Keith Smith on Free Market Health Care
Nov 18 2019

surgery.jpg Entrepreneur and Anesthesiologist Keith Smith of the Surgery Center of Oklahoma talks with host Russ Roberts about what it's like to run a surgery center that posts prices on the internet and that does not take insurance. Along the way, he discusses the distortions in the market for health care and how a real market for health care might function if government took a smaller role.

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Explore audio highlights, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.

READER COMMENTS

M Jetton
Nov 18 2019 at 8:22am

It seems there are four numbers in the 3rd and 4th paragraphs after 28:03 and more later that need to be multiplied by 1,000.

John Paschetto
Nov 19 2019 at 8:03pm

That’s correct.  Russ makes that point on the podcast, but I guess it didn’t make it into the transcript.

[Hi, John. The clarification that the following numbers were in the thousands made it into the Highlights/transcript instantly–in fact, on the Monday morning of the EconTalk release. However, sometimes saying offhandedly “this is all in thousands” is not instantly or perfectly understood on the spot.–Econlib. Ed.]

bonaparte
Nov 18 2019 at 5:23pm

The final Q&A is gold.

Q: What’s gonna happen to the poor

A: In the current system, we are all poor.

Justin
Nov 18 2019 at 7:37pm

Yeah but that doesn’t answer the question. Some people are just poor in the more literal sense.

And is the charity sufficient? Seems like an empirical question. I know that Roberts has some research on this, but charity would have to fully offset government funding. It would also require many are as kind as Keith Smith, which is certainly not a given

Hoosier
Nov 19 2019 at 9:38am

Exactly- he had no answer. That’s why these questions will never be solved. Too many people just throw their hands up. And no, we’re not all poor now. That’s a very silly statement.

There have been poor people since the beginning of time and there will always be poor people. It may be only 5% of the population but they’re still there, and I, at least, believe that we can’t ignore them. Even in a perfect market economy there’s going to be poor people- maybe they have mental illness, maybe they’re slow, maybe they’ve been abused- even if most of us can survive there will always be some who can’t. It’s completely unrealistic to think otherwise. And as a medical professional, it’s our responsibility to serve everybody. Every single person who is in need.

I’m all for private entrepreneurs like this branching into medicine- more power to them- but medicine should never exclude someone because they can’t pay. I’m sure there are places in OKC that serve the poor and needy so I’m not claiming they’re thrown to the wolves, but in the perfect libertarian system, where would they go? Charity can help, but you can’t realistically tell me it would solve the problem completely.

Finally, end of rant here, if the great majority is served well, and there’s even a small minority who isn’t, is that morally defensible? This applies to everything in life. The market is great for the majority, it’s great for most of us, but there are people who it won’t be great for and we shouldn’t forget them.

Thanks again for another great episode. I learn every time I listen, even when I don’t agree with the philosophy of the guest.

Ajit
Nov 19 2019 at 11:58am

“I’m all for private entrepreneurs like this branching into medicine- more power to them- but medicine should never exclude someone because they can’t pay.”

 

This right here perfectly encapsulates the major debate. Saying medicine should never exclude someone because they can’t pay inexorably means someone else must and I’m sorry, but we don’t live in a world of infinite resources.  I would point out – India would love to be able to pay for every person’s health care. So too would Rwanda and Laos. They cannot afford it, so they ration and inevitably, that leads to hard choices.

Right now, we live in a fairy land where we largely avoid these hard choices by shifting the burden onto the next generation. But that musical chairs ends eventually in a huge default. Right now, we are on an unsustainable path.

That I think is the biggest barrier to overhauling our stupendously messed up healthcare. No one even wants to go down a different path if the answer is…”well there will be hard choices.” People will prefer to kick the can down the road until it hits the brick wall. By that point, maybe we will all have moved to Estonia.

Seth
Nov 20 2019 at 1:13pm

He did have an answer.

That was one part of his answer to frame the idea that the structure of the current system is what drives prices up to the point where more people can’t afford it.

Then, he said market competition can bring prices down to make more care affordable to more people, leaving a much smaller group of people unable to afford it.

Since that group would be much smaller, it would be more easily addressable with charitable solutions on individual basis.

James Dunavant
Nov 23 2019 at 12:02pm

No. Charity would not have to fully offset government funding, primarily because government funding has driven up the cost of healthcare. In the free market world that Dr. Smith operates in, the price of healthcare is a fraction of cost in the government-backed crony system. You cannot just look for private charity to cover the grossly inflated cost that is a result of government intervention.

Charles Johnson
Dec 4 2019 at 10:05am

… charity would have to fully offset government funding….

Charity does not have to fully offset current government funding if the costs to be covered turn out to be much lower than current costs.

If Smith or Roberts didn’t have anything to say about how to reduce costs — especially costs for routine and non-emergency care — then that would be a pretty big evidential challenge for them to overcome in support of their position. But they do have a lot to say about how to reduce costs, especially costs for routine and non-emergency care. Maybe what they have to say about it is wrong or ill-argued, but even if so, that’s a separate question.

krishnan chittur
Nov 18 2019 at 5:32pm

This will be my choice of the BEST podcast for 2019 (even as I know there are several weeks ahead!).  The Surgery Center story is not news to me – and yet, I could not but do what Russ Roberts did at times – incredulous at the astonishing inefficiencies and poorly run healthcare system that seems to enrich a few at the expense of others.  I guess when a sector of our economy is HUGE like this they have ENORMOUS power to make sure that market forces do not dampen the rent-seekers from rent-seeking.  It was shocking to hear the games insurance companies (and employers) play – shocking to hear how much more profitable hospitals/etc became AFTER the mandates on serving anyone who shows up in the ER.  What a terrible waste of resources.  I can only imagine how much more life as we know it will be better if we indeed let market forces operate in the healthcare sector.  Do we have the will to change what we do?  Not sure if we do – but hope something changes for the better.  Thanks Dr. Keith Smith for what you and your group does – a shining example.

Mark Webb
Nov 20 2019 at 1:42am

Would it still be such a huge percentage of our economy if:

People paid 10% of the cost they’re charged today,
Without paying insurance premiums,
And therefore government didn’t $ub$idize employer-based plans,
And government didn’t pay for ‘lost revenue’ on inflated prices?

Maybe it would be like clothing, housing, or food.  Remember that ‘share of the economy’ is based on those same inflated dollar amounts.

Ajit
Nov 18 2019 at 6:10pm

I nearly choked on my water with laughter when the guest said his procedure costs 1900 and the Non-Profit’s was 19k. It’s preposterous.

 

On a more serious note, myself and probably most others listening will find themselves in the guests’ and Russ’ camp. However, I do want to raise on issue. Most of the big health care spending is chronic end of life spending with lots and lots of unhappy outcomes, where price suddenly becomes more opaque. More to the point, there is a moral outrage within our society of person A being able to afford cancer treatments and person B not being able to. Even if prices come down dramatically, there will always be some margins where a poor person cannot afford what a rich person can and this situation is an anathema that kills the private healthcare conversation before it begins.

Even if everyone can rightly say the current system is unstable and will bankrupt the country, the current system does not at this time say no to treatment regardless of ability to pay.

I don’t know if we can ever get from our current mess to the private healthcare system without addressing this issue.

David
Nov 18 2019 at 8:21pm

Very timely ‘observation’ that 1/3 of costs are due to digital data.

https://techcrunch.com/2019/11/18/the-coming-fight-over-who-controls-digital-health-data/

The best thing about the free market is that it finds a way to work even though it is disadvantaged by government, regulation, and existing monopolies.

W Banks
Nov 18 2019 at 10:03pm

‪Hospital administrator here – I set prices and negotiate discounts for a Midwest health system. A couple rough spots fact-wise (Smith had an incomplete understanding of uncompensated care), but generally on point. ‬His big secret? He doesn’t have any ‘losing’ service lines that must be subsidized with his surgery program. As one example, half of the babies delivered in my hospital each year are paid for by Medicaid, which doesn’t cover our full costs. Same with mental health/ substance abuse services. At the same time , we’re supporting school nurse programs and opioid interdiction efforts. Every hospital in the US uses the proceeds from their surgery program to subsidize a wide range of services that the community needs. Smith doesn’t have any of those issues, and so can price surgeries at a reasonable margin over costs. Could I run my hospital like Dr. Smith does? Sure, if 70% of my services weren’t rendered to Medicare or Medicaid patients; but that’s not the environment in which I operate.

Ajit
Nov 19 2019 at 11:50am

Thank you for your reply. I always appreciate when commenters in the industry provide their own perspectives and insights.

“Every hospital in the US uses the proceeds from their surgery program to subsidize a wide range of services that the community needs.” This is the problem right here. The government is trying to hide outright expenditures by forcing “businesses” to do it. It’s basically a hidden tax and subsidy that doesn’t show up on budget. Just like minimum wages. But it’s worse because this kind of system would die if there was outright competition, because people would never got a hospital that has been mandated to run inefficiently. So the government essentially had to quell the competition and thus we arrive at this monstrous system.

The real issue is the one I mentioned above. This whole mess is about how to provide healthcare for the chronic, long term illness for patients who cannot afford those treatments. Rent seekers and lobbyist drove this worthwhile goal into the crony capitalist hydra that it has become, but it doesn’t change the basic question. And on this, I don’t think there are any real solutions that will make everyone happy. Much like climate change, I’m hoping technology saves the day.

 

 

 

M Sierra
Nov 23 2019 at 9:12am

Could you elaborate a bit on Smith’s “incomplete understanding of uncompensated care”? My first reaction was: it can’t be that simple and that brazen. Does it factor in the cross-subsidies you mention? I understand there’s a wide gap between nominal prices and what insurance actually pays, but am not aware of any meaningful constraints on the nominal prices. And I’m unclear what percentage of the gap between those two numbers do hospitals typically get paid.

Aaron Bergman
Nov 18 2019 at 10:44pm

One aspect that should have been more highlighted is how much market power the surgery center has since “free market healthcare” is such a small niche. One of the reasons everything sounded so dandy is that, relative to the status quo, everyone involved is a winner. Patients save money and the doctors do well while feeling good. Take the proposal to its natural conclusion and you have firms making something more like a normal profit. Much less room for for charity or niceties in this world.

Also, the idea that the poor should rely on private charity is both unethical and likely unrealistic at scale. Why not just use vouchers or plain old cash transfers?

All that said, moving on the margin, a lot, toward a freer market would doubtlessly be good for the country as a whole.

Gregg Tavares
Nov 19 2019 at 5:56am

I’m confused on this point

Patients save money and the doctors do well while feeling good. Take the proposal to its natural conclusion and you have firms making something more like a normal profit. Much less room for for charity or niceties in this world.

If the doctor and the patient have more money don’t they have more money for charity and niceties? Or maybe you meant hospitals with less money would not have money for chartiy and niceties? But aren’t hostipals bankrupting their patients? How is that not a net minus?

SaveyourSelf
Nov 24 2019 at 11:21am

This sentence is probably false:

“The idea that the poor should rely on private charity is both unethical and likely unrealistic at scale.”

“Private charity” means “voluntary charity”. I assume that in denouncing private charity you are condoning “public charity”. “Public”, when used a synonym for government, is by and large involuntary. To think otherwise is to ignore the influence of widespread coercion on individual and aggregate decision making. And since ‘voluntary activities’—including charity—are, as a general rule, more ethical than ‘involuntary activities’, it is likely that “private charity” is the stronger ethical position most of the time.

As far as the practicality of private vs. public charity goes, I would remind you that the motivation behind the creation and maintenance of the USSR was to help the poor working man. Any assertion that the USSR–or any other coerced collective including our own–was or is capable of greater good than the individuals who make it up acting independently and freely misunderstands all of modern history as well as the history of economic thought.

Publius
Nov 18 2019 at 10:48pm

Keith Smith really handwaves over the cost shifting issue in the American healthcare system.  Regardless of what decisions an individual makes (or does not make) with respect to both health and healthcare, that individual will pay for the decisions of others, through grouped insurance rates and through government expenditure.

Shayne Cook
Nov 19 2019 at 4:17am

Ditto’s to commenters bonaparte and krishnan chittur! My thoughts exactly!

But a bit more …

This podcast was recorded on September 12th. Last Friday, November 15th, Trump announced at a news conference that he was issuing Executive Order[s] to the effect that ALL health care providers publish their prices – just like Dr. Smith’s Surgery Center of Oklahoma already does. Additionally in the EO’s, is a mandate that the “negotiated” prices between health care providers and health insurers ALSO be publicly published.

After Trump’s announcement, the “talking heads” on the business channels were nearly apoplectic – basically stating that Trump and his EO’s would immediately be challenged in court. Which I have no doubt will be the case. And it is certainly anyone’s right to use legal means to challenge EO’s. I’m not a big fan of “dictates from the top” myself, as it happens.

But here’s the thing: Whether you like Trump and what he does or don’t like Trump and what he does, you might want to ask yourself whether you like being rendered perpetually and increasing POOR by our current health care system – as noted by Dr. Smith, and also by bonaparte, myself and, I’m sure, others.

