Medical Price War Erupts Over Controversial Eye Surgery : The Competition for Radial Keratotomy Business in Phoenix Drops the Cost From $1,500 to $495
In what many doctors see as an inevitable result of growing entrepreneurial pressures on medicine, a price war has broken out here over one of the most controversial surgeries currently in use--radial keratotomy to reduce nearsightedness.
It has already provoked chuckles and raised eyebrows, as well as bringing agreement and criticism from doctors and health economists.
Something New
Competitive pressures have been building in medicine for at least a decade, and doctors for at least five years have been talking about previously taboo subjects like marketing. But the idea of a price war is something new.
And, depending on their points of view, the doctors involved here and those observing it from the sidelines say the question is whether the local situation is more reminiscent of the techniques of Earl Scheib or Henry Ford.
Auto painting magnate Scheib made a successful career of offering, through blitz advertising, cut-rate car refinishing. Ford’s refinement of the assembly line and mass production techniques between 1908 and 1914 brought down the price of autos so they became affordable for the masses, beginning a personal transportation revolution.
What has happened here is also a bit reminiscent of what used to occur among service stations competing to sell gasoline.
On Jan. 12, Dr. David Dulaney, who operates eye surgery offices in Phoenix and nearby Mesa and Sun City, started advertising he was taking the scalpel to his price for radial keratotomy, cutting from about $1,500 per eye to a flat rate of $500 each, with no additional charges. Dulaney’s advertising capitalizes on the fact that he, himself, has had the surgery.
Ten days later, the gauntlet was picked up by Drs. Lorin Swagel and James Wootton, of Mesa, who met--and beat--Dulaney’s price with ads promising no ups/no extras surgery at $495 per eye.
Reduction Made
A third surgeon, Dr. Ronald Barnet--also with a three-office chain--has reduced his price to $950 an eye and says he is watching the situation and may jump into the price war if he sees significant cuts in his radial keratotomy business.
But the situation here differs from the economics of gasoline price wars or lower-priced automobiles in one significant respect: The Phoenix price war is being fought over a procedure that, while it produces at least temporary vision improvements in about 80% of the patients who have it, is prompting growing doubts about its long-term effectiveness and risks.
First developed in the Soviet Union in 1974, radial keratotomy consists of cutting a series of incisions into the cornea--or lens of the eye--to flatten it and correct nearsightedness. Originally offered in the United States in 1979 for people--like fire and police personnel--who were required to have perfect vision without wearing glasses, radial keratotomy has spawned a lucrative, highly popular industry, with more than 200,000 patients treated already. It has become one of the most widely and hotly marketed items of medical care today.
Radial keratotomy’s advocates laud it as a safe, effective way for nearsighted patients--mostly young people--to see well enough that they no longer have to grope for their glasses just to see what time it is.
The Phoenix doctor who emphasizes that he has had the surgery himself said he wants to convince potential patients of the procedure’s safety and effectiveness.
But a national study monitoring the long-term effects and risks of the surgery last fall reported unexpectedly pessimistic results for patients two years after the surgery. And critics have begun to publish reports of complications ranging from healing of the eyeball that takes as long as four years, to serious infections, perforated corneas, cataracts, retinal detachment, blindness and at least one case in which an eye weakened by the surgery ruptured in an automobile collision.
Marked Change Alleged
For many patients, these critics say, the vision correction achieved by radial keratotomy changes markedly over time, and many people who have the operation find they still must wear glasses afterwards--even though the lens prescriptions are not as strong as before.
In the immediate instance, however, the Phoenix price war has also brought to the surface another, lingering question in medicine that has nothing to do with eye care: How do doctors put a money value on specific services they offer?
Disposable supplies used in radial keratotomy cost the doctor about $100, surgeons here agreed, and a surgeon starting to offer it must make a one-time equipment investment of about $20,000. But for an ophthalmologist who already has an office equipped with an operating microscope and staffed by skilled nurses, the direct costs of doing the operation add little to total overhead, the doctors agreed.
Similar price-value questions have been raised about a variety of plastic surgery procedures, elective sterilization and even hernia repair as well as about such operations as coronary artery bypass.
In an interview, Dulaney said he decided to slash his radial keratotomy prices after he started to compare the total amount of time he spends with a radial keratotomy patient--the surgery itself requires only about 10 minutes per eye--versus the time taken with cataract patients, who make up the largest proportion of Dulaney’s practice with about 1,500 cases a year, he said. The time computation, Dulaney said, included examinations and counseling before the surgery, the operation and care afterwards.
