Why Aren’t Prices Transparent in Healthcare?

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I had a friend ask me that (the title of the post) a few days ago. He prefaced the question by saying he’s asked a few different people and knows already that there isn’t a simple answer to it. But those other people he asked misled him. The answer actually is quite simple. And why nobody is explaining this clearly, despite all the talk about price transparency in healthcare these days, is a symptom of a general lack of understanding of how industries actually function.

Prices are transparent in healthcare–the insurer knows exactly how much they’ll pay each healthcare provider for every service they cover. The problem isn’t transparency. The problem is that the party making the decision on where to seek care is not the same party that bears the financial consequence of that decision. Who chooses where to seek care? The patient. Who bears the financial consequence of that decision? The insurer. Therein lies the rub.

Think about two different scenarios. In the first, the patient will have both responsibilities. Patients would start to actually consider whether the extra $5,000 they would have to pay to go to Provider B for their cholecystectomy would be worth it as opposed to just going to Provider A. Is Provider B’s quality actually that much better to make it worth the extra $5,000? If not, patients will probably choose Provider A. And what happens when patients all start being unwilling to pay unjustifiably high prices? Provider B will either have to lower prices (goodbye crazy price variations!) or continue to deal with a large number of unused operating room hours. Patients win because they get better value, and high-value providers win because they get patients. In this situation, the decreased expenditures on healthcare are taken from the low-value providers. Who would argue against that? In this case, even the “I’m better than the average physician” belief that 100% of physicians have (statistically impossible as it may be) will help to decrease healthcare expenditures.

This pairing of both responsibilities in patients is actually happening, by the way. Why do you think insurers are trying out reference pricing, where they just commit to put a set dollar amount toward a given procedure and have the patient cover the difference if they choose a provider who charges more than that? And what about tiered plans, where patients choosing to go to the more expensive hospitals (the ones in the higher tiers of the insurance plans) have to pay a larger copay? And what about high-deductible plans for services below the deductible? These are all doing the exact same thing but in different ways: making the person who chooses where to get care the same person who bears the financial consequences of the decision. And providers with higher value are being rewarded with increased market share (volume).

In the second scenario, the insurer will have both of those responsibilities. It’ll still bear the financial consequences, of course, but now it’ll also be the one that tells patients exactly where to go for care. Patients wouldn’t like this, of course, but what would happen? Insurers would send every patient to the cheapest provider that meets minimum quality standards. Unlikely to ever happen? For run-of-the-mill procedures, probably it won’t ever happen. But for incredibly expensive one-time procedures, it already has. I heard a story about an insurer that did this with liver transplants (which, all told, is estimated to cost over $500,000 dollars). The insurer asked around to all the reputable local hospitals and got the cheapest bid for each patient. Then they sent each patient to the lowest-bidding hospital. The insurer saved a bundle. And the hospitals that could offer lower prices (possibly because they had lower costs somehow) were rewarded with volume. Ah, that whole reward value with volume thing again. It’s beautiful.

One final real-world example. ACOs. So far, one major way they’ve saved money is by sending patients to cheaper specialists. Let’s apply the principles we’ve just talked about to understand what’s going on. The referring provider is generally the party charged with making the decision of where the patient will go for a specialist visit. (The doctor says, “You need a specialist to look at this. Here’s the phone number for a good doctor, so go see her.” The patient says, “Okay, Doc, whatever you say. I’ll go see her.”). And when the referring provider is getting a bonus for keeping overall costs down, he now also bears the financial consequence of sending patients to expensive specialists because it’ll cost him his bonus. Now that you understand the principle of those two responsibilities needing to be invested in the same party, the world starts to make sense; you start to actually be able to predict whether something will work or not.

So now when you hear people complaining about our “horrendously evil system of third-party payment,” you’ll know that it’s not intrinsically a bad thing. It’s only bad when it results in a separation of those two responsibilities, the decision-of-where-to-seek-care responsibility and the financial responsibility.