And one other thing: While a Presidential Executive Order can be and should be (always) contestable within the Judicial Branch and system, a “Not For Profit” designation is strictly an IRS granted status. And unless I’m mistaken, the IRS is under Treasury, which is in turn under the Executive Branch. The folks who’d challenge these particular Executive Orders in court, in order to keep their pricing structures “tippy top secret”, may want to consider they may well also defending their “Not For Profit” status challenges within IRS/Treasury/Executive.   Just sayin’

Dr. Roberts and Dr. Smith, thank you for this discussion!! Brilliant!!

And just one last question for Dr. Smith: I’d be very interested in your thoughts/comments on the Trump health care pricing transparency Executive Order announcement made last Friday.

Mort Dubois
Nov 20 2019 at 7:54pm

Great move by Trump.  And I loathe the man.

 

I’ve long thought that forcing the health insurers to reveal their negotiated payments would be the best way to start changing the current pricing system.

Shayne Cook
Nov 23 2019 at 3:21am

Hi Mort. We’re pretty much in agreement.

Unfortunately, I have no expectations that these EO’s will get very far – also having nothing whatsoever to do with Trump. Executive Orders are far too fragile a mechanism to achieve any real, long-lasting result. And, there are far too many private AND government agencies that have too much vested interests in making sure price transparency doesn’t happen.

Probably gonna have to count on folks like Dr. Smith, and you and I, to bring it about. THAT is a far more powerful mechanism than Executive Orders, or even statutory laws for that matter.

Marilyne Tolle
Nov 21 2019 at 8:01pm

The Economist has an article on this in this week’s edition: Tackling America’s giant hospital bill

Shayne Cook
Nov 23 2019 at 3:24am

Hi Marilyne.

Thank you for the link! But unfortunately, I no longer subscribe to <i>The Economist</i>.

Can you give me a brief outline of what the article entails and conclusions/recommendations? (Without violating their copyrights, of course.)

James Dunavant
Nov 24 2019 at 2:45pm

I am the Executive Director of the Free Market Medical Association that Dr. Smith co-founded. I certainly agree with you that these “non-profit” hospitals deserve to be scrutinized on their prices. Dr. Smith and I both applaud the President bringing this game to light. The fear we have, however, is that real transparency will be co-opted by the cronies and redefined through legislation to mean “patient’s out-of-pocket” or Congress will find a way to create exemptions for supposedly “nonshoppable” procedures. We shall see. Regardless, what President Trump is doing is heroic because it is creating more attention for the true transparency movement at facilities as Surgery Center of Oklahoma, Texas Free Market Surgery in Austin, and a growing number of others who are FMMA members.

Steve
Dec 4 2019 at 11:34am

No, Trump neither brought ‘this game to light’, nor is he ‘heroic because it is creating more attention’.  All of this has been known for decades.  Many, many people have tried to fix it and failed because the monied forces are too powerful.

Your post is a transparent plug for Trump.  You should be ashamed.

Carlos
Nov 19 2019 at 4:58am

I liked the podcast, i think Mr. Smith’s business is needed in order to push things to a more efficient system of healthcare, but I also think this interview was one sided and very  biased.

I believe this clinic has no real competition at the moment, ( not really free market, more of a oligopoly of a determined kind of services). what would happen of there were plenty more? Yes, prices would go lower but would quality remain the same? Would the incentives be the same (1st health, 2nd returns)? What happens to procedures that are not as clean or direct as surgeries (in and out), as a previous commenter said, what would happen with long term illnesses? Or rare diseases? Who would treat those that no one wishes to treat for considering them not to be profitable? What happens when you can’t rely on the owner’s charity to choose and pick if your surgery will be free of charge?

I always wish there were some numbers as to see if the services provided by a mixed market are as cheap or expensive as in a free market. Or if in a free market system it would all be so so much cheaper, efficient and high quality as an average.

The goal should be to reduce scammy insurance services and improve the efficiency of the system.

PS: Alas, I am also biased, I am Spanish. Our health care seems to be highly rated and I can afford it.

Shayne Cook
Nov 19 2019 at 7:34am

First, thanks for your comment here – it’s certainly relevant.

And I’d like to respond a bit. First to your PS at the end of your comment. I do know the Spanish health care system IS highly rated. Ours in the U.S. is certainly supposed to be. But the real relevant point in what you stated is, “… and I can afford it.” Quite unfortunately, here in the U.S., we CAN’T afford ours any more. Certainly not as it’s currently constituted. This podcast, and Dr. Smith’s discussion illustrates at least partially why we can’t afford ours.

Second, on your comment that, “… this clinic has no real competition … (not really free market…)”, is actually false. And I think I can illustrate why I say with a true, but admittedly anecdotal story – as follows:

My next door neighbor’s wife  was recently diagnosed as needing hernia surgery. Her primary care physician, surgeons, et.al, at the local hospital all confirmed that, and set up for the surgery. ALSO, this lady had “health insurance” – an “Obamacare” based policy, as it happens.

But when she went in for the pre-surgery meeting with the surgeon, doctors, etc., she and her husband were informed by a hospital administrator that her “insurance” company “declined” the procedure, and they were going to have to pay for it themselves. So, basically, my neighbors cancelled the whole thing – pretty much irked at their “insurance” provider.

So while they are calling and complaining to their “insurance” provider – which isn’t getting results – I suggested that they just “bite the bullet” and go ahead and pay for it themselves.

BUT, I had heard of another “surgery clinic” like the one Dr. Smith describes here, that publishes their prices on-line, and I suggested that clinic to my neighbor. They weren’t particularly hot on the idea of going there, but I also suggested they take THOSE surgery clinic published prices in to the local hospital, and get them to do the hernia surgery procedure for the surgery clinic’s published price. Which they did. The local hospital didn’t like having to comply with some other clinic’s published prices, but they did it anyway.

Point being, Dr. Smith’s clinic, and their “model” of pricing and delivering actual health care, is PRECISELY an example of the power of free-market competition at work. It isn’t just that his clinic is doing it. It’s that quite a few new clinics are also doing it. And increasingly, the hospitals and other health care providers which aren’t doing it are going to have to at least react to the new competitive reality.

Carlos
Nov 20 2019 at 12:01am

Thanks for your reply. I would like to clarify what I meant, although I am not entirely sure how it works in the US. I meant no real competition as in (I suppose) there aren’t many surgery only, cash only, price listed clinics… I guess without considering plastic surgery, most of the surgeries takes place at a hospital… I believe Mr. Smith’s clinic has no competition from many other similar clinics but from hospitals, which leads me to ask myself? Is it possible to have a healthcare system based on surgery clinics?
I would also like to add my amazement at how easily people wave there fees, or change prices (from $19K to $1900 as in the example, or no charge, or just the supplies…)… This just means, I guess, that all prices are massively inflated, (the clinic’s as well as it seems they can afford free surgeries) and it all comes down to the person  in charge liking your case or not… very arbitrary.

JK
Nov 19 2019 at 8:22pm

You’re worried about what might happen if there was more competition? I really hope we have this “problem.” My thought the entire time was: I wish there were 1,000 more of these places.

Carlos
Nov 20 2019 at 8:45am

No, I welcome competition, but we cannot base a feasable possible solution on this case as it is very anecdotal and unique. The results of a higher competition were nos discussed, and I believe it is relevant, as much as for the quality of the service as for surgeon’s wages.

Eric
Nov 19 2019 at 6:54am

Russ Roberts: But the employer knows that. The employer is aware of that. The employer is aware of that. The employer understands that the 20% thing is predicated on a fake number. They should know it, don’t they?

I would argue that the executives at the company DO NOT know they’re dealing with fake numbers. The HR manager who’s selecting the health insurance options probably doesn’t know that either. They get a Powerpoint deck at the annual kickoff meeting that says “our company saved $X millions last year by going with this company. They never see the math behind it, because they don’t need to. They just get the metric that Lisa in HR saved the company 20% in their employee costs, and that’s all they need to know.

Lisa and her team know that something is wrong, but they also know that everyone is in the same “marketplace” and therefore it’s all about fussing with the gingerbread and ignoring the crumbling foundation. And that’s probably normal in a short timeline business environment. Everyone is obsessed with this year’s budget, this quarter’s earnings and this week’s sales. No one is paying attention to the 5 year timeline, except that they assume they’ll be promoted or shifted to another position before then, and then it will be someone else’s problem. Or at least someone else’s Powerpoint deck.

James Dunavant
Nov 24 2019 at 2:06pm

Agree with this 100%

Doug Iliff, MD
Nov 19 2019 at 11:21am

What Russ calls “fake prices” are not just pulled out of thin air, although they are certainly not market driven.  Dr. Smith referred to corporate physicians (I’m not one of them) being paid by Relative Value Units (RVUs), and this is how they came about, and what’s wrong with them:

Once upon a time Medicare wanted to set a fee schedule which would replace the “usual and customary” fees which then dominated the marketplace.  The AMA set up a committee (the relative value system update commission, or RUC) with representatives from all the specialty societies.  It’s job was to create a comprehensive list of procedures– from primary care office visits to neurosurgical removal of gliomas– and for each one create a “fair” fee based on level of skill required, materials consumed, and time required.  The RVU for each of thousands of procedures is then multiplied by a dollar amount, and that is what Medicare pays.  The dollar amount may change with inflation, and the RVU may change with experience.

Here’s the rub.  The first total hip replacement might have taken nine hours, and the first cataract surgery 60 minutes.  The RVU was based on that experience.  Before long, however, hip replacement might take an hour, and cataract surgery 5 minutes.  But did the RVU change?  Well, you might guess at the answer if I told you that orthopedic surgeons and ophthalmologists suddenly became the best-paid physicians in the country.

An office visit for hyperlipidemia and type 2 diabetes never changes; but new procedures are always being invented, and the RVUs do not fall as fast as experience does.  That’s the main reason why American health care is dominated by procedurists, while everywhere else is dominated by generalists (with overall better results for a lot less money).

What hospitals nominally charge for their services is, in fact, pulled out of thin air.  Previous comments have addressed the reason for this, which includes the necessity of cost-shifting and assuring that no money is “left on the table” in a variety of insurance contracts.  Woe to the consumer with no insurance protection and tangible assets who will be bankrupted by the list price for their treatment.

Skip Franklin
Nov 19 2019 at 12:50pm

This was a great discussion, thanks to both Keith and Russ for putting it together. Examples of ridiculous inefficiency (intentional or not) in the current health system aren’t exactly hard to find, but it’s always interesting to hear more.

I’m a bit confused about whether the podcast was directed only at elective surgical procedures, or was supposed to apply to all types of health care. Market forces can work reasonably well for elective surgery, which seem to be most of what Dr Smith’s center does. The patient has lead time to make decisions and can afford to wait or even choose not to have the procedure. But in much of health care, this is not the case. The patient needs treatment with little or no time to shop around, or even if they have the time, do not have the means to travel or otherwise sacrifice their time/resources to choose different health care options. In those cases – which are very common with the income inequality we have in the USA – I don’t see how a free market is a viable solution.

Doug Iliff MD
Nov 19 2019 at 7:04pm

Actually, Skip, there is plenty of time to shop around for almost all surgical procedures, with a few obvious exceptions like gunshot wounds and heart attacks.  And since we just got the results of a $100M study demonstrating that emergency heart procedures did no better than medical management, that small list just got much smaller.

Thomas
Nov 23 2019 at 10:06am

I guess you are not referring to the ISCHEMIA study, which did not include patients with acute coronary syndrome. Did you have another study in mind?

Thanks.

Mark Webb
Nov 20 2019 at 1:02am

Housing, food, and clothing are all imminent needs.  If you lack one of these because of extenuating circumstances you can’t afford to wait or not get them.  Yet it is exactly this kind of extenuating circumstance that people cite for health care – even though the range health needs that fit this description aren’t a large percentage of the market overall.

Market forces plus some degree of charity seem to have largely solved these problems over time in other industries.  And it wasn’t always so.  People used to have one set of clothing, then two – one to wear while the other was getting washed.  Now they seasonal have wardrobes.

People used to worry about the weather, whether they were farmers or not.  Because famine killed lots of people.  Now overeating consistently kills.

People used to live in one-room houses.  Yet square footage keeps rising to the point where living rooms often have the square footage that whole houses used to.

Those markets all have distortions, too, but not to the extent that health care does.  It’s not obvious to me why we would make the argument that a market is incapable of reliably providing something people have an imminent need of in order to survive, since they have a long track of doing just that.  Maybe we just don’t see it anymore because they’ve become so reliable.

Indeed, medical care didn’t used to be good enough that getting it was necessarily beneficial.  It wasn’t 120 years ago they were still using leeches and emetics.  The reason health care looks like it must operate under different rules than everything else is because we screwed it up while the market was still very young.  It hasn’t had the time to mature that other markets have, and all we’ve done is get in its way.

James Dunavant
Nov 24 2019 at 3:05pm

The true “nonshoppable” items, which I would argue are minimal (10-30% of healthcare expenses) can and should be included in real market-based insurance to cover accidents and unforeseen catastrophic events. However, I should also mention that that are value-based transparent providers of these services already in the market. The Free Market Medical Association includes the Oklahoma Heart Hospital and a growing number of free market, price transparent ER hospitals.

