Handing consumers hospital chargemasters to help them shop for the best deal is about as useful as handing them a scalpel and telling them to perform their own bypass surgery. Yet, the state of California in 2003 enacted a law requiring all hospitals to make their chargemasters publicly available.
Numerous states have followed suit in one manner or another by requiring hospitals to disclose charges for common procedures. These well-intentioned but misguided attempts at cost transparency strike me as efforts to show the public that policymakers are doing somethinganythingto address rapidly rising healthcare costs. But simply giving consumers a price list of a la carte services does little to help them make informed choices about which providers will cost less for an episode of care, let alone which providers offer the best valueor the optimal combination of the lowest cost and highest quality.
As an economist, I believe in markets, but the lack of useful and understandable healthcare cost and quality information has long stymied meaningful healthcare competition. Markets depend on transparency to help consumers make choices and to promote competition on price and quality among suppliers.
And yet healthcare is not hog bellies, and to pretend that consumers alone can transform our complex, fragmented healthcare system is naive at best and disingenuous at worst. Current efforts to increase price transparency often downplay the complexity of medical decisions, patients dependence on physicians for treatment guidance and the need for meaningful information on quality. Moreover, many patients healthcare needs are too urgent to shop based on price and quality, and some illnesses are so complex that significant diagnostic resources are needed before determining treatment alternatives.
Traditionally, health insurance has either removed or sharply diluted consumer incentives to consider price in choosing a provider or treatment strategy. It is difficult for consumers to get price and quality information from providers, who have to date shown little interest in competing for patients on this basis. The lack of quality information understandably makes consumers reluctant to choose a provider on the basis of a lower price. And there is probably some risk that patients will gravitate to high-cost providers in the absence of quality information because in their minds higher cost may equal higher quality. Similarly, lack of information on effectiveness of treatment alternatives makes consumers reluctant to consider price in treatment choices.
Despite my skepticism, I do believe that if we can develop truly useful toolsand convince people to use themto compare price and quality when choosing providers and making treatment decisions, we can get better value from our extremely costly healthcare system.
There are direct and indirect benefits of choosing providers that offer better value. The direct benefits are simply the cost savings, for example, of choosing the lower-cost of two providers of comparable quality.
But the indirect benefits are potentially more important. If enough consumers become active in comparing price and quality, this will lead to market pressure on providers to improve their performance on both cost and quality dimensions. Providers that measure up poorly on the value dimension will lose market share and will be motivated to revamp their operations to remain viable. Our market economy offers many examples of competitors responding to loss of market share by making difficult changes and regaining their edge, and examples are starting to appear in healthcare as well. The gains from providers improving their operations will accrue broadly to the healthcare system.
Much of the policy discussion about price and quality transparency has neglected the important role that insurers play as agents for consumers. Insurers have the ability to analyze complex data and present it to consumers as simple choices. For example, they can analyze data on costs and quality of care in a specialty and then offer their enrollees an incentive to choose providers in a high-performance network. Insurers also can develop innovative benefit designs, such as increasing cost sharing for high-cost services of marginal benefit and reducing cost sharing for services that research shows are highly effective.
Insurers buying power, or ability to negotiate significant discounts from hospitals, physicians and other providers, eclipses what patients can negotiate individually. And insurers potentially can become even more effective agents as they develop more sophisticated benefit structures and information tools to support consumers in choosing effective treatments from higher-quality, lower-cost providers. In contrast to legislation forcing hospitals to disclose their charges, health plans are beginning to offer comparison tools that use negotiated payment rates rather than provider charges to illustrate price variation among providers for services.
Shifting from choosing a provider to choosing treatment strategies, the absence of neutral financial incentives for providers is a serious and growing problem. The typical situation today is one where the provider gets paid on a fee-for-service basis, so the incentive is to recommend more services, especially those that have higher unit profitability. Increasingly, physicians have an ownership interest in services, such as imaging, beyond their usual professional services, creating an additional conflict between physicians interests and those of their patients.
We also need to be realistic about the magnitude of potential gains of providing consumers with price and quality information. For one thing, a large portion of medical care may be beyond the reach of patient financial incentives. Most patients who are hospitalized will not be subject to the financial incentives of either a consumer-directed health plan or a more traditional plan with extensive patient cost sharing. They will exceed their annual deductible and often the out-of-pocket maximum. Remember, in any year, 10% of people account for 70% of health spending, and most of them have no financial incentives to economize.