Price Transparency

Bioethics-in-the-News-logoThis post is a part of our Bioethics in the News series. For more information, click here.

By Michael R.Wassenaar, Ph.D.

Price transparency in healthcare is getting a lot of attention at the moment. In February 2013, Time magazine published a lengthy article titled, “Bitter Pill: Why Medical Bills Are Killing Us,” (Brill 2013) detailing the extraordinary prices charged to a group of seven patients and the apparent illogic and inconsistency behind their bills. How can a hospital get away with charging $77 for a box of sterile gauze pads? How is it possible that a three-hour workup for chest pain (that turned out to be heartburn) can result in a $21,000 bill?

Soon after, and partly in response to media coverage of “Bitter Pill,” Health and Human Services Secretary Kathleen Sebelius released a data file containing the chargemaster, or “sticker prices” for the 100 most common inpatient diagnostic related groups (DRGs) for every hospital across the country. The Center for Medicare & Medicaid Services data revealed wide price disparities for the same procedure, even among hospitals within the same geographic area. One of many examples that surfaced as reporters began combing the data included one hospital in Miami that charged $127,000 to implant a permanent pacemaker, while another charged $66,000. The disparity itself is remarkable, but especially given that the two hospitals are literally across the street from each other! (Kliff & Keating 2013; Young et al. 2013).

By most accounts, the increased attention to price transparency is a positive step. Certain patients will benefit directly from access to price information. For patients contemplating an elective surgical procedure, for example, reliable price and quality information allows them to comparison shop between providers and choose the one that represents a superior value. The savings can be substantial. In a recent study, Rosenthal and colleagues (2013) contacted 122 hospitals nationwide and, pretending to speak on behalf of a 62-year-old grandmother, sought to obtain the total cost for a hip replacement. Although not all hospitals provided prices, among those that did, the price varied between $11,100 and $125,798. Admittedly, fewer patients will be required to pay full price for procedures as the Affordable Care Act rolls out and the number of uninsured (or “self pay”) patients declines. But insured patients with high deductibles or co-payments could also realize savings.

While certainly beneficial for some individuals, the driving force behind price transparency is the idea that enabling patients to act as consumers—making price-conscious health care decisions—will create market pressures and drive down the costs of health care for everyone. The notion of health care as a genuine marketplace is relatively untested, since price transparency has not existed up to this point. But there are anecdotal stories of success. For instance, the New York Times recently profiled a surgery center in Oklahoma City that posts all-inclusive pricing information on its website, allowing patients to know beforehand what they’d be charged and to shop around. The clinic’s co-founder reports having an effect on geographically distant patients, who are using his prices to leverage better deals in their own local markets (Rosenberg 2013). If the experiment works, the cumulative benefit of price-conscious consumer behavior could be considerable. A white paper by Truven Health Analytics (2012) estimates that if the 108 million patients currently under 65 with employer-sponsored insurance paid the median price on 300 common “shoppable” procedures, it would save the healthcare system $36 billion.

Price transparency seems like a “win-win,” but a few qualifications are in order. First, price information needs to be accompanied by other important data, like quality, safety, and patient satisfaction scores. Price transparency on its own simply creates a race to the bottom. Not knowing what is otherwise equal or unequal, patients will tend simply to choose the lowest price, instead of making a multifactorial, value-based decision (Ginsburg 2007). Second, price-conscious behavior has limits, since not all procedures lend themselves to comparison shopping. A hip replacement is different than an appendectomy or open heart surgery, which, because of urgency or complexity, make comparison shopping impractical.

Somewhat more problematic is the prospect that price transparency might lead some patients to make bad health decisions, in an effort to be frugal. A study by the Rand Corporation (2011) of high-deductible health plans showed that those patients do spend less on health care, but also avoid preventive care. However, this isn’t as much a problem with price transparency in and of itself, as it is with the idea that patients must have “skin in the game,” i.e., face the prospect of losing money, in order to motivate price-conscious behavior. This is the logic behind higher deductibles and co-insurance: if patients need to pay a portion of their medical bills themselves, it will motivate them to make more price-conscious decisions. Yet that decision might also include forgoing treatment that a patient perceives to be less valuable, such as preventive care, follow-up care, or chronic disease management. While understandable, this sort of price-conscious behavior isn’t fully rational and may end up losing the health care system money in the end.

Most problematic is the fact that price transparency, when coupled with consumer cost-sharing, shifts the burdens of cost control (for everyone) to those who are afflicted by illness and unable to afford a better insurance plan. In other words, it provides a benefit to the many by imposing a burden on the few. With an estimated 60% of personal bankruptcies in the US related to catastrophic medical bills, is that really the best, and fairest, way to bring down the cost of health care?

Assuming the goal is to motivate price-conscious behavior, why not reward patients for making value-based decisions, rather than penalize them (or, more precisely, give patients an opportunity to lessen their penalty)? Under the cost-sharing approach, price transparency gives a patient, e.g., with an 80/20 co-insurance policy, an opportunity to pay less out-of-pocket by choosing a lower cost provider. But the patient must still pay for needed medical treatment, which imposes a financial burden on the patient and creates counter-incentives that may lead to treatment avoidance. Under a reward, or benefit-sharing approach, price transparency gives patients an opportunity to gain from choosing the lower-cost/higher value provider identified by their insurance company. For instance, they might receive a $50 gift card or accumulate “points” that can be reimbursed for gifts or put toward a reduction in one’s premiums. This tactic is fully compatible with patients paying nothing for their individual medical treatments. It would motivate cost-conscious behavior and create market pressure, without imposing additional burdens on the sick.

What are your thoughts?

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Wassenar-photoMichael R.Wassenaar, Ph.D., is a Clinical Ethicist, and an associate in the Center for Ethics and Humanities in the Life Sciences at Michigan State University. He serves as a Clinical Instructor for the MSU College of Human Medicine in Grand Rapids.

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2 Responses to Price Transparency

  1. Stephen Jefferson, M.D. says:

    “Toss it out and start over? Yes, because it’s based on a false premise. Our health care system is based on the premise that health care is a commodity like VCRs or computers and that it should be distributed according to the ability to pay in the same way that consumer goods are. That’s not what health care should be. Health care is a need; it’s not a commodity, and it should be distributed according to need.” That is Marcia Angell describing fee-for-service health care. I think it is unrealistic to expect patients to “shop around” for the best “deal” they can find. Patients expect that their physicians refer them for tests and procedures that are in their best interest and are not used to questioning where they are sent or what the price will be. Aside from the issue of the uninsured, the payment system that leads patients to expect that insurance will cover most or even all of the charges they incur insulates them from the whole issue of cost.

  2. Michael Wassenaar says:

    I agree, certainly in some situations, like urgent or complex procedures, shopping around is less realistic. But in other types of situations, it seems to work to a patient’s benefit. For example, in another of the New York Times series on cost, a patient “shops around” for the best price on a hip replacement and ends up saving tens of thousands of dollars. Granted, in this instance, the man gets a better price by traveling overseas, but the same scenario could play out within the US. If hospitals and insurance companies no longer insulate patients from the cost of their procedures, perhaps expectations will change and patients will demand more information from physicians when they make referrals, recommend treatments, or write prescriptions.

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