Thomas
Nov 26 2019 at 10:10pm

One thing that was also not discussed was risk-stratification. How does the Surgery Center at OKC deal with high-risk patients? Do they increase the price? Do they turn them down altogether? Handpicking low-risk cases is a good way to create a profitable enterprise – while leaving the high-risk patients to the “loathed” hospitals to deal with.
While I agree with more transparency in healthcare, people confuse government-run “single payer” systems which ensure everyone is covered with for-profit third party insurance companies, which are only held accountable to their shareholders. An ideal solution would be a single payer system for all combined with free-market driven for-profit institutions like the one Keith Smith operates.

Skip Franklin
Nov 27 2019 at 12:18am

I see several replies basically saying “there’s not much medical care that is time-sensitive” and I don’t really care to argue that, not being an expert. Maybe I should have stated it differently to begin with, because the real issue I was trying to get at is that the patient may not be in the right frame of mind to make a rational decision. If you are having a heart attack or have been shot, obviously that qualifies for “not the right frame of mind”. But being in chronic pain, or having just received a cancer diagnosis, or having a mental illness, or being the parent of a seriously ill child…those kinds of situations will impair your decision-making ability as well.

Market systems don’t work well when the buyer’s ability to make decisions is impaired, for whatever reason. Hidden information is one way that happens, like in today’s hospital prices. Lack of resources is another, which is where the question of those unable to pay or travel far enough to find better care comes in. Or, as mentioned above, when that buyer is suffering health issues.

Greg A
Nov 19 2019 at 5:31pm

Wonderfully enlightening conversation. Thank you.

I deeply hope that Keith Smith and kindred spirits proliferate.

A decade ago, I broke my ankle and found a podiatrist who would accept cash. It was the best experience with the medical system I’ve had.

Nick Ronalds
Nov 19 2019 at 6:04pm

This was an outstanding episode. My understanding of healthcare pricing has made a quantum leap, and the confusion that besets me every time I look at a bill for health care services has finally been dispelled (and I’m in my seventh decade). Oh, and Mr. Smith deserves the Medal of Freedom.

Steve Ravet
Nov 19 2019 at 8:40pm

As another commenter noted, I was already aware of the Surgery Center of Oklahoma, yet I was still taken aback by his description of the types and levels of corruption in health care.

Russ, if want to continue with stories of free market health care I could recommend that you talk to Josh Umbehr of Atlas MD who has brought the free market to the other end of medical care, the primary care physician. For a flat monthly fee of $50/person for employee groups you get an all inclusive plan that includes house calls, office calls, procedures, everything, at no additional cost. They are also registered as a pharmacy and are able to write prescriptions at wholesale rates.

There is a free market revolution in healthcare going on, hopefully it will succeed before single payer is forced on us.

AMT
Nov 20 2019 at 1:25am

This was a good episode but I think both Keith and Russ are extremely overoptimistic about how charitable doctors and hospitals can solve the problem of providing care to the (very) poor. I mean, I don’t even trust any mechanic shop I take my car to, to not be at least trying to overcharge me if they think they can get away with it.

Just like all decent economists, I know that incentives matter, quite a lot. Lets not turn into moronic socialists that believe people will just keep working just as  hard and contribute to society without significant financial incentives. I’m not naïve enough to believe the majority of people in the health care industry are there purely because they want to help people. Everyone knows doctors make good money, so, many of the people who become doctors do so because they want to make good money! We have to face facts that the very poor really will not get much health care, no matter how much prices drop. Imagine the closest hospital to a poor neighborhood where most of the city’s drug addicts live. I doubt that hospital will feel like providing free care for all of them for very long. 

Do you honestly believe the very poor will just get their health care for free, but we aren’t even charitable enough to house the homeless? You seriously need to open your eyes to reality. Econ 101 lesson: people are more self-interested than you think!

We can choose between a Canadian type system which of course has inefficiencies through rationing and lack of pricing for users, and higher taxes, or a free market system that is likely more efficient but does not provide care at all for some fraction at the bottom. Obviously the current system is a gigantic disaster, but the real question to convince people of is: why the inefficiencies of a single payer system are not worth it, to provide care for the very poor. Or, maybe that we should have a market system and then subsidize or provide health care vouchers or something for the poor. But I know that otherwise, all of the currently homeless (and probably a few others) are going to be healthcareless (or nearly) in a free market system too.

You can’t claim markets are amazing because of how they align incentives, and then conveniently assume incentives don’t matter much at all in another completely related situation.

Ezra Brand
Nov 20 2019 at 5:26am

Another great episode. Thanks to Keith and Russ for a very informative discussion of the dark underbelly of the current US healthcare system, and the bracing power of the free market.

Russ at the end, as well as many of the commenters, focuses on the issue of poor people who can’t pay for care. Keith gives answers that his Center is flexible on an ad hoc basis, but as many commenters point out, it’s probably not scalable.

A concise, yet fairly comprehensive argument against the Surgery Center of Oklahoma’s system being a practical model for a full-fledged free-market alternative the current is system is Roman Zamishka’s, here. Zamishka ends there by saying:

“To conclude, this is not a critique of the Surgery Center of Oklahoma’s model, which I praise and admire, but a call for an honest analysis of its limitations. The broader problem that I see is that much of the health insurance market is already nationalized through Medicaid, Medicare and the VA. The reality is that it is politically impossible to reverse from this position. If we then add to this list emergency medicine, perinatal healthcare, child healthcare, genetic diseases, mental health and chronic disease management, all of which I earnestly believe have a legitimate case to be nationalized, then what are we left with for free market shopping? Surgeries and generic drugs? At that point, you might as well nationalize the rest just to simplify things and remove any regulatory asymmetries. I hate to say it, but it’s not clear to me as a conservative that single payer (or at least universal coverage + optional private supplemental insurance) isn’t the right solution.”

Keith Smith
Nov 20 2019 at 9:51am

I am overwhelmed by the response to this podcast and the thoughtfulness of the responses, both pro and con.  I’d like, with Russ’s permission, to respond to the idea that the free market provision of medical services can only apply to elective procedures/care.  At the outset, it should be noted that Dr. Marty Makary, an expert in “surprise medical billing” has determined that 70-80% of all medical care is “shoppable,” the rest provided to patients in no condition to shop.  I would argue that this does not mean that market forces have no opportunity to work, as the reputations of hospitals or physicians who financially victimize the most vulnerable would be besmirched or destroyed in a true market economy.   I’d also like to add that physician-owned, price transparent emergency room hospitals (see https://okerhospital.com/) are disrupting the ability of big box price gougers to take advantage of vulnerable patients and are increasing in number.  Thank you all, once again, for your comments, and thank you Russ, for the opportunity to appear on your fine podcast.  GKS

Ajit
Nov 20 2019 at 3:59pm

Dear Kieth,

If you happen to read this, what do you think about my contention that the biggest issue people have with the free market is what to do about long term chronic diseases where the costs would presumably be too prohibitive for a certain segment of people. What is the appropriate solution in this case?

 

I think once you go down the welfare angle route to address this, it becomes a messy marriage of moral hazard and inefficiency.

Ryan Bhandari
Nov 20 2019 at 11:41am

Great episode overall. Fascinating to hear about Dr. Smith’s business and how he manages to operate a traditional business (transparent prices, no third party payers, etc.) in a market so heavily controlled and influenced by the government. For me, it was particularly fascinating to learn about claims repricing, disproportionate share hospital payments, and a variety of other ways in which the feedback loops and incentive structures between hospitals, insurance companies, and employers have been so heavily distorted.

But as much as those points are valid and should be explored by economists and policymakers, the fundamental flaw with trying to proliferate businesses like Dr. Smith’s nationwide was aptly highlighted in the last 10 minutes by Russ, though not in the way that he thinks.

If we take for granted that citizens of a developed country should be entitled to health services when they get sick, that the health and well-being of our citizens should not be determined based on ability to pay (a concept supported by a supermajority of Americans but probably disputed by libertarians), then this model of 100% out of pocket costs being borne by the consumer will fail. Dr. Smith even highlighted why at the end of the podcast. It’s nice that he provided some surgeries for free to a few families that couldn’t afford it, but the supplies, labor, and services provided to those families were not free and ultimately those costs will have to absorbed somewhere. In his case, it’s in the form of marginally higher prices to everyone else who pays out of pocket. Now, if only 1% of total surgeries done by his practice are done pro bono, that’s no problem, and spreading those costs over the other 99% of people will work nicely, but in a society where at least half of people couldn’t afford to pay out of pocket for any of his services (this is just a guess based on the fact that nearly 60% of people live paycheck to paycheck https://www.usatoday.com/story/money/2019/08/14/paycheck-to-paycheck-most-americans-struggle-financially-survey-says/39940123/), then this system collapses. That is of course unless you believe foundations and private charities could somehow cover all of the healthcare expenses for tens of millions of people who wouldn’t be able to afford it in a system like this.

Bill Brown
Nov 20 2019 at 2:24pm

Here’s that NY Times article about the Mexico surgery plus bonus check since it wasn’t linked in the show notes.

Marilyne Tolle
Nov 20 2019 at 3:15pm

This was an excellent podcast and an illuminating discussion.

My only regret is that Russ didn’t elicit more of a clarification about the extent to which the success of Dr Smith’s operation is due to its set-up giving rise to the “right” incentives for surgeons, suppliers and customers, or to Dr Smith’s own good-hearted and just nature.

What is the role of good incentives vs good inclinations?

Sarah Crowley
Nov 20 2019 at 6:24pm

Very interesting discussion.
I have a question— I checked the surgery center of Oklahoma’s website, and there is a pricing disclaimer stating the following:
NOTE: If you are scheduled for surgery at our facility and we are filing insurance for you, the prices listed on this website do not apply to you.

But Dr Keith Smith was very clear in the discussion that he doesn’t work with insurances. Can anyone help clarify? Thank you!

Todd Schanel
Nov 20 2019 at 7:04pm

One of the most interesting comments was a marketing observation.  Paraphrasing: “when you are transparent with your prices, people trust that you know what you are doing.”

Mike Brunnquell
Nov 20 2019 at 9:17pm

My understanding of uncompensated care is that it does not include the difference between the adjusted price an insurer pays and the listed charge (i.e. those patients don’t have outstanding bills at the hospital). Uncompensated care only includes care for patients who do not have a payor, or whatever portion of a bill a patient is responsible for that isn’t paid. Is this true?

It may seem like a minor distinction (and there is certainly still gain for hospitals in jacking the listed price up) but given that uncompensated care was discussed at 2 points in the podcast, and cited as one of the main results of perverse incentives, I think is important to clarify as Mr. Smith certainly has a different understanding.

Thanks for any clarification, and as always thanks for an interesting conversation.

Victoria
Nov 21 2019 at 8:55am

There are countries which are not as rich as America, where the cost the goverment/ insurance  covers is nowhere near as much ( or nothing) , and let me tell you, the free market system for health care is brutal.

Nick R
Nov 22 2019 at 2:31pm

By “brutal” you mean brutal for the service and product providers? That is, costs are driven down? Or do you mean “brutal” for patients and care-seekers?

Russ Roberts
Nov 21 2019 at 1:53pm

Here is a follow-up on this episode including issues by a number of comments here.

Jamal Nahavandi
Nov 22 2019 at 11:31am

Excellent discussion. I learned many things that I did not know the level of detail from a practicing professional.

There is a well-established area of economics addressing products and services where the market fails to produce or produce adequately or efficiently. It is not easy or even impossible to price these products or services. There are ‘market fundamentalists’ who believe that markets will address all human needs well and any intervention will only make matters worse. The market fundamentalists argue that decisions such as marriage, having children, buying and selling human organs, and even the national defense could be left entirely to markets. Needless to say that when we refer to the market, we mean a competitive market with many buyers and sellers and not markets dominated by firms with market power that use their means to influence public policy or the consumer experience. What Dr. Smith is discussing is a form of ‘disruptor’ that challenges the prevailing industry structure. Dr. Smith is disrupting the market not only through honest pricing but also through compassion and assuming responsibility for the welfare of others. He is openly in defiance of ‘greed’ and ‘self-interest’ as two guiding principles of the market. Yet, we all know that competitors will rarely place limits on how far they are willing to go to dislodge each other to gain market share that leads to a more desirable state with market power. To wake up every day and think what needs to be done to stay competitive is good in theory but is also extremely stressful. That is why people and organizations like to eliminate competitors as quickly as possible so that they can breath easy for as long as it lasts. Whether Dr. Smith believes in transparency and honesty as a virtue or he believes it is good for business, I cannot say. It seems he is doing well by the standards he has established for himself that includes work satisfaction and happiness. I am willing to accept both mindsets as a better alternative to what we experience or observe almost every day. In discussions on the role of government I often ask whether by ‘government’ we mean the person in the city hall who issues marriage or birth certificates for a published fee or corporate executives who take a temporary leave to work in the West Wing of the White House, run for congress, or work as lobbyist? The discussion often ends with a long pause and no response.

