THE BLOG
11/13/2013 06:44 pm ET | Updated Jan 23, 2014

Localism is the Cause of High Healthcare Costs

The CVS I use in Washington, D.C. links to CVS stores around the country and to my insurance. It has all my prescriptions and renews them automatically. The store in Pittsfield, MA accessed my information and filled my prescriptions this summer. Walgreen's and Rite Aid compete with CVS in my neighborhood and are linked to their stores in other locations. Supermarket chains and big box stores with pharmacies are linked too. I use CVS, but CVS knows I have choices so I get the benefit of competition in the whole sector.

Medical practices in the U.S. should be more like the pharmacy sector. Instead they are still mostly small stand-alone operations. Only a quarter of physicians practice in multi-specialty groups. Big hospitals are buying up small practices, but this is largely to increase their power to raise prices. That is the opposite of what the country needs. What we need are healthcare organizations that have to compete for insurance dollars by lowering prices and improving care.

Small stand-alone medical practices are inefficient. Their administrative staffs are swollen and still growing. Practices communicate with each other, if at all, mostly by telephone as they might have after World War I. Communications between doctors by phone, fax, or letter usually passes through assistants at each end, a process fraught with medical risks and wasteful expense.

The Committee on the Cost of Medical Care in 1929 said that doctors should practice in "organized groups" to lower costs and improve care. The idea was denounced as "socialism" at the time by the AMA. The Institute of Medicine six decades later (in 1991) still lamented that doctors "practice in isolation." Unfortunately most still do in 2013. As a result care suffers and overhead and administrative costs are far higher than they are in modern industries.

This costly fragmentation of healthcare, contrary to public impressions, has little to do with federal healthcare policy. Medicare, Medicaid, VA and other federal programs pay for roughly half of the Nation's healthcare, but did not cause healthcare to be a "mom and pop" industry. Rather, the structure of American healthcare has been shaped by local interests that have enough clout in towns, cities, states and in Washington to have prevented modern healthcare organizations from emerging and driving down costs.

Obama-care did not make healthcare a mom and pop industry. Medicare and Medicaid did not do it. What has happened is that the organization of healthcare along modern lines has been held back by the resistance of local medical associations, fears of older people that they will have to give up their favored but inefficient doctors and the parochialism of state regulatory, insurance, and licensing bodies that reflect local politics.

Look at pharmacies, supermarkets, retailing or almost any other U.S. business sector. Most were once fragmented local industries. People say they love the small Main Street businesses but most opt for lower cost modern alternatives when they emerge to challenge the locals. Today regional, national, and even international companies have greatly reduced the role of stand-alone local businesses in most industries. We feel nostalgia for the mom and pops but understand at some level that competition between modern firms lowers prices. Boutique medicine like boutique pharmacies and restaurants always will have a place, but most Americans cannot afford them.

Fifty integrated healthcare organizations like Kaiser-Permanente with millions of patients each would be big enough to have the advantages of scale and modernity while assuring that there is competition for insurance and patient dollars in every part of the country. Antitrust laws should be used to prevent larger healthcare organizations from stifling competition in local markets but large medical businesses competing on price, service and quality is what the country needs to lower healthcare costs.

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