Wednesday, March 26, 2014

Transparency in Medical Care

There is a concern that one of the principle reasons for why healthcare costs are so expensive and why the Affordable Care Act (ACA) will have a limited influence on healthcare costs is that there is little direct information pertaining to prices for given services. This “blind” pricing creates an environment of uninformed consumption where individuals hope that they receive a competitive/fair price rather than know they got a competitive price. Therefore, some individuals believe that if hospitals and other medical institutions list their prices for given services consumers will be able to comparison shop using market forces and competition to lower prices. To this end a number of proponents for this form of transparency hope for the establishment of a procedure marketplace similar in design to existing online booking agents like Expedia, Travelocity, etc.

Note that a number of transparency sites already exist operated by various insurance companies. Some of these insurance companies, like Cigna and United Healthcare, have sites that are fairly effective at demonstrating to consumers differences in price between various hospitals for various procedures whereas others like Healthnet and Kaiser Permenente have sites that fair badly at accomplishing this goal.1 Unfortunately most people do not realize that these sites exist because few people actually use them. It stands to reason that the existence of these individual sites provides support for the creation of a centralized procedure marketplace. However, there are some important issues that must be addressed before this new procedure marketplace (PrMa) could be developed.

First, it is not accurate to compare medical services to consumer goods like pears or toilet paper. The principle distinction between these two categories is that there is a limited supply market for medical services, which involve inherent price modifiers. Basically there are only a limited number of physicians and surgeons that can perform a given examination or procedure. Therefore, even if hospital A offers a lower price on an angioplasty versus hospital B there are only so many angioplasties hospital A can perform, thus the influence of the lower price on business gained for hospital A and business lost for hospital B is conditional and limited; depending on the market size this limit may allow hospital B to avoid lowering their prices even in a transparent and competitive environment and yet retain the same number of patients/customers.

Another problem is that supporters of a PrMa appear to view it in the most simplistic manner possible where all parties pay for medical services out of their own pocket rather than utilize health insurance as a cost modifier. Clearly this presumption is inaccurate, especially after the passage of the ACA placing a mandate on health insurance coverage for all citizens of the United States. Therefore, any transparency in prices will need to include the reduced negotiated rates by given insurance providers as well as co-payments and deductibles for given plans in addition to clear information regarding hospitals that are in a given network. Even if transparency is created for these elements there still exists significant price inelasticity based on the factors tied to the insurance companies.

Extending on this above point is a major reason Expedia and similar sites work is because consumers can select any flight from any participating airline and the price shown is the price paid, there are no second party negotiations creating changes in that price. Airlines participate because there is typically a glut of supply (available seats) and selling a seat at a 20% discount is superior to not selling a seat at all and this sale is more efficient on Expedia and other similar sites. A PrMa site could not produce similar results because there is more complexity. Due to a limited number of surgeons and operating venues there is a supply-based limiting factor that heavily influences the ability to profit due to volume for healthcare providers. Therefore, hospitals are going to charge as much as they can in order to maximize profits. This limiting factor makes it difficult for insurance companies to undercut a competitor to increase customer number; this fact also ignores the ease of switching insurance companies.

This limiting factor creates an environment where health insurance companies do not have ultimate bargaining power with healthcare providers. There is a limit to how much of a “discount” health insurance companies can negotiate based on competing profit potential for both insurance companies and hospitals. Finally based on market segregation of health insurance there is little reason for health insurance companies to participate in such a website. Due to the limiting supply factor it stands to reason that they would be as likely to lose money as make money, thus there is no real reason for any to actually participate in such service unless required by law.

The problem is further complicated in that customers purchasing plane tickets have a greater level of flexibility increasing the value of the transparency. For example suppose a person wants to travel to Miami and one week later wants to travel to Stockholm. The lack of contract between different airlines allows this individual to purchase a ticket from carrier A for price x to travel to Miami and then purchase a ticket from carrier B for price y to travel to Stockholm. In a PrMa the consumer is tied to their insurance company. Person A cannot easily switch insurance companies even if another insurance company has negotiated a lower price on a particular surgery at hospital A. Basically this restriction limits most consumers to only comparing prices between different hospitals not different insurance companies. Even for those shopping for new health insurance policies have difficulties because of a lack of knowledge regarding what procedures