Finally, I find it difficult to advise an indigent woman diagnosed with breast cancer to start scanning the web or knocking on the doors of churches in her neighborhood for a charity to pay for her medical care. I also believe that the U.S. healthcare sector (not a system) will not change unless it is disrupted or broadsided from the outside. For now, what Dr. Smith is doing is better than doing nothing. So many people in the medical care sector are experiencing burn out, conflicted every day or do not enjoy work satisfaction. A recipe for more neglect and medical errors.

Stu
Nov 22 2019 at 4:40pm

I love this. It is a needed disruption in healthcare. That said I have a concern I wish had been discussed. Surgery centers have similarities with Dollar stores. They both come in and skim off customers looking for a lower price on some high margin items. In the case of dollar stores that contributes to a loss of grocery stores with a wider range of foods, including produce. As up front pricing surgery centers become more widespread, how are negative impact on other healthcare such as chronic conditions and cancers to be avoided?

Mark
Nov 22 2019 at 6:08pm

Great episode! So interesting to hear Keith’s perspective on the perverse incentives at play in the current system.

I work for MDsave (apologies for the self-promotion), an online marketplace that, like the Surgery Center of Oklahoma, offers upfront, bundled pricing for those paying out-of-pocket for medical procedures. On our site, you can shop for care from over 280 hospitals in 31 states, select from over 1,570 procedures, and read verified patient reviews of their experience.

Like the Oklahoma Surgery Center, our prices are often significantly lower than typically charged since we remove the need for providers to deal with insurance and can distribute payment to all the parties involved (e.g. the facility, surgeon, anesthesiologist, etc.) within four days.

I invite you to take a look at our site at mdsave.com.

Eric Zuercher
Nov 22 2019 at 11:58pm

I’m curious about how the cost of the Surgery Center’s procedures compares to the reimbursement rates for Medicare or Medicaid.  I often hear that doctors don’t want Medicare or Medicaid patients because the reimbursement rates are too low.  Are the Surgery Center’s prices low enough that they would take those payments (if the patients paid cash)?

Patrick
Nov 23 2019 at 8:56am

Professor Roberts

Thank you I think this is one of the best of many excellent podcasts.

I am a Primary Care Physician who primarily works in wound care with hyperbaric medicine.

When I was a hospital employed primary care physician there were some patients who I would see in the morning before the clinic opened without billing for follow up care. They paid monthly payments to an insurance company for a cheap high deductible plan, which was all they could afford. Unfortunately after paying the basic insurance fee, there was not enough left to pay a co-pay.

My primary work now is doing wound care and hyperbaric medicine.  Presently most wound care centers with hyperbaric medicine is greatly inflated with charges greatly exceeding what insurance companies pay. Those without Medicare or private insurance are not offered hyperbaric medicine.

Not clinicians but insurance companies determine what is treated and when. Many conditions that would benefit with hyperbaric medicine are not treated  because of insurance. Sometimes the window of opportunity for treatment is lost because of insurance authorization delays. Requirements for a failure of standard treatment first often results in treating cases that may have responded better with standard care rather then after the standard care fails.

During my hyperbaric medicine fellowship there were some opportunities to use hyperbaric medicine as an adjunct to surgery. Some patients did much better when hyperbaric medicine was used to precondition prior to surgery, or used early and aggressively for threatened flaps or grafts.

After the initial investment for material, which is not prohibitively expensive, the actual cost of hyperbaric medicine (oxygen and compressed air) is very cheap. There is clinical evidence that there are many applications of hyperbaric medicine that may reduce the risk of complication, result in less follow up surgeries and shorter hospital stays. I read a recent article that reported less risk of cognitive decline following on pump coronary bypass surgery with 1 application of hyperbaric oxygen prior to the surgery. It seems that many would gladly pay $ 150 for a treatment before the bypass knowing that this treatment would reduce the risk of cognitive decline later in life.

Hyperbaric oxygen is viewed with suspicion by many and much of this is for good reason, but there is evidence that hyperbaric medicine can be applied as an adjunct to some surgical procedures with increased risks of complications.

Unfortunately the dominant use of hyperbaric medicine is at externally managed high volume low acuity wound care centers wound care. Medicare or private insurance is required and In most cases the supervising physicians is trained wit 40 hour course provided by the wound care management company.

Dr. Smith’s  practice seems to have a great potential for the application of hyperbaric medicine. Adding another $150 for each hyperbaric medicine procedure would not be prohibitively expensive and if applied to an investigative registry could further the knowledge of hyperbaric medicine. I don’t see much potential for furthering our knowledge of this clinical application with the current medical-insurance scheme.

 

John Wolfe
Nov 23 2019 at 2:27pm

I believe that for one time episodes – such as a repair as opposed to ongoing treatment – this model might be advisable. However, most healthcare spending is for chronic and end of life illness. These are not healthcare events that are addressed by OSC or by the direct pay primary care practices that I have researched in my Colorado town of 100,000. The direct pay primary care practices seem to not have advertised prices for anyone over 59 years old.

In effect, the OSC and others are taking the low hanging fruit and that is fine. The larger healthcare spend in this country is for other episodes of care that extend beyond the 3-hour surgery.

Mark Simoennli
Nov 24 2019 at 10:16am

EconTalk has taught me that statistics are complicated and things are not always what they appear to be on paper. This begs the question; how much of the aggregate healthcare costs routinely cited are billed costs versus cost actually paid?

Mike M
Nov 24 2019 at 6:36pm

This podcast brought up many very important issues both explicitly and implicitly.

There is an old joke that goes something like, “What do you call the guy who finished last in medical school? Doctor.” Like almost every other service, medical care has a normal distribution and you get what you pay for. The dirty lie is that somehow if everyone is made “equal” under some kind of “Medicare for All” or other nationalized scheme, we will all get better care at a lower cost. The premise is absurd on its face. People with the ability to pay will ALWAYS find better care, just like they have bigger houses and nicer cars.  If people of modest means want to have nicer “stuff,” they have to borrow or save. If this idea was applied to healthcare at the onset of adulthood, people might realize that they should save for unexpected health events just like anything else. As it is, we are collectively borrowing against the future to propagate a horribly inefficient system with a myriad of rent-seekers and fraudulent activity.

I applaud Dr. Smith for working to convert health care into a normal good where cost discovery can finally occur.

Separately, I hope the mention of this podcast on the WSJ’s “Best of the Web” column recently leads to more subscribers!

TJ Judson
Nov 25 2019 at 5:16am

Thank you, long-time listener to EconTalk, and admirer of Keith Smith & SurgCtr of OK.  One of my favorite EconTalks, for the reason cited, someone going out and proving markets can work even in healthcare (at least the 99% that isn’t literally an emergency situation).

The Original CC
Nov 25 2019 at 1:22pm

Great episode, but I wanted to point out one thing: Russ said that his friend’s insurance ended up paying 13k for the surgical procedure, but the host’s surgery center only would charge $9900.

Am I the only not surprised that a procedure in an expensive part of the East Coast cost 30% more than it does in Oklahoma?  This sounds pretty resonable, and almost looks like prices from a free market in medicine!  I would’ve expect a much bigger divergence here, and this seem to undercut the central thesis.

Michael Pettengill
Nov 28 2019 at 9:18am

The doctor sounds like the doctor who setup the HMO in NH that in 20 years or so provided almost all health care for 60% of NH residents for a fixed annual price, mostly by employers, and NH welfare. This was part of ERISA requiring employers to give employees the option of HMO.

The HMO employed doctors for primary care, outsourcing to hospitals and specialists, until as it grew it looked at the kinds of procedures Keith Smith focuses on and setup an in house surgery center which provided more convenient care to patients with lower costs to the HMO.

The HMO was run by doctors who took the same view as Dr Smith on quality, and using honest doctors, being up front with patients,  etc.

It was during the Reagan administration that changes were made favoring for-profit health care (insurance) and imputing taxes on profits for not-for-profit like Blue Cross and HMOs. These changes made in law got implemented in regulation during the 90s. The result was most of the Blues got sold to for-profit, and HMOs were forced into providers billing fee-for-service to an insurer, and both were run by MBAs with doctors forced out of running things.

There are two problems.

Delivery, which should be run by doctors. Doctors sign up for an ethical standard, plus they understand the tradeoffs.

Payment for delivery based on means. The unit cost for a large population is fixed, so the only question is how that cost is paid, or what happens when it can’t be paid.

Free market health care with no means tested price requires creative destruction of the poor: euthanasia and sale of body parts for transplant. This can be delayed until the poor show up at the ER with no means to pay. Dr Smith surely would agree to euthanize a poor person for the expected return from harvesting and selling body parts, right?

Stuart John Boyle
Dec 2 2019 at 7:42am

Excellent podcast!  Russ has been consistently critical of government in healthcare, which I agree there is plenty of reason to be critical of.  However, when he speaks of patients being indifferent to cost because “they are spending other peoples money”, this is inherent to the nature of insurance.  It’s the insurance that make people indifferent as to price.  Every time he says this it sounds to my ear that he is complaining about  insurance rather than the government.  Of course, the government is so intertwined in healthcare, it’s hard to separate.  Maybe the way insurance changes behavior would be worthy of examination.

David S
Dec 2 2019 at 2:19pm

Great podcast, some corrections.

Commercial payments do not factor in disproportionate share payments.

EMTALA law has nothing to do with tax elimination, it is the non-profit status.

DeVon Griffin, Ph.D.
Dec 2 2019 at 6:35pm

My wife is a cardiac device nurse. EMRs allow vastly more efficient diagnostics for complicated cases, particularly those with remote data transmission. My sons are ED physicians, and while they don’t like filling out EMRs, the records allow them to instantly see previous history for complicated, potentially life threatening cases. Smith has found an insulated cocoon, and while I generally enjoy Roberts challenging conventional wisdom, he does not have enough expertise in this area to ask the critical questions–particularly given his inherent point of view. Roberts should get Smith back on and let my wife and/or sons ask the questions.

Douglas Costello
Dec 4 2019 at 5:46am

Hi Russ, I have no idea if you are going to read this or not – but I’m dropping this here, hopefully it gets passed along to you.

My name is Douglas Costello and I founded a manufacturing company 6 years ago in Taunton MA.  This year I have 68 employees.  We aren’t a white collar company – we are a very blue collar company.  Because of this podcast episode I contacted a direct (non insurance) primary care physician and I will be purchasing direct (non insurance) primary care for all 68 of my employees.  I will be looking into other ways I can completely avoid or upend the traditional (dysfunctional) health care system as my company continues to grow and hopefully inject some amount of sanity into an otherwise insane health care system.

I just wanted you to know about the impact your podcast has on the real world and real people.  Everyone can hear what you are saying and I am sure that there are many others, like me, that are taking direct action.

PS
Best episode of the year.  Flat out.  Love it when you have entrepreneurs on.

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DELVE DEEPER

This week's guest:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:


AUDIO HIGHLIGHTS
TimePodcast Episode Highlights
0:33

Intro. [Recording date: September 12, 2019.]

Russ Roberts: Today is September 12, 2019, and my guest is entrepreneur and anesthesiologist, Keith Smith, the co-founder of the Surgery Center of Oklahoma in Oklahoma City. Our topic today is that center, the potential for a true market in healthcare--not the one we have now, which is distorted in so many ways. Keith, welcome to EconTalk.

Keith Smith: Thanks for having me.

00:58

Russ Roberts: I went to your website, of the Surgery Center of Oklahoma. I think some people if they come upon it, must think it is supposed to be humor, as opposed to a serious medical facility. I hope that doesn't alarm you. There is an outline of a human body. There are rollover points for your cursor of the body in all different places--shoulder, pelvis, head, neck, wrist, etc. When your cursor rolls over that, it gives you a choice of surgical procedures for those different parts of the body that are common and that you conduct at the center.

And then the incredible thing is, there's a set of prices. You promise 100% transparency, so there are no surprises. It's inclusive of the facility charge, the anesthesiology; and, you only take cash. On your website, you say you are a 'free market loving, price-displaying, state-of-the-art, AAAHC [Accreditation Association for Ambulatory Health Care] accredited, doctor owned, multi-specialty surgical center, surgical facility in central Oklahoma.'

Rather extraordinary. First let's hear how you got this idea. When did it start, and how's it going?

Keith Smith: Well, thanks again for having me. I think the idea became pretty apparent just a short time after I'd started my anesthesia practice in a large big box hospital in the early 1990s. It was becoming increasingly clear that the patients were paying a lot of money. Many of them were surprised after the procedure to find out just exactly how much money they were going to have to pay in that the hospitals, they seemed to be pulling back on the funding that was available for clinical staff and the administrative staff was ballooning. The physical plan of the hospitals where I worked, too, was also ballooning. So, the people actually taking care of patients and doing the work, interacting with patients, were paid increasingly poorly. And this all started in the early 1990s, when the government became heavy-handed with its resource base relative value scales. Very distorting.

Simultaneously, while the physicians and the nurses were being paid much less, the hospitals were raking in record profits. And so, an anesthesiologist buddy and I--we knew this was not right. It's not something we signed up for. We felt like, frankly, we were an accessory to a crime that we were aiding and abetting--really a financial homicide. Some of these patients were completely destroyed just for coming in and having what we knew was a very simple procedure that should not cost that much.

