a bidding war from the payer , who didn't want to appear as buying second-stuff.
Like theologians, we should never believe what we teach to the undergrad.

Just saw Shangwen's post that got rescued from the spam filter. Yes, I am a gadfly. I have had more than one health practitioner try to do me harm by mismanaging my diabetes. Another prime example was the time I was in the hospital with an infection and the hospital wanted to insert a needle into my veins every four hours to test my bloodsugar. I had to cry and scream to get them to use my glucometer. They wanted to do a procedure that was excessive, invasive, painful and mentally very trying for me. Not to mention expensive with the cost of lab work.

I long ago accepted that I know more about diabetes than most practitioners simply due to experience. I can and will advocate for myself or else I know the system will run roughshod over me.

Shangwen also makes a good point about integrated clinics. Diabetes thrives in such a clinical setting; I seek out clinics based on their unified practice model. In fact Diabetes was one of the originators of this model starting in the 1960's. Diabetes care depends on patient compliance (counselling), insulin management, monitoring for complications and diet control. Activity, diet and insulin intake are inextricably linked. A nurse, endochrinologist and dietitian have to work together or the treatment plan won't work. Diabetes is not a "pop this pill, take it easy for two weeks and you'll be fine" thing.

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