Why Aren’t Prices Transparent in Healthcare?

Image credit: presentermedia.com

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.

How to Keep Insurance Companies from Stealing Healthcare Cost Savings

In February 2011, I posted on what healthcare delivery reform proposals are getting wrong. Here’s the brief rundown on what I explained:

  • Most reform proposals will make care less expensive for patients (due to more integrated care plans, a better focus on preventive care, fewer complications, etc.)
  • Providers are the ones charged with making these delivery changes
  • Patients saving money = providers getting paid less
  • Why would providers make the changes only to lose money? They somehow need to financially benefit from their efforts and improvements
Are there solutions to this? Of course! Here are my favorite two:

 

First, integrated delivery. If the organization charged with making changes to how care is delivered is the same that will benefit financially, it works. An example might help. I live in Utah, where Intermountain Health Care (IHC) dominates. IHC is really good about doing research and finding ways to improve quality. So let’s pretend they do a lot of heart valve replacements, and that they’re usually paid $20,000. But, if they have a complication, they have to do all sorts of extra work, and they end up getting paid $30,000. (I’m making the numbers up, but I’m not lying about the fact that providers often get paid more for procedures when there were complications.) So, IHC finds that they can tilt the bed at a 20-degree angle and that magically reduces complications by 25%. But that means they’re getting paid $10,000 less every time they avoid that complication! The patient whose complication was averted with the tilting of the bed maybe ends up paying $2,000 less in co-pays than he would have, and the insurance company saves the other $8,000.

 

Poor IHC, right? They spent thousands of dollars on the research that produced the bed-tilting idea, and now the patients’ and insurance companies’ wallets are benefitting. Except, IHC has a secret. The insurance that patient was on is Select Health, which is IHC-owned! So, really, IHC just saved its patient $2,000 and saved itself $8,000. Not bad! This scenario, when the provider and insurer are the same entity, is called “integrated delivery,” and it creates excellent incentives to improve quality. The only time this breaks down is when IHC averts all sorts of complications for patients on different insurance companies. [Update: There are downsides to integrated delivery organizations, including ACOs, that relate to their limiting of the options available to patients and, thus, interfere with value-sensitive decisions. I won’t explain it here, but I’ve learned more since writing this post.]

 

This brings me to the second solution, which can sometimes work when it’s not an integrated delivery situation. So when IHC goes to renegotiate their contract with, say, Altius, they will have their reduced-complication-rates data in hand, and they will say, “Hey, we have 25% fewer complications than before, so your average cost will go down from $22,500 to $21,000. But we want some of those savings since you didn’t do anything to warrant saving all that money, so we’ll raise your rates a little bit to make your average cost $22,000, which is still lower than it was before, and we’ll be getting some compensation for all this hard quality-improvement work we’ve been doing.” I guess this solution could be called “splitting the savings.” [Update: Since writing this, an amazing idea called “shared savings” became popular. It’s exactly what I describe above. But it has a pithier name.]

 

The providers will still be losing some of the savings to the patients and external insurance companies, but at least they’re improving quality and their reputation!