In 1997, Steve Lantier and I, both anesthesiologists, walked away. And we walked away from very successful anesthesia practices and opened the Surgery Center of Oklahoma with the idea that we would always tell patients how much their procedure was going to cost, and that we would provide only the best care. That's really how we started. Within a week of opening, our dream came true. The phone rang and a patient said she needed a breast mass removed and wanted to know how much it was going to cost. I was so happy to get this phone call, but then I realized I did not know the answer to her question. I asked if she'd mind if I put her hold; and I called the surgeon and I asked him, 'How much is your fee?' He had no idea. So, I said, 'Will you suggest a fee or I'll have to answer for you.'

By then, many doctors were already tiring of someone else telling them what they were worth and declaring their worth. So, this particular surgeon, he's a really nice guy, and he said, '$500.' And I thought that was cheap, but I said, "Okay." And, I knew this procedure, a breast biopsy, was going to take about 20 or 30 minutes. Anesthesiologists basically bill for our time, so I added in what I thought that amount of time mine was worth and what I knew the minimal operating room supplies required would cost. And then I was about to take her off hold, when I realized that--

Russ Roberts: Got to keep the lights on.

Keith Smith: that she would want to know--she was going to want to know: Is this cancer? So, I called a pathologist friend and asked him, 'How much do you want to examine this specimen?' and, of course, he didn't know. He thought about it for a little bit, and he wanted $28. So, I added all this up and took her off hold. The whole thing took five minutes. I told her $1900 is our all-in price. She said 'That's interesting. The so-called not-for-profit hospital down the street wants $19,000 and that's just for the facility.'

And, I tell that story so people know that how we come up with our prices. It happened the first week were opened. We knew we were onto something. After we crunched our numbers on our end, we realized we were profitable at that number. To this day, that's still our price. The prices on our website are the same prices we quoted over the phone in 1997 with a handful of exceptions, all of which are lower than the prices that we quoted in 1997.

So, we really did want to interact directly with patients. We wanted not just to be their medical, but their financial advocate and we thought if we owned and controlled our own facility that we certainly had that opportunity and now we take that responsibility very seriously.

7:12

Russ Roberts: I want to mention, it's important to remember that the prices that those people you talked to in setting that original price--they're not real prices in the sense that you mentioned some complicated--there's an acronym for it, I'm sure, that the government did in the early 1990s, some pricing structure. There are always new ones. Those are prices that are often made up, by definition, by the government. So, what a surgeon earns or what an anesthesiologist charges or what a facility charges, they're all kind of complicated by the fact that the price universe out there is unmoored from the usual market considerations. There are some feedback loops. The insurance companies have some incentive--not enough in my view--to keep prices down in a way that keeps customers happy because there's another set of intermediaries, the employer, usually. It's a terrible, terrible system right now. But you've cut through all those Gordian knots as best you could. You've set a set of prices given that existing universe out there of fake prices--and they're fake in many ways that we'll be talking about. But, you're serious? You haven't raised them in 22 years?

Keith Smith: Yeah. Yeah, so much for the spiraling cost of healthcare. And, I'd like to point out that some of the prices on our website may actually look higher than when we first started. And the reason for that is that the actual bundle of services that we are providing that initially maybe were not inside of the bundle of care, are.

For instance, a patient might need physical therapy after one of the procedures on our website; and when we first posted that, that wasn't included, so the patient had that expense when they left. Now, we actually bill and collect for that, for a price less than what the patient have originally paid. So, it's a little confusing, but some of prices may actually look higher, but it's actually because there are parts of the care that are now included in the bundle that originally were not.

Russ Roberts: But the part that's accruing to you--to the facility--has it changed?

Keith Smith: That is correct. Our fees have not changed at all. They were just these fees over which we had no control originally, over which we now have control. We include that in our bundled, all-in, cash-out-the-door price.

Russ Roberts: And, some of those prices are actually literally lower than they were 22 years ago?

Keith Smith: That's correct. Not only the prices that we've listed online are lower, but what the patient's paid for the care that they received outside of the Surgery Center after they were discharged is actually lower, primarily because there was such competition from vendors to get in on this and secure our business.

What's happened is, as time has gone by and we've become busier, our standing with the equipment and supply representatives that we work with has grown. And, when they decide to extend a better price to us for whatever it is that we buy to perform these surgeries, we extend that courtesy to the buyer. And that allows us to cut our prices. So, we extend that courtesy to the buyer, and that makes us more competitive in this market where there are really an astonishing number of people who really are price sensitive, who are shopping, who do care what it costs. I guess what's truly shocking is how many people complain about how much it costs, but they really don't care: it's not their money.

Russ Roberts: It's intellectually offensive to them, but it doesn't hurt them.

Keith Smith: Yes. Exactly.

Russ Roberts: You know what--

Keith Smith: Go ahead.

Russ Roberts: No, you go ahead.

Keith Smith: Well, we did this for years, just quoting prices over the phone; and the phone would ring again and someone would say, 'Well, I have a breast mass and I need a breast biopsy.' My staff would call and say, 'Well, how much do we want?' I would laugh and say, 'Aren't you writing these down?' I mean, we're going to be doing this--

Russ Roberts: Or other ones--

Keith Smith: So, there was a list that was created over time; and we'd been open about 10 years--and it was 10 years ago, about right now--when I decided to launch a website and put all the prices online. When we did that 10 years ago and posted all these prices for everyone to see, the first patients that arrived were Canadians. We all thought that was very interesting and instructive. They had coverage; they just didn't have access to the care many of them needed. They are part of a group of buyers and patients in this country and outside of this country that are price sensitive and actually do care that there's a $10- or $15- or $20,000 difference between a price at our facility and wherever it is that they live if it's available.

Russ Roberts: What proportion of your patients come from--say, from Oklahoma?

Keith Smith: About 40% of our patients are from Oklahoma. One year ago, we crossed the 50% threshold and now, week to week, consistently, 60% or more of the patients we care for are not from and don't live in the State of Oklahoma.

Russ Roberts: How many of them come from outside the United States, roughly?

Keith Smith: I would say five percent. Five percent or less on any given month come from outside. We have our first patient from Pakistan coming next month, but it's not uncommon at all to see patients from Africa, Europe, Canada, several other foreign countries.

Russ Roberts: Those early patients that came from Canada, they were coming, I assume, because they were in a hurry and you could do that surgery quickly.

Keith Smith: Well, you can define 'in a hurry.' The most common Canadian story we still see is a woman that has painful or dysfunctional uterine bleeding and needs a hysterectomy. And they're in a three year waiting line to see a gynecologist. And they're tired of receiving transfusions or just feeling downright awful. So, for $8,000--that covers surgery and anesthesia, facility, pathology and their overnight stay--they're more than happy to pay that, many of them. So, I don't know that three years is 'in a hurry.'

Russ Roberts: It's not a hurry.

Keith Smith: I would say three years is unavailable.

Russ Roberts: Yeah, that's true. Fair enough.

14:26

Russ Roberts: Let's talk about your surgeons. You haven't raised prices in 20 years. What do they get? Do they get the same they used to get? Does that surgeon get $500 for that biopsy or is it changed?

Keith Smith: No, it's changed. The surgeons make more, net, on a surgery they perform at our place than they do anywhere else and regardless who is paying them.

So, what we did is we basically took the profit component that a facility would receive and padded the surgeon's fee with a large part of what that profit margin would be. So that the Surgery Center of Oklahoma runs almost as a not-for-profit, but with just a slight marginal profit. So, we've disintermediated the system, basically, and taken the institutional profitability and minimized that to a large extent, but giving part of that to the surgeon who is actually performing the procedure. What that means is, when a patient contacts Surgery Center of Oklahoma and says, 'I need a hernia repair' or 'I need my cruciate ligament reconstruction' or whatever it is they need, when I call the surgeon and say, 'Hey, you know, this patient's looking for you, why don't you give them a call?' that patient goes to the head of the class. That is their favorite patient. That's the business they want--for a couple reasons. One is: they're paid handsomely. The other reason, though, and this is actually more important: these are the most grateful, informed people we've ever come across. These people that are paying their own bills--

Russ Roberts: Yeah. Novel.

Keith Smith: shockingly--they've done their homework. And they realize that they're traveling to a facility that's honest, and we're going to charge them $3,000 for their hernia repair; and the next best price they had might've been $18,000. So, they're grateful when they arrive. The surgeons are paid very well. They're very well informed. They've done their homework. Everybody has smiles on their faces. It's a wonderful environment.

Russ Roberts: Are those surgeons on staff or do they freelance at your facility?

Keith Smith: They are on our medical staff, but none of them are employed. They operate at multiple facilities in this area. Some--

Russ Roberts: Well, that's--

Keith Smith: at even outside--

Russ Roberts: 'But, Keith--that's horrible. They're, they're like, they're part of the gig economy. They don't have any--' Well, they have other jobs, so I shouldn't be making fun of this argument. But the point is, is that they're not on--they don't draw a salary from you.

Keith Smith: No.

Russ Roberts: They're paid in piecework, the equivalent of, like, a commission.

Keith Smith: Well, they're paid fee-for-service. I mean, if they perform a surgery, they get paid for that. End of story.

Russ Roberts: Amazing.

Keith Smith: One thing I'll say is--it doesn't happen very often because we do our homework before people travel here, but it's very--I'll say it's not rare for a patient to arrive with a diagnosis that is surgical and a diagnosis that's been attached to this patient as surgical by another surgeon or a physician. And, one of our physicians sees them and says, 'Well, actually you don't need your rotator cuff repaired. It's not even torn. You just have a bad case of bursitis.' They get an injection and pay $200 and go home. And, this has come about because the surgeons that work at our place--they're honest. And they know--we don't have a single insurance contract. So, all of the business that we receive comes through the door because people choose us. And they want to be there. They're not told by Blue Cross, United, Cigna, Aetna that 'This is in the network. This is where you must go.' Patients come to us because they want to be there; and we know our reputation's everything. We live and die by our reputation. So, there's just an accountability that goes along with that, that many times manifests by a surgeon just looking at somebody in the eye and honestly saying, 'You know, you actually don't need surgery.' That's not a terribly uncommon occurrence.

Russ Roberts: Just to be clear: You take no insurance; you take no Medicare; you take no Medicaid. And, I actually--I find this--a part of me really likes this. You don't take credit cards, really. You take cashiers' checks and cash. That's it.

Keith Smith: Well, actually we do take credit cards. I don't know if there's something on our website that says otherwise. We take Bitcoin. We had a patient--

Russ Roberts: Yeah--right now--go ahead.

Keith Smith: We had a patient pay--a guy who lived off the grid, who wanted to pay in gold coins and Bitcoin. And we've had a second patient pay in Bitcoin. Actually, he paid in a different cryptocurrency.

Russ Roberts: I think the website discourages credit cards. It says 'cashier's checks and cash are preferred,' so you might want to just--

Keith Smith: They're preferred.

Russ Roberts: You might want to check that. But my point is you take zero insurance, so it's not like you have a small staff to deal with that red tape. You have no staff to deal with that red tape.

Keith Smith: That's correct. Of course, you have to keep in mind: The insurance companies, they started this. Back in the early days when we opened, I didn't know. I actually thought it would be a good idea to have insurance contracts. But none of the insurance companies wanted to deal with us. And it took me a while to figure out: You know, they don't want to deal with us. And, over the course of the years, I think we've had two insurance contracts. But it's primarily because in our formative years the insurance companies did not want anything to do with us. So, we have decided--basically, they did us a favor and we're returning that favor now--we really don't want anything to do with them. I think if an insurance carrier contacted me and wanted to work with us at this point it would be very difficult for me to overcome my skepticism.

21:10

Russ Roberts: Well, we're going to talk in a minute about how that affects pricing in that strange, surreal Kafkaesque world of prices in a typical hospital.

I want to go back to that bursitis, rotator cuff story. So--because I think it's a really interesting example of the challenges of a market-based system. So, I tore my rotator cuff about, I don't know, about three years ago. I went to a physiatrist. He's a good friend of mine. He would never say, 'Oh, I think you need surgery.' He said, 'It's a small tear.' Now, of course, he's not doing the surgery anyway, but he might refer me to a buddy of his if I weren't his buddy and say, 'Hey, I got another one for you.' They might have a formal kickback scheme or just might be a relationship that they've established over the years. He happens to be my friend. And he's not going to tell me I need surgery when I don't. He said, 'I'm going to give you a cortisone shot, steroid shot, and it'll probably be fixed; and just give it some time.' Okay? That's what happened.

Now, if I'd gone to an orthopedic surgeon who is a crook or greedy, extra greedy, unnaturally greedy or hungry or needed to pay for his boat, he might've said, to himself, 'It's a borderline case, I'll tell him he needs surgery.' And he could show me on the MRI [Magnetic Resonance Imaging] where the tear was. I wouldn't know whether it was a small tear. I wouldn't know whether it's likely to repair itself over six months, three months, three years. And at the same time, his reputation matters a little bit in our messed up world of current healthcare. But not so much as it does in, say, lots of worlds where consumers are buying and assessing quality in a different way.

