Americans agree on one thing: health care costs too much, both individually and to our nation. In 1960, the average U.S. health care cost per person was $146. As a nation, we expended $27.2 billion, which represented 5 percent of GDP. Fast forward to 2016 when average per capita spending on health care was $10,348, an increase of more than 7000 percent in fifty-six years. In 2016, the U.S. expended $3.4 trillion on health care, note the “tr” instead of “b,” or 18 percent of GDP.
While there is consensus that we are spending more than we can afford, people disagree about what to do about it. Some tout price transparency as a method to encourage consumer shopping and thereby lower costs. The idea is gaining traction, but is it a sound concept or merely a sound bite?
Both state-generated and private websites have sprung up to provide price information intended to make individuals more informed shoppers. However, “price” in health care is not what consumers think it is. In all other commercial activities of daily life, the consumer pays the price listed on the item. But in health care, no one pays the list price or maximum charge.
The actual payment for a medical good or service is generally a lot less than the list price. Insurance companies negotiate downward starting at Medicare rates. They pay some fraction of what the government pays for a medical service or good. Medicaid rates are much lower than Medicare rates so that average reimbursement is typically a very small fraction of the charge.
When I was a practicing pediatric cardiologist, my charge for a life-saving catheterization procedure in a newborn baby was typically $4,800. Medicaid paid $560, or 12 percent of the “price.” How useful would that price information be to the parents of my patient?
For price transparency to change consumer behavior and lower costs, two things must happen. First, the “price” provided to consumers must be the actual cost to them, not some meaningless number that no one pays. There has been stiff opposition to make price information transparent, not even the more useful payment data. In Ohio, after a health-care price transparency bill was passed, a coalition of insurance plans, hospitals, and provider groups went to court seeking an injunction against implementation of the transparency bill. The court’s decision is currently pending.
But even if consumers have good data, not merely list price information, being informed isn’t enough. There must be an incentive to act on the information. So while people are interested in knowing price data, they will only shop carefully and lower costs when they take money out of their own pockets.
A free market achieves lower costs because consumers do the value calculation, value as defined by them. When purchasing a car, the buyer decides whether the higher cost of a Mercedes gives enough value over the lower-cost Ford to warrant spending the additional dollars. And, the buyer knows how much he is able to pay, as there are only so many dollars in his bank account.
The key to lower costs is spending one’s own money. In a free market, the buyer is also the payer and thus has a powerful incentive to spend less. In health care, the buyer who is also consumer is not the payer. That is a third party: private insurance or the government. In either case, the buyer is spending other people’s money. Where is the buyer’s incentive to reduce spending? There isn’t any.
Transparency of cost-to-consumer information, not merely price data, could lower prices and could improve access to care, but only when combined with consumer empowerment. It would be a happy consequence if a push for payment transparency stimulated consumers to demand what they should have in the first place: decision making authority.