Transparency is key to free-market cost control

Competition over healthcare prices and quality is coming. Transparency and the radical redesign of health insurance benefits will be its handmaiden. Companies such as General Electric are leading the way.

The conglomerate, after years of experimenting with wellness programs to reduce healthcare costs, has moved its 500,000 employees, future retirees and their dependents into a high-deductible healthcare plan.

To aid these workers and families, it downloaded patient cost and outcomes data (it self-insures, so access to the claims wasn't an issue) into a Web-based tool and mobile app that allows patients to compare provider prices and quality. It even employs health coaches in telephone call centers to help people make choices that suit their financial and medical needs.

The choices across the U.S. can be stark. Why go to the outpatient surgery center for routine hip replacement that costs as much as $110,000 in California when the same operation can be found elsewhere for as low as $15,000 and the statewide average is just $30,000?

Using newly available Medicare cost and outcomes data, Modern Healthcare reporter Joe Carlson recently investigated the disparities between costs and outcomes at hospitals in a dozen markets across the U.S (Oct. 28, p. 18). He found several examples where higher-cost providers had inferior readmission results for a common cardiovascular procedure.

Dozens of enterprising information technology companies are springing up with Internet tools that use the cost, price and outcomes data now available to the public. There is cause for concern about this proliferation of Internet-based tools to empower consumer choice in healthcare. Who is checking on the quality of the data and validity of the comparisons offered by these start-up vendors?

Variation is the enemy of quality in comparison shopping just as much as it is in the operating room. That's why the American Hospital Association and the Healthcare Financial Management Association, which say they back transparency efforts, are working to set standards that begin with consistent definitions of price, cost and quality.

Unfortunately, the media coverage of the outrageously high list prices at hospitals has not been very helpful to this effort or to public understanding of the issues. Those chargemaster prices affect very few patients and remain in place only because of misplaced incentives in the reimbursement system.

Competing insurance companies like to brag to their customers about the big discounts they get off the price charged by hospitals. Medicare ties its extra outlier payments for complex patients to charges, not actual costs. High list charges are also a convenient way for healthcare systems to inflate their charitable care numbers.

The more than 95% of patients who don't pay retail list prices care about none of that. What they want to know—and what tools like GE's will soon offer them—is what a procedure or a bundled episode of care at a particular provider actually costs, what their health plan pays, what their copayment and deductible will be and the facility's relative quality and outcomes.

For most of the past decade, the national effort to rein in skyrocketing healthcare costs has focused on overutilization and the misplaced incentives in the fee-for-service system that encourage volume over value. Yet even without major changes in reimbursement, hospital utilization has steadily declined and lengths of stay have dropped to nearly the lowest in the industrialized world.

What truly makes the U.S. an outlier among nations, as Kaiser Permanente Chairman George Halvorson told last week's Robert Wood Johnson Foundation National Summit on Health Care Price, Cost and Quality Transparency, is its extraordinarily high prices. The average cost of a normal delivery in the U.S. is $3,390. In Canada, it's $460.

Everyone has a favorite target to blame for high U.S. prices. But how we got here doesn't really matter. There are only two ways to bring the U.S. more in line with the rest of the world—either use the heavy hand of government regulation or rely on the market.

As we saw with the insurance reforms in the Patient Protection and Affordable Care Act, even Democrats today want to rely on the market. There was little support for government price controls or a government-run insurance plan to compete with the private plans on the exchanges.

Take that mindset to the delivery system side of reform. What policymakers will seek going forward is greater competition over price and quality to drive excess costs and profits out of the system. That's what free markets are supposed to do. But free markets in healthcare can work only with greater price and quality transparency—which is coming.

Follow Merrill Goozner on Twitter: @MHgoozner