So: Why would your guy be different? So, you say, 'Our brand name matters.'

I come in to your place. I've got bursitis, but I think it's a rotator cuff because I've been misdiagnosed or lied to, and you say, 'Yeah, it's a rotator cuff.' And you make your fee and everybody goes home happy. I think I've been repaired. Why did your surgeon tell the truth? What was--what's different?

And, a related question: How many did you fire? How many did you stop using? And how would you know, in this case, that it was the wrong decision, if they went and did that surgery that shouldn't have been done?

Keith Smith: Well, the answer to Part One is that most physicians--and most surgeons--are honest. I mean, the vast majority of surgeons that don't work with me would do exactly what I said. There are some that are not honest, but I would argue that is a very small number.

I would say this: That, over the years there have been physicians that I worked with who really were honest and really were good people and everything being dynamic as it is, that things changed. For instance, in the operating room, we would notice during a knee arthroscopy that maybe there wasn't anything wrong. And, inside the knee, you can see--even an anesthesiologist, the staff--I mean, we're kind of looking at each other, where there's nothing wrong inside of this person's knee, or there's nothing wrong inside of this person's shoulder. Or a surgeon's--the number of cases they try to schedule increases dramatically. And so those are red flags. What we do at the Surgery Center of Oklahoma is kick those people out. Because, their affiliation with our facility--even their affiliation with us is damaging to our reputation. So, a person like that, they just don't stay; and we just tell them we don't think this is working out and you can't schedule cases here any more.

Russ Roberts: But who's going to know? In other words--

Keith Smith: Everyone knows. Actually everyone knows. The staff in the room. The scrub techs, the nurse, the anesthesia staff. And we've done this long enough. Scrub techs talk amongst themselves, and they go home and say, 'I'm working with this doctor who is doing all this unnecessary stuff.' I mean, so, you don't have to be a physician to know. But, once the word of someone's perhaps unethical behavior begins to make the rounds, a facility's reputation really cannot survive that. And, we even sniff that. And it's addressed. We know that, without any insurance contracts, we don't have some firehose kind of funnel kind of patient that is coming our way, whether we're any good or not or ethical or not. We have to be accountable to the preferences of the buyers. And our reputation is a huge, huge part of that.

Russ Roberts: But at the other hospitals in town--and you're not alone; you're not the only place a person in Oklahoma City, forget Oklahoma, forget the United States, but even in Oklahoma City, you're not the hospital. Do they have a problem with that, you think? Do those other hospitals, are they more likely to tolerate someone who's more aggressive like that, or unethical?

Keith Smith: I think so. They're not--they're not--you know, as honest as they're inclined to be, they're also additionally not matched up against the power and the discipline of the market. So, it is more likely to occur.

Also, the way surgeons are paid, the way physicians are paid in big hospital systems where they're employed is very strange. They're paid based on their relative value unit production. And so--

Russ Roberts: One of those fake prices I was talking about earlier.

Keith Smith: Yeah. Yeah. So, a surgeon who injects a steroid for bursitis, his RVU [Relative Value Units] production for that activity is minimal. And so--and likewise, a primary doctor who orders multiple, multiple tests, their RVU production goes way up. They can actually see fewer patients and make more money. So, I think the constraints of the market to the extent that they're absent in the other arrangements--the constraints frankly that we've embraced--I think there is a higher likelihood that you'll see over-utilization issues.

28:03

Russ Roberts: Let's talk a little bit about the pricing in those other institutions, because I've been thinking about it. Most people don't know much about it until they find themselves in that world or they have a friend or family member who has surgery. A friend of mine recently had back surgery at an academic institution, a nonprofit regular hospital, a very good one with a good reputation. The surgery--not the anesthesiology, for a particular type of back surgery--the surgery was $101,000. And it was actually-- I have to get this in for my listeners, Keith. I apologize. The surgery was $101,673.77. Seriously. Now, my listeners know that macroeconomists have a sense of humor. We know they do because they use decimal points. But it turns out hospital finance offices do too. So, according to my friend, the billed amount was over $100,000 and it had those decimal points. We're both at this; I'll just call it $100,000.

That is not--repeat--not--what the hospital collected from the insurance company. But that list price, that weird, enormous list price of $100,000--a little over 100,000--was on the form.

The surgery facility, and I think the surgeon, but not the anesthesiologist, I understand--they didn't get $100,000. They got $13,000 from the insurer. The list price was $100, the facility actually collected $13. You charge for that same surgery, I looked it up, a little under $10. So, they're 30% more than you for what they collect and they're 10 times what you charge on the list price.

My first question is why did they write down that goofy number of $100,000 on the bill, even though the insurance company only pays $13? What is that about?

Keith Smith: Well, I'll back up in time. I was at a meeting where there was some hospital people and they were very angry with me because we put our prices online and--

Russ Roberts: I bet you're really popular in Oklahoma. Among the patients. Maybe not so much among the--among the hospital administrators. I would imagine that.

Keith Smith: Well, I'm actually becoming more popular with the hospitals and I'll talk to you about that if you want to. But, this angry hospital administrator lost his cool. And normally the hospital administrators play things very close to their vest. But he asked me what percentage of my revenue at the Surgery Center of Oklahoma was uncompensated care.

Russ Roberts: Right. That's for poor people who can't afford it.

Keith Smith: Yes. And I mean, that question haunted me, because that is a very bright, very articulate person. And he does not misspeak. I thought very carefully about what he actually said. What percentage of my revenue is uncompensated care? Well--

Russ Roberts: It'd be zero--

Keith Smith: Well, when I think of uncompensated care, I think of care that I've delivered for which I receive no compensation.

Russ Roberts: That's pretty clear.

Keith Smith: But he asked me how much--what percentage of my revenue?

Russ Roberts: Yeah.

Keith Smith: So, I did some checking and indeed hospitals are paid to the extent that they claim that they were not paid. And this is a kickback--

Russ Roberts: Say that again? Say that again?

Keith Smith: You heard me right.

Russ Roberts: I couldn't understand. I didn't hear you right. Say it again.

Keith Smith: Hospitals are paid to the extent that they claim that they were not paid.

Russ Roberts: So, explain.

Keith Smith: So, a $100,000 bill, the hospital collects $13,000. They claim that they lost $87,000.

This $87,000 loss maintains the fiction of their not-for-profit status, but it also provides the basis for a kickback the federal government sends to this hospital in the form of what's called Disproportionate Share Hospital payments.

So, when you hear uncompensated care, that is the $87,000 that your friend saw written off on the difference between hospital insurance and what insurance paid.

So, the fact is, the hospital made money on that case. But they claimed that they lost $87,000.

And then that fictional loss provides the basis for a kickback from the federal government, called--it's uncompensated care or DSH, Disproportionate Share Hospital payments. So, as I thought about this, I began to realize that there's a lot of people in on this scam. Including the insurance companies. I mean, why would an insurance company agree to play along with this hospital? Well, the insurance company actually wants an inflated charge because then, for employers they work with, they can show that the savings that dealing with that particular insurance company generates is very, very large. And so--

Russ Roberts: Because they negotiate at such a great price. It was $100, but they only paid--they got you that special price of $13.

Keith Smith: That's right. Which most employers are unaware has been pre-negotiated.

Now, what the insurers actually do is ask the hospital administrators, 'Can you do a brother a favor and actually charge $200,000 for that, so that our percentage savings actually looks larger?'

Then, there's another part of this called Claims Repricing. What that means is: To the extent that an insurance company provides these huge percentage discounts, many times an employer is contractually obligated to pay a commission on the discount achieved. So, this is called Claims Repricing.

And so, imagine an insurance company that manages an employer's health plan. And they'll say, 'We have this $100,000 bill. We reduced it to $13,000. We saved you $87,000; and per the terms of our arrangement, you owe us 20% of that savings.' And so, it doesn't take a mathematician to figure out that the insurance company would actually rather have received a $200,000 bill.

And so, that's how that scam works. I call it the giant hospital bill scam--

Russ Roberts: But the employer knows that. The employer is aware of that. The employer is aware of that. The employer understands that the 20% thing is predicated on a fake number. They should know it, don't they?

Keith Smith: They're surprisingly unaware. All they seem to embrace is this idea that this insurance company saved us all this money. 'We get better discounts.'

I have a friend in Montana who's an ERISA [Employee Retirement Income Security Act] lawyer. Her name's Cori Cook and she said, 'What if she walked up to you and said I'll sell you my house for 50% off?' And the normal, rational person would ask the obvious question--

Russ Roberts: What's the base?

Keith Smith: Yeah. 50% off of what?

Russ Roberts: Yeah.

Keith Smith: But that's how this scam works. Because not enough people ask that question, '50% off of what?'

35:55

Russ Roberts: I'm a little bit skeptical of the pure scaminess of that, but there's a lot of scaminess in this business. And one of the problems, which we unfortunately don't have a lot of time to talk about, but one of the problems is that although you do have competitors in the city of Oklahoma City, other hospitals who are not charging cash, but rather taking insurance for many of their folks, they don't have a lot of competition. Because if I want to open a hospital in Oklahoma City, in some states, I don't know if it's in Oklahoma, I have to get permission from the existing hospitals that I would be needed. And strangely enough, existing hospitals often think you're not.

Keith Smith: Yeah. That's exactly right. And I--

Russ Roberts: Certificate of Need, I think it's called.

Keith Smith: Yeah. That's right. I'd be remiss if I didn't point out at the end of our last discussion that that is--hopefully, the obvious reason the insurance companies do not want to work with me, is, when I say, 'Here's how much it is' their opportunity to reprice that claim and scam off that discount is foregone.

37:10

Russ Roberts: I want to go back to uncompensated care. And let's call it something else: call it poor people. There are people who can't afford or it would be very hard for them to afford a $10,000 surgery. It's less than 13, it's less than 100, but it's still 10 or 9,900, your case for that surgery in your facility.

You don't--let me say it differently. At a hospital with an Emergency Room, if you show up in distress and you are taken into surgery and it turns out you are unemployed, homeless, no assets, no insurance, you're not over 65, you're not part of the Medicaid system--the hospital, I think, is legally obligated to do that surgery on you.

And they eat that bill. They may just send a bill out to that person. If the person doesn't have an address, it doesn't matter.

But, there are a lot of people they send bills to; they just don't pay them. And they get a bad credit rating. But they'll try to collect that money. I know that from experience, people know in the emergency room business and the hospital business that there are a lot of bills that never get paid for those folks.

And you could argue--I think what your angry buddy at that meeting was suggesting--is that you don't have to deal with that. Because you only take cash and if a poor person shows up, you send them away: They can't pay.

Keith Smith: Yeah; and before we get to feeling too sorry for the hospitals, all of the ones I know of claiming to go broke have a crane in front of them building onto their Emergency Room.

Understand, too, that this situation is not a situation that was inflicted on the hospitals. There was an arrangement, and the arrangement was a quid pro quo. It was a mutually beneficial exchange where the government had this EMTALA [Emergency Medical Treatment and Labor Act] idea--I believe it was under Reagan--that said that the hospitals have to take care of someone who comes in the Emergency Room, regardless of ability to pay. They also can't just send them down the road to another facility that's a competitor.

But the hospitals' part of this was they didn't have to pay tax.

So, ya'll--you think about your life without tax. So, the hospitals basically doubled their net profit with this move in the institutionalization of this 'you have to take care of people regardless of their ability to pay.'

Russ Roberts: Are you serious? Keith, there's too many moments in this episode so far, our conversation, where I'm thinking are you serious?

Keith Smith: Yes.

Russ Roberts: You're saying that before that requirement of treating Emergency Room patients regardless of ability to pay, that hospitals had to pay income tax, taxes on their revenue, on their profit?

Keith Smith: Yes. That was part of the arrangement. So, if you do this, then you don't pay tax. I think before people feel like the hospitals have been just terribly victimized, just imagine your own life without property tax, without paying any income tax. All of a sudden, your balance sheet looks a whole lot healthier.

Russ Roberts: But aren't they nonprofits, a lot of them? Don't they pay no taxes anyway, before?

Keith Smith: Well, some of them pay property taxes and paid all kinds of other taxes.

Russ Roberts: You mean they don't pay any taxes now?

Keith Smith: No. No, they don't pay any tax at all. So, I don't know: again, the hospitals that are complaining about this, they are buying out physician practices, they're buying out competitors. They seem to have a whole lot of money. They're not suffering. Now, what they have done is used the situation you described--the legitimate non-payer--they've used that as a propaganda tool, I would argue, to develop a justification for cost shifting where they charge us all a whole lot more to make up for all the money that they're losing. But they really need a lot of this red ink to maintain the fiction of their not-for-profit status.

41:37

Russ Roberts: We'll talk at the end, I hope, about whether your facility is a model for a wider array of healthcare provision, in particular worrying about people who are poor and what they would do in a more market-oriented world. We'll come back to that, I hope.

