Will telemedicine create perfect competition?

September 22, 2020

Will telemedicine upend the economics of health care?

Every economist dreams of the world of perfect competition where service suppliers compete fiercely for business, higher prices reflect higher quality, and it is ruled by a well-informed consumer.

That is not how health care operates.At least not yet.

In health care, patients with good insurance might have to wait for appointments or services and might encounter impersonal or rude staff. Price is uncorrelated with quality of care. Why?

Health care markets are local.Consumers see a primary care physician or a specialist in person.This means a patient must see a provider who is an in-network provider and is accepting new patients and is within a reasonable distance from their home and has openings compatible with the patient’s own schedule. Comparative information on price, quality and customer experience of competing physicians is incomplete, unreliable, and hard to find. And it is not well utilized where it does exist; a 2019 consumer survey by Deloitte found that only 45% of US consumers consider themselves likely to use decision health care support tools. Provider directories are woefully inaccurate; studies reveal that information inaccurate for 40% or more of network providers.

With all of these constraints on a functioning marketplace, Adam Smith’s invisible hand fades as opportunities for constructive competition diminish. In the US there is one endocrinologist for every 43,000 people and one interventional cardiologist for every 85,000 people.And many of these providers work together in group practices, thereby negotiating prices together rather than competing on price.Therefore, for many specialties there will not be much competition within a one-hour drive, particularly outside of major metropolitan areas.

In addition, there is substantial economic evidence that hospital systems are consolidating, and that hospital consolidation leads to higher prices and even lower quality. Provider consolidation, which limits supply side competition, should have the same economic impact on price and quality as the constraint to local health care markets due to geographic proximity.

There was a time that another market had this locality constraint –books.Before the year 1995, people shopped locally for books.They were constrained by both the selection at bookstores in their local market and the prices that were offered at those stores.Then Amazon began a simple and convenient service to easily search for books online and have them delivered directly to the consumers’ home.Book delivery eliminated the market constraint that supply needed to be local to demand.The impact on book prices was swiftprices dropped quickly. While there is nostalgia for the closed community bookstores, Amazon provided consumer greater choice at a better price. And the availability of competition had a result in other industries as well. For example, the life insurance industry reduced prices on term life policies by 8% to 15% due to increased internet competition.

Online education is another example of how the breakup of a local market reduces prices through increased competition.Online education is a good analogy because it is a service and not a product, and certain aspects of education may be easy to substitute with online alternatives (while other parts are difficult because it requires a skilled professional). Nonetheless, something that previously needed to happen locally, can now happen at a distance. Online education programs often cost universities less in operating expenses such as reduced priced faculty, less building maintenance, and decreased overhead, while still allowing greater class sizes online. This can decrease costs for students through larger class sizes available through technology. A single online class in Artificial Intelligence at Stanford attracted 160,000 students.

Health care is different in large part because for most people in the United States, insurers do the contracting and their members are at least somewhat shielded from the market consequences of their decisions. But just as Amazon, on-line life insurance, and virtual education have brought market forces into their industries, telehealth can liberate market forces in health care. The economic intuition is the same, telemedicine eliminates the need to be local, that increases competition and competition drives down long run prices.

This is how we anticipate telemedicine to directly drive down prices. A recent poll of 1,000 consumers by CVS Health reveals that 32% are using digital technology in their health care in 2020; up from 14% in 2019. Medicare claims show a dramatic rise in telehealth usage in the early weeks of the COVID-19 emergency: a recent HHS report found that “43.5% of Medicare primary care visits were provided via telehealth in April,” compared with less than one percent in February (0.1%). There must be a local provider for needs that must be met in person as the hub of the organization, but providers who can only be reached via telemedicine can be added to increase capacity.Provider organizations with a local access point and expanded capacity can compete on price and quality across localities. However, telehealth is not yet forcing market dynamics into health care. Consumer adoption is rapid but has a long way to go.

Health plans do not need to evangelize telehealth, but they should make sure they are consistently informing their members about the option – particularly during the COVID-19 emergency when visiting a doctor office carries risks. It is also time re-examine telehealth regulation; most states have telehealth parity laws already. Requiring consumers to have the choice of telehealth is a laudable goal but requiring reimbursement parity is not. Reimbursement parity cuts against the value-based initiatives and if telehealth provider can offer certain types of care for less money, providers should have the option to work for less in exchange for growing market share.Health plans should be pushing this reorganization to capitalize on the new demand side acceptance that telemedicine is a good substitute for in person medical care for many types of visits.

Mike S. Adelberg is the leader of Faegre Drinker Consulting’s health care strategy practice. He brings unique insights into the processes, policies and people driving the major government health care programs—Medicare, Medicaid and “Obamacare” (the Affordable Care Act)—that provide health care to nearly half of all Americans.

Before joining Faegre Drinker Consulting, Mike held several senior positions within the Centers for Medicare and Medicaid Services (CMS), including concurrently serving as the director of the Insurance Programs Group and the acting director of the Exchange Policy and Operations Group in the Center for Consumer Information and Insurance Oversight (CCIIO). In these roles, Mike was responsible for establishing ACA policy and implementing critical ACA operations in multiple areas. While in CCIIO, Mike led a team of 125 staff and oversaw a $300 million annual operating budget. Prior to that, Mike was the Director of Medicare Advantage Operations, where he supervised the annual cycle for reviewing applications and award of Medicare Advantage contracts and led monitoring of Medicare Advantage health plans. He also oversaw CMS’s Special Needs Plans and Program for All-inclusive Care for the Elderly (PACE). Mike served as the associate regional administrator for Medicare operations (Chicago Region). Mike also led CMS’s local education and assistance initiatives, and served on the leadership team that prepared the agency for Medicare Part D.

Adam E. Block, PhD, is currently an Assistant Professor of Public Health in the Division of Health Policy and Management at the School of Health Sciences and Practice at New York Medical College. He is a health economist with deep experience in the hospital, health plan and government sectors. He has research interests in how individuals make decisions in health care markets and his research activities focus on patient selection of hospitals, patient selection of insurance plans and diffusion of innovation in the market, as well as evaluations of medical technology.

Prior to joining New York Medical College in 2017, he worked developing contracting models for value based purchasing for a major hospital system and has worked extensively performing financial analysis and evaluation of medical management programs for a large Medicaid managed care plan. Dr. Block spent several years developing the legislation on the Affordable Care Act as an Economist at the Congressional Joint Committee on Taxation and subsequently wrote regulations and regulatory impact analyse