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4 thoughts on “Why Aren’t Prices Transparent in Healthcare?

  1. Totally agree with you. Somewhat in line with the whole alignment of incentives concept: if people are more involved with futting the bill, they’ll be incentivized adjust their behavior so they pay less!

    WSJ just today had an article on how two big employers are basically putting health plan spending decisions into the hands of their employees. I think that’s a step in this direction. Hope the URL works. Should be viewable for 7 days.

    WSJ.com – Big Firms Overhaul Health Coverage: http://online.wsj.com/article_email/SB10000872396390444549204578020640220260374-lMyQjAxMTAyMDIwNzAyODc3Wj.html?mod=wsj_valetleft_email

    • The article you mention compares this new concept to the introduction of the 401(k). I think it’s an apt description because the 401(k) was sold as a better retirement opportunity for employees but turned out, instead, to shift the return risk to the employee without the higher return benefit. Also, it led to companies funding less and less of their employees retirement costs. As it turns out, most people are not well equipped to manage their own investments as the past several years have not been kind to their retirement plans. It did, however, help businesses reduce their retirement costs more effectively. The result is that whatever overall cost benefits that were realized by adopting a 401(k) were captured by management and owners and not by employees.

      My concern is that this “new” concept for health insurance for employees is another attempt to pass on expense risk to employees from owners. Just like the idea that people could manage their own retirement plan better themselves (the returns suggest that was a bad assumption), it’s a stretch to think that just by making prices more transparent, they will have the ability to make rational and correct judgements about healthcare. In my view, the better question is why we should rely on employer provided health insurance in the first place because they have some incentives that are not aligned with their employees.

      At one point the Bush administration pushed the idea of privatizing Social Security (which, in hindsight, would have been completely disastrous), I fear that forcing more healthcare decisions onto consumers assuming that they can make informed, rational choices based on price signals is wrong. The idea that there are private sector solutions to all that ails us is an idea that rentseekers continually try to foist on us.

      • Hey, I am sorry for such a late reply here. I don’t get a notification when someone writes a comment or responds to a comment thread I’m in. I’ll check that email comment box below this time. Anyways…

        You make a great point. I see what you’re saying. The 401K concept and the social security point are good examples. I disagree with some points that you’ve made. Bear in mind: this is a complicated issue with many moving parts, inputs, and variables. But let me address two issues.

        First: “it’s a stretch to think that just by making prices more transparent, [people] will have the ability to make rational and correct judgements about healthcare.” This is a multifactorial issue. I think that it relies on a number of policy-directed forces (health literacy, community health education and awareness, etc.). But, I think that, on the whole, if people are properly educated and given the opportunity to choose prices in a competitive environment, they will do so. Especially if they’re held more accountable for their health/lifestyle choices (see next paragraph).

        Second: 401k reference. Yes, I see what you’re saying there. The article briefly references some of the potential downsides to these types of plans (for instance, that the company benefits don’t end up keeping pace with premium increases, thus exposing employees to the risk for premium inflation). I don’t entirely agree with you on the 401k logic, but that’s a separate, ideological difference. Regardless, you make a good point and I respect your opinion on it. For this discussion let’s assume that your argument is correct. It’s not necessarily bad if premium increases (which partially reflect an employee’s health/lifestyle choices) are carried to some extent by employees. By placing more of this burden on employees, the employees become more accountable for their health expenses. This is how it should be. For instance, if you’re a smoker and you’re not quitting, your premiums are going go to up as your health deteriorates. So, you should pay more. Your company shouldn’t pay more in this circumstance: you (not you, Doug, but the hypothetical smoker!) should pay more. So yes, some of the expense risk should be carried by employees.

  2. Very well-written and argued.

    I agree that those purchasing the product need to be privy to prices (and need to bear some share of the cost) for the market to function as it should.

    As a doctor, I find it extremely frustrating that, even if I wanted to provide cost-conscious care, it is very-near-impossible because the pricing structure is so opaque. I’m heartened to hear that some of this is being fixed.

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