I want to come back to my friend's surgery. So, again, for listeners, I want to get the numbers in your head. The hospital billed $100. These are all going to be in thousands, roughly. They billed $100. They were reimbursed $13. And you charge $10. Now the $10 is actually--it's not an apples to apples with the $13 because your $10 includes anesthesiology; their $13 doesn't. There are probably some other things that are not included. That's for my friend, not me, just making it up. Bottom line is: Depending on what you use as your base, depending on how you phrase it, the main normal hospital charges 30% more than you do, in terms of what they actually collect; or you charge about--it's around $13, yeah, roughly--about 20% less. You're cheaper.

Now, there could be a lot of reasons for that. It could be your surgeons aren't as good, your results aren't as good. It could be your land is cheap. You're in Oklahoma City where--relatively low land costs; this was in a higher metropolitan area with higher rents.

But my guess is that's not the main thing. And you claim that you actually pay your surgeons a little bit more. Now, one of the disadvantages the $13 hospital has is they've got more people processing Aetna, Cigna, Blue Cross Blue Shield, Medicaid, Medicare paperwork that they got to cover. But I think it's more than that. I have a feeling there's stuff that's done all along the way that, in the case of the $13, there's nobody to say, 'Do I really need that?' It just becomes standard operating procedure.

But in your facility it's like, 'I'm not sure we need this, maybe we shouldn't do it.' So, tell me if I'm right. Tell me why you think it's 30% more and maybe in another place it's actually 100% more for a lot of procedures. And, how much of that's due to saving on insurance compliance versus all the other bells and whistles that go with that surgery procedure? Some of which are needed, of course, and you don't want to cut corners, but some of which maybe aren't.

Keith Smith: Yeah. And you're right. The waste at Surgery Center of Oklahoma is punished right off of our net profit. Waste in a big hospital system is actually encouraged, many times because hospitals are paid based on what they use. Many times surgery centers are paid for what we do. That is changing a little bit, but not very much. So, to the extent that the hospital uses a lot of supplies, that typically raises and increases the amount of revenue that they receive. So, the waste at a hospital is not necessarily something I would say that's discouraged. And, just the opposite is the case for the way most surgery centers are reimbursed. That's not universally true. I don't want to be too broad stroke, but it is still very different, the way hospitals versus surgery centers are paid by the various payers.

But, you're exactly right. There are a lot of things that we believe are wasteful. We have not found that there's really a good reason or indication for us to use electronic medical records. Those are very expensive systems. And so, we still have paper charts. I think all the excitement about the international-operability of these systems--patients can have their records will them all the time--and almost all of these dreams of what those systems can bring have gone up in smoke. I think most physicians honestly would agree that these systems actually command more of their time and make them less efficient.

Russ Roberts: I've not met--

Keith Smith: It also makes patients' records more easily stolen. Things like electronic medical records--we don't have an electronic medical records system at Surgery Center of Oklahoma. If the patient wants the records, then I put them through a scanner and put it on a thumb drive and hand it to them on their way out the door; and that costs very little. There are a lot of staff at a hospital that are necessary employees that can do nothing but fight for payments with the government and these quasi-government insurance companies. Yeah: we don't see how any of that translates to better patient care, so we just don't do any of that.

Russ Roberts: I have a lot of friends who are doctors. I have not met one who thinks that the electronic medical records are a good idea. They hate them. They hate them. Actually, it's deeply demoralizing to them because it's put a barrier between--it's like they're checking their phone all the time while their patient's telling their symptoms and their story because they're taking notes on this electronic pad. We've had a lot of guests talking about the placebo effect and the role of the human touch. The electronic medical records, I think has hurt that; it's been terrible for it. I've not met a doctor who thinks it was a great innovation or it's more efficient or anything like that. They all think it stinks. They could be wrong, of course, but they don't like it.

47:59

Russ Roberts: Let's go back to this question of the quality of the care. Let's say I need some surgery or I think I do, and either my doctor has got a long waiting list right now or Blue Shield hasn't approved the surgery yet. Or, they've disapproved it--and I'm stuck; I need to pay cash. And, I hear about you. By the way, if I go to a hospital and I've had this experience and I say, 'Well, what's it cost for,' you know, 'I don't have insurance' or 'I can't wait for the approval,' or whatever it is. They will not quote a price, often. They just say, 'Oh, we can't. We can't do that. We don't know how.' They claim it's impossible, which I find, of course, offensive, for a lot of reasons. One of them, of course, is that this is the only part of economy--the only part of my day-to-day life--that's like this. It's like, 'You're going to take it, like it, or not like it, doesn't matter: you're stuck with it. You can't do anything about it.'

But you're different. Surgery Center of Oklahoma says, 'Our doors are open. We can get you in.' I assume you have a relatively short wait list. If not, you can grab another doctor because you don't have to expand your staff. You have to find one you like. But then I'd say 'Well, you know, I'm here in Washington, D.C. area; I know a lot of fabulous surgeons, personally. I know a few. Personally. And if they are not in the area that I need surgery in, they know a buddy who they would trust and I'd rely on them. But they don't know you. Why would I ever let you open my body, cut into me, slice me up? How would I have any idea whether you're any good?

Keith Smith: I've actually asked patients that have traveled to our facility. The first question I ask is: Did you shop around? What was your next best price? Then I ask them what was the tipping point--because the first thing that happens when a patient expresses interest in coming to our facility is I connect them with one of our surgeons. By the way, there's no one at our facility that I would not let operate on me or my family. That's one of our rules. And I say: 'Here's a guy from Minnesota or Wisconsin or Alaska--we see a lot of Alaskans--and he's been told that he needs this procedure. You mind giving him a call?' So, it's during that phone conversation, I think, that the patient realizes that, number one, 'My gosh. This is the surgeon that called me'--

Russ Roberts: That's different.

Keith Smith: 'Wow, I'm actually talking to the guy and he sounds very bright. He's articulate, he's honest, he's obviously done this before. He's affiliated with this facility that has put all their infection rates online and is not afraid of the discipline the market will hand out.' But ultimately the answer I almost always get is: patients connect the dots. They realize that if we're honest about the price, then we're probably good at what we do.

The other thing that is apparent to many patients is that, if something doesn't go well, we don't make more money. And that distinguishes us from a hospital. That is a tacit understanding that there's an accountability, once again, that we've really embraced. And so, all of those things come together; and the patients understand that.

We've had some patients that actually went so far as to express the following insight and that is: that in many markets, you get what you pay for, but because healthcare is so dysfunctional and it's not a vibrant market--

Russ Roberts: It's a distorted market--

Keith Smith: that the opposite. Yeah, the opposite is actually the case. Where prices are high, there is an absence of competition. Where prices are lower, that means somebody is mixing it up and they have to compete not just on price, but on quality. If anything, the quality light is shining brighter on our facility because our prices are low. Because that's a skepticism generator. And--

Russ Roberts: But, Keith, I come in--

Keith Smith: That's the answer.

Russ Roberts: But I come into your facility: I need the rotator cuff repaired, or I need hernia repair, whatever it is, and it doesn't go well. It happens; that's part of life. Not every surgery or hernia, is my understanding, is the metric for a straightforward surgical procedure. But most of these things have gray aspects to them. So, for starters, I don't always know if it went well after I wake up; and it may not have gone well and I may know that because I was supposed to have--be pain free in my knee or whatever or shoulder--and now I'm not. How often do you have to deal with that? You say you don't make money if it doesn't work, but you've already collected the fee, I assume.

Keith Smith: Yeah. We just don't make more money if something goes wrong. So, it's very individualized. There is no guarantee on our website for a reason. And that's because we feel responsible for something not going wrong to the extent that we are responsible for something going wrong. And what I mean by that is if we perform a hernia repair on a patient and they have their instructions for what to do and not to do and then they go immediately back to work and are doing heavy lifting and they destroy their repair, that is a situation where we probably would ask the patient to at least pay for the supply costs. The surgeon, he may waive his fee. I may waive my anesthesia fee. That's very individualized.

We had a patient from Minnesota that had a ruptured disk in his back, and he came to the Surgery Center and paid the $9,900 she[?] referenced online. Went back to Minnesota, happy. All of his lower extremity sciatica pain was gone. His cat stepped out in front of him and he slipped and fell and ruptured a disk at another level. His family got him back to the Surgery Center of Oklahoma for--

Russ Roberts: It wasn't easy.

Keith Smith: an operation on this other level. The situation was just so tragic and sad and awful that the surgeon waived his fee and I waived the anesthesia fee and the Surgery Center just charged him for the cost of the supplies. So, for $1,500, he basically got his other level fixed.

Russ Roberts: That's like when you drop your ice cream cone walking out of the ice cream shop and they say, 'Oh, I'll give him another one.'

Keith Smith: Yes. Yeah.

There are two economic models, I believe, in this industry. One is how to maximize revenue? What can I get away with? And, unfortunately, that's the prevalent--the prevailing model. I blame the federal government for the creation, through various incentives, for that model.

The other model is: how do I render maximal value? And, fortunately, in the United States, that movement is growing. And so, that's our mindset with all patients, including those after surgery who have some mishap or some instance. Our focus is such that every step of the way, even if something goes wrong, the exchange remains mutually beneficial.

56:28

Russ Roberts: Well, that sounds nice. I think a lot of people think--I was in a Twitter war earlier today along these lines--'Yeah, but that's all business is.' That first proposition. 'It's just all about getting more revenue, getting more money. It's all about greed.' And, you're saying that in the nonprofit and for-profit hospital world, they don't have the incentives to do a good job. You do. But, I'm sitting here; I'm a skeptic and I love, let's say, a different kind of medical system. I don't like what you're doing. And I'm thinking, 'Oh, it's all marketing. You don't really believe that. Okay, one time, maybe--I don't even know if it's a true story--you gave a guy a cheap price on his repair of a second ruptured disk.' Why would I believe any of this? This is all just romance.

Keith Smith: Well, I mean, we've been doing this for a long time and I think our record on supporting on free markets, the discipline that comes along with them, is established. I think that there are more Facebook reviews of patient experiences at our Surgery Center that would back up my claims, than someone wants to take time to read. So, we really do believe this and we practice it, and I think if we were dishonest in some way or trying to [?maisel?] people, you know, and deceive them, one of the things we absolutely would never have done I think is put our prices on a website and make them all-inclusive. So, again: the patients who come to our facility have connected those dots. I think they equate price honesty with quality and people who know what they're doing.

Russ Roberts: Let me ask about one more example of a, say, a bad surprise. You go in and do that back surgery, and there's a small, but non-zero chance of spinal fluid leakage. And, let's say it happens. It's not a failure on the part of the surgeon. It's just a part of the practice of surgery that things that are unexpected--or an infection, which also happens in your facility, a small percentage of the time relative to the national average, but, you know, I don't know how small it is relative to "similar facilities." I have no idea. I can't evaluate that--right?--as a prospective patient. What happens in that situation though, where something doesn't come out with the happy result that one hoped for? Or worse, a tragedy? There's paralysis, there's death. These things happen in surgery, sometimes to the fault of an inept physician, but sometimes just bad luck. How do you cope with that?

Keith Smith: Well, I mean, financially how does the patient cope with that, and how do we cope with that? Again, it's very individualized. Again, to the extent that we believe we are responsible--and this is not something that is argued about: it's a conversation that we have with the patient--to the extent that we feel like we have some role in a bad outcome, then we bear that cost.

So, we did a bunion surgery two years ago on a patient that was very overweight and was a really bad diabetic and a heavy smoker. And so, we knew at the outset that she was at very high risk for infection. And the infection rates you see on our website include people with those type of co-morbidities. So, her employer has a self-funded health plan; so they pay 100% of all of their employees' bills if they come to my facility. We have 300 contracts like that with employers all over the United States, in fact in all 50 states, that will fly their employees to Oklahoma City to have their surgery. And if the employee agrees to that, the employer will pay the entire bill.

In a conversation with the HR--Human Resource--people at this employer, I told them: I said, 'Just on the front end, just so you know, I mean, this patient is at very high risk of infection. And we're going to go ahead and do this and do everything we know to do but, you know, this one is kind of a head scratcher.' So, after surgery, the patient did--they developed a wound infection. And I called the employer, and, 'So well, here's what I propose. The surgeon and anesthesia, we're going to waive our fees and I would like for you just to pay as we go along the cost of the supplies here at the Surgery Center and for taking care of this issue.' The employer said, 'You need to have more infections.' And, 'You need to have more complications.' I said, 'What? I don't understand.' He said, 'If your goal is to deliver value,' he said, 'you could not have demonstrated it more strongly than you just did.' So, again, when something happens, the response to that on our end is very individual. It's different for different patients.

If someone has something go wrong and they're really in dire straits, then we exercise our right to be charitable. And we do that. So, that--the answer is it's not a broad-stroke answer and that's why there's nothing in writing about it on our website. But we are physicians and we own and control our facility. And one of the reasons we do is so that we can be financial advocates for patients who are there. And that's what guides us.

Russ Roberts: I'm talking with Keith Smith of the Surgery Center of Oklahoma. I want to thank Plantronics for providing his headset, the Blackwire 5220.