Outlandishly Expensive
Using as a price standard his normal fee of about $2,000 per eye for cataract surgery, Dulaney said he concluded radial keratotomy was outlandishly expensive. He said the $500 fee for radial keratotomy makes its price--on a minute-for-minute basis--roughly comparable to cataract operations.
A major difference is that most health insurance plans pay for cataract operations, but radial keratotomy is still considered either elective or experimental by insurers and benefits generally do not apply. With no insurance reimbursement, radial keratotomy becomes a highly price-sensitive commodity.
“There is a perverse philosophy,” Dulaney said as he relaxed after an afternoon of cataract and radial keratotomy surgery, “in that there are a lot of people who think if something is less expensive, it must be less good. As someone beginning to do a new procedure (when he first offered it six months ago), I didn’t want to stand out like a sore thumb and look like it was necessary to charge low prices to have patients.”
Dulaney said he originally set his radial keratotomy fee at $1,500, essentially without thinking about it, because that was the prevailing fee in the community. (The price is representative of what is charged for the procedure in most cities, including Los Angeles where radial keratotomy doctors have long been heavily involved in advertising--including television spots--but where no price war has occurred.)
After a few months, Dulaney said, he concluded radial keratotomy simply costs too much. “I just had the feeling that it seemed like an awfully expensive procedure for what we were doing. But it (the price) had been sort of arbitrarily established by somebody at some point and people tended to follow.”
Volume Jumped
Before the price cut, Dulaney said, he did about 15 radial keratotomy procedures a week--usually grouped together on Thursdays when his private operating suite schedules few cataract operations. After the price cut, the volume jumped to 25 cases a week and seems headed to at least 30. The patients are wheeled to Dulaney’s powerful operating microscope two at a time, with the doctor operating on one patient and then turning his attention to the adjoining litter.
Dulaney and his employees say many--perhaps 75%--of the patients done since early January have been attracted by the price. Dulaney said he would like to see his radial keratotomy business average 1,000 cases a year.
Many of them are like Marilyn Zale who was operated on by Dulaney two weeks ago. Her husband, Raymond, watched the procedure from an observation booth adjoining the operating room. “She really wanted it, except the price was prohibitive,” Zale said as his wife was wheeled to a recovery area. “When we saw the ad at $500, well, everybody can afford that.”
Across town, Swagel and Wootton have taken Dulaney on in the price war but not--so far, at least--in terms of volume. The two surgeons say they began offering radial keratotomy about six months ago and have done comparatively few cases. In an interview, they said they hope to boost volume to five or six patients a week.
“I don’t think the point is the money,” Swagel said. “Already, I make more than I can spend, so what’s the sense? In ophthalmology, if you’re good at what you do and you take care of people, there is no reason you have to worry about finances.”
‘Seemed Reasonable’
Swagel said he and Wootton had followed the market when they priced radial keratotomy originally at $1,500 an eye and, later, at $1,200. “We didn’t really approach it that analytically,” he said. “We had thought about doing this (cutting the price to $500 or less) four or five months ago.”
But they didn’t take action until they saw Dulaney’s ad in a local newspaper. “My decision to charge $495 was a solo decision,” Swagel said. It “seemed really reasonable.”
“My partner and I looked at one another and said, there are a lot of doctors doing this surgery in town who are really going to be mad (about this),” Swagel said. “But then we thought about it. . . .”
“We just came to the conclusion,” said Wootton, “that, based on the amount of time it takes, it was vastly overpriced.”
Barnet--widely perceived here as Dulaney’s most significant high-volume competitor--said he has performed about 200 radial keratotomy procedures. Though some doctors here expected Barnet to jump into the fray, he said he was “stunned” by what has happened and protested, “I can’t think why anyone would think I would initiate any kind of price war.”
He said he cut his price to $950 per eye several months ago because he believed radial keratotomy was overpriced and has no plans for further cuts. But if volume drops, said Barnet, circumstances could force him to reconsider to preserve his market share. “If we find out suddenly that we aren’t getting any more patients, we’ll think about” a price cut, he said.
‘More Than a Sale’
But, said Barnet, his three colleagues (Dulaney, Swagel and Wootton) may have slashed too much. “I had one friend who’s a car dealer,” Barnet said of reaction to the advertised price competition. “He said, ‘when we have a slow month, we have a sale. But that (the surgery price slashing) is more than a sale .’ ”
Dr. Alan R. Nelson, vice chairman of the American Medical Assn. board of trustees, chuckled briefly when told details of the Phoenix price war. Nelson, an internist from Salt Lake City, said what is happening here represents the first such overt price competition of which he has heard.
In a report released last year, the AMA questioned the effectiveness and safety of radial keratotomy, noting that the procedure is the latest in a series of surgical operations to come into clinical use long before long-term studies--comparable to those required before a new drug can be marketed--have established their safety and effectiveness.
Nevertheless, Nelson said, in a broader sense, the AMA believes today that free-market forces have not operated as they should in medicine and that a period of adjustment to the kinds of supply-and-demand rules that govern other areas of commerce is inevitable. “We don’t have any objection to market forces working,” Nelson said. “Some procedures have been over-inflated.
“Assuming that quality standards are being met, the marketplace ought to determine (the price). The marketplace ought to be working better than it is.”
Seen as Inevitable
In a Los Angeles interview, Nelson said he was a little surprised anyone found the Phoenix situation shocking, explaining: “I would have thought it (a price war or its equivalent) would be inevitable.”
Nelson said the AMA believes that as market forces and price-setting processes change in medicine, greater financial reward may await specialists in so-called cognitive fields--where a doctor’s major skills must be in forming a diagnosis based on complex reasoning processes--and more technical areas, like surgery, in which much of a doctor’s success depends on technique.
Harvard Medical School economist Rashi Fein, a leader of the philosophy that opposes the control of medicine by unadulterated marketplace economics, said that while he has not heard of another price war breaking out, “I would suspect that Phoenix is not alone.
“I think we’re going to see more of it for high-cost elective procedures and that has a plus side and a down side. The plus side is that a number of patients are going to be able to get various kinds of medical services at lower prices than they previously did.
“On the down side, like in most retail businesses, if you lower the price, you may be doing it in order to have a loss leader, hoping that once the customer is in the store, you’re going to sell him gourmet cheese while he’s on his way to the meat counter.”
Possible Harm to Bond
Worse, though, Fein said, the very emergence of economics as crass as an advertising price war may cheapen and change the nature of the relationship between doctors and patients, which, he said, is quite unlike the bond between a used car salesman and his customer.
“I think a lot of the relationship between physician and patient in the past was based on elements of professionalism and trust,” Fein said. “Once you get into $495 or $499, then I think what we are doing is dangerous. It’s dangerous in that physicians may begin to view themselves in a different light and they may say, ‘Why should I take care of that Medicaid person who can’t pay?’
“The (chain supermarket) doesn’t give food away to poor people because they’re a business. A lot disappears in the process (if the same relationship evolves between doctors and their customers).
“It may already be too late, but I’m happy to see physicians reducing their fees for procedures that were costly. I am suspicious that it may not save us a lot of money in the long run (because more procedures may be done unnecessarily). I am worried about these kinds of competition. We change the ethos of the relationship and that kind of thing is a very delicate business.”
The philosophical questions over the effects of price wars on the doctor-patient relationship were joined by what many eye specialists say is growing suspicion that radial keratotomy may simply not live up to its promise and--possibly worse yet--that it may prove to have serious long- and short-term complications.
In results released last October, the Prospective Evaluation of Radial Keratotomy study, a federal government-financed investigation of the effects of the surgery for up to five years after it is performed, reported unexpectedly that a quarter of radial keratotomy patients experienced major vision differences between their two eyes after they had the surgery. The PERK study, as it is called, found that repeat operations--performed because initial surgeries did not have the desired results--were even less predictable than the initial procedures.
Continued Vision Loss
A third of the 435 patients being studied, the PERK team reported, experienced continuing deterioration of vision that required use of progressively stronger glasses after the operation. Some patients who had undergone a reduction in nearsightedness reversed course and started to worsen again.
“The underlying theme,” the team reported in a statement, “is variability, variability, variability.”
Dr. Ronald Smith of USC’s Estelle Doheny Eye Foundation and one of the PERK study investigators said that after the new results were presented at an ophthalmology convention in San Francisco last fall, “the overall tone was a lot more downbeat” than in 1984, when PERK reported some generally favorable results for patients one year after surgery, versus the new findings two years after surgery released in San Francisco.
“I don’t know how much of this is getting to the public,” Smith said, “but from the standpoint of the ophthalmologists, the enthusiasm is not as high as it was.”