1:02:53

Russ Roberts: I want to continue by asking about one more complication. You open up somebody; you've agreed on the price, it's on the web, it's totally transparent. But, once you get inside, you realize I think we needed to use the mesh--or whatever it is, whatever. The human body is complicated. What do you do in that situation? Do you charge them? I bring this up because a lot of people think that if you're like me and you believe in a free market for healthcare and I suspect you do too, Keith, that 'Oh well, people--they'd be bleeding and they'd be taken advantage of.' So, here's the perfect case. You're under the knife. How do you deal with that? You wake the patient up, take them off the anesthesia and say, 'Hey, want to go for the higher quality one? We think you need it?' How's that work?

Keith Smith: Early on, we had a situation very much like what you've described, and the surgeon, who was new to our facility and operations said, 'Well, at this point, I guess, Keith, you'll go out and visit with the family about getting more money.' I said, 'No, at this point, you and I will discuss the extent to which your surgeon's fee will be reduced for your failure to correctly diagnose the situation that we're actually in.' There is no way I would ever go back to the patient and ask for more money--the ultimate bait-and-switch.

The problem you've described is the manifestation of the inexperience or the mistake of, otherwise, a good diagnostician. We've been known to reduce the surgeon's fee to the extent that buying extra supplies like that are needed, the use of which should have been anticipated by them. Also, I have complete control over to whom these referrals are sent. If a surgeon illustrates a history and a pattern of mistakes like this, then they just receive no more referrals.

1:05:11

Russ Roberts: You talked about employers flying patients to see you. Recently a story the New York Times, where an employer flew a patient to Mexico--which would not be that exciting usually. A patient might like to go to Cancun--it's in Cancun. A patient might like to go to Cancun, but not for knee surgery. But they were reassured, it's an American facility in Mexico with an American doctor flown in from Wisconsin who was trained at the Mayo Clinic. 'Oh, and by the way if you'll do this for us and fly to Mexico to have your surgery there instead of under the American system of the not-for-profit hospital nearby, we will pay you a check. We will give you money. We're not going to make you meet your deductible. We're not going to make you pay anything out-of-pocket: we're going to give you money: $5,000.' There's that much of a distortion and, again, Kafkaesque confusion about what a price is in our current so-called market.

And, for me, nothing illustrates how dysfunctional our current medical care system is than that. I'd like your reaction to that; and I see you as a--you're just a slightly different version of that. I don't pay $5,000: you pay zero to go there, for that employer. They're just still a better deal than what they have around the corner. But the point is, for this Mexican example, there's so much of a gap between the so-called price and the true cost, that it's worth it to pay the patient to leave the country and get the surgery done elsewhere.

Keith Smith: Yeah. And you'll see more and more self-funded health plans do exactly that. An ERISA [Employee Retirement Income Security Act] lawyer, a good friend of mine, Adam Russo at the Phia Group in Boston, he pays his employees to travel to a venue and pays all of the medical costs. He also pays them a percentage of the fraud that they can detect on their hospital bill. So--

Russ Roberts: Oh. They get a commission?

Keith Smith: Yes.

Russ Roberts: They get a--

Keith Smith: You should interview Adam Russo at The Phia Group. He's a lot of fun.

Russ Roberts: Explain what ERISA is, by the way.

Keith Smith: Well, ERISA is a federal law that governs, among other things, health plans that the employers decide to implement basically and operate themselves. Employers of varying sizes, usually 50 or more employees, although not always, they decide they don't want to pay Blue Cross. They would rather assume the risk themselves. So, these self-funded or self-insured companies, they actually pay for their employees' medical care. Sometimes they'll have a safety net, kind of catastrophic--

Russ Roberts: Catastrophic. Yeah--

Keith Smith: stop-loss policy underneath it. Sometimes they don't. But ERISA is the federal laws that lord over and govern that arrangement.

Russ Roberts: Okay. I'm sorry. I interrupted another one of your serious moments in this episode. So, these folks pay their employees a share. They give them a finder's fee for finding fraud in the bill--like, they gave them orange juice that they didn't get? What are we talking about here?

Keith Smith: Yeah. I mean, who knows better than the patient when they look at the bill? 'Well, I never got that. I never got that.'

Russ Roberts: Does that happen?

Keith Smith: They start--

Russ Roberts: Oh, yeah.

Keith Smith: They start red-lining their hospital bill and 'Well, this never happened. This person never came by to see me. And, this never happened.' Adam Russo, he'll pay them on the commission on the extent in which that fraud is uncovered.

So, the ability and the willingness of self-funded health plans and the employers who provide those to really mix it up with big hospital systems is--that is a very vibrant movement, too. I believe that's the engine that ultimately will move the United States more toward a market system. The buyer that the self-funded health plans represents is more gigantic than most people know. Eighty percent of all of the medical bills paid in the United States, other than the ones government pays, are paid by this self-funded industry.

Russ Roberts: Bring it on. A little more skin in the game.

Keith Smith: Yeah. And you can imagine: the self-funded industry loves what the Surgery Center of Oklahoma is doing. And, the Surgery Center of Oklahoma is just one facility. A list of who is getting into this game is found at the Free Market Medical Association's website where there are prices for everyone who is a member posted. So, the self-funded industry is really grabbing on to this price-transparent, non-price-gouging movement. And so, your comment earlier that a hospital will not give you a price if you ask--increasingly, they will. Because this is very creepy to--

Russ Roberts: Market pressure on them.

Keith Smith: Yeah. It's very creepy to them. There are a large number of patients that will actually print out a price list, mine or somebody else's, and they'll bring it to the hospital or to their surgeon and say, 'You guys need to match this or I'm flying to Oklahoma City.'

The power that the Certificate of Need you referenced earlier that prevents new facilities from emerging in this marketplace, that power is beginning to fade. Because, a fair price--a known, guaranteed fair price--is a plane ride away for everybody in this country. And so, the ability to prevent a new facility from popping up in North Carolina or New York or New Jersey--three of the worst states in the country--and the ability to keep a facility like that from appearing on the marketplace, it's just not as powerful when someone can fly to Charlottesville, Virginia or Oklahoma City or Austin, Texas or Houston or Torrance, California or Las Vegas or any number of places where these facilities like mine exist.

1:12:02

Russ Roberts: So, one thought you might have as a listener, or might have generally, is that, 'Well, this is such a great idea--why isn't it more common?' You just listed a handful of places. It's a handful--10, 8, 15. I looked at the website. There may be 20-ish places you can get transparent pricing like you do. You're part of a movement. It's a small movement. Why isn't it bigger?

Keith Smith: It's small because it's relatively new. We also have--there's a lot of inertia because the industry is so dominated by the government and the cronies. The government is--and the legislators--they don't want to jeopardize the support of their friends in the medical industrial complex. So, there's just a lot of inertia. What's astonishing to me is not how small this movement is. What's astonishing to me is how quickly it's growing in spite of all the obstacles.

And I mentioned earlier, I actually have some friends in the hospital world, as shocking as that may sound because a truly honest hospital administrator knows that what's going on is not sustainable. And so, they want to understand; and they actually want to participate in this free-market movement if they can. And so, I work with several hospitals who are in the shadows. So, they are participating in this, but they're kind of behind the scenes, because they're afraid that some insurance carrier is going to be angry with them for actually quoting patients guaranteed bundled fees. So, I actually help run a payment clearing house that helps sort of shield these hospitals from anyone knowing really who they are or how much these prices are that they're quoting.

So, the movement is actually much larger than it appears because there are people who are in the shadows who just kind of have their toe in the water, very afraid of what the big insurance carriers might do in response to their joining this movement. But, there's a tipping point and it's coming. I think it will come very quickly. I think, as Murray Rothbard said: These revolutions, they don't really emerge over time. They just kind of suddenly happen. And I think that's what we're going to see in this industry.

1:14:44

Russ Roberts: You mentioned the insurance companies negatively a few times, sort of pointing out they also have many, many barriers to competition that make life easier for them. It's very hard to operate across state lines. A lot of Band-Aids that set a lot of services in stone and make it hard for competitive opportunities to distinguish themselves. It's kind of a--it's not a good system. I'm going to make a little speech now, Keith, I apologize. But I want to say something to my listeners and it's from the heart. It's going to actually end with a question, though, but sit still for a sec here.

Because, you may have noticed that while I've been talking--and, Keith, I don't know if--you're not a regular listener. You don't know how my tone is. This is a somewhat typical episode. But there have been a couple of moments where I got a little more intense than usual. And I was sitting here thinking while you're talking, 'Why is that?' Part of it's: you're on my team; you like free markets, you don't like government so much, you like competition.

But I realized there's something deeper going on. And that is: all my life, I've talked about the power of markets and feedback loops and the incentives that markets produce through emergent phenomena, not through dictates or legislation. And when you take that view, you get chastised a lot. Lately, the latest thing I get chastised for, you heard on some recent guests, you're going to hear it on some others coming forward, 'Oh, you're just so dogmatic. You're just such a fundamentalist. You just think markets solve everything. You don't realize healthcare is different.' And then they'll say, 'Well, look at the healthcare market in America. Look how horrible it is. It's expensive.'

So, my side takes a beating on this issue.

And here you come along, and you say, 'Actually, you know, I'm not going to theorize about the ability of markets to solve problems, or private choice, or the ability of people to figure out what they need. I'm going to actually do it.' And so, I find it exhilarating. You've heard some skepticism from me. You might be a little bit overenthusiastic: it is your business. We all understand that. But, I think an open-minded person would have to say, 'Wow, this is interesting, this is different.'

And the fact that your competitors are providing a service that's often zero out-of-pocket--seem that's your real competition, is the current structure of price. It's kind of like saying, 'Can a private school exist?' 'Oh, of course not. Everybody gets their schooling for free. Who would pay for it?' So, a lot of people--not everybody, but a lot of people out in America today--get their healthcare with very little out-of-pocket. It's subsidized through the tax system, through their employer-provided healthcare. It's paid for by Medicaid. It's paid for by Medicare. It's a incredibly distorted system. And yet, in that system, you've been able to provide a service with real money. Where people had to put their own skin in the game--your surgeons, your savings, and your patients' lives. And it works pretty well, maybe it works great. I'm open to that possibility. I'm actually optimistic about that. I lean that way. I have confirmation bias that way.

But that's why I realized, in this course of this conversation, I got a little heated in enthusiasm for what you do, and in frustration at the way the rest of the system works. Because, I keep getting told all my life that we need to get away from markets and have single payer, and we need all these other solutions, and we need to have government do it. And, look how efficient and wonderful it is in Canada and the United Kingdom. You suggest that actually we need more markets, more choice, more skin in the game.

So, thank you for that.

And now, a question. The question is, is that--in my world you would be the common way that this world worked. And then the question would be: For people who can't afford it, a group we touched on earlier, who can't afford $10,000, can't afford the $3,000 hernia. Maybe they're homeless. Maybe they're just really poor. Maybe they are a single mom and that single mom is paying tuition at the private school that I'm in favor of because there's no government schools any more. So, how's that mom going to pay for her biopsy or her kid's surgery when it's $10,000? And, my answer has always been, 'Well, I think they'll be foundations that'll help fund that.' But I'm curious what you'd say, and: Do you have a vision that the rest of healthcare could move more into your direction and away from the direction that everyone else seems to be leaning? And thank you for your patience. I mean that in both senses of the word, patients and patience. Sorry about that. Bad joke.

Keith Smith: Yeah. The 'what about the poor?'-question is a very frequent question. And I always caution people not to consider the poor in the aggregate. They are individuals; and I believe that individuals that do not have the means to secure care that they want or need should be treated as individuals--partly because, to consider them in the aggregate is to beg for a centralized solution that will fail them and ultimately will just ration to them.

So, one way to think about this is that, at current prices, we're all poor. And the only way to bring--the only way to bring prices down without sacrificing quality in every other industry and market that is known to man is market competition.

So, we believe that as market competition is not thwarted but actually encouraged, or not hamstrung by the players in the industry now, and as there's more market competition, prices will fall so dramatically that the number of individuals for whom a partial or complete lack of funds is an issue, it dwindles--it becomes very, very small.

For that group of patients, we believe the answer is to be charitable. We know that our ability to be charitable is strengthened because we've disintermediated our system. We could care less whether the Surgery Center of Oklahoma as an institution makes a profit on an individual that you and I would both agree and characterize as poor. And as physicians, we're happy to waive our fees when that individual comes along. And I'm here to tell you: the cost of the supplies is just not that high. And we've seen GoFundMe efforts to cover that. We had a patient--we had a family drive over from South Carolina to have their child's tonsils taken out with the proceeds of the church bake sale. And when we learned that that was the story, we just gave them all their money back, and said, 'No, no; we're not--' you know, 'We'll do our part.'

I think that the first way to address the problem of the poor is to just have a whole lot fewer of them by making sure prices are mashed down. And then, the issue of the poor is very much more manageable. I believe that it's a local and and individual solution that--it's individual, per patient. Because otherwise you court the disaster of a national centralized solution that will do anything but deliver quality and care to those people.

Russ Roberts: My guest today has been Keith Smith. He is the co-founder of the Surgery Center of Oklahoma. Keith, thanks for being part of EconTalk.

Keith Smith: My pleasure. Thanks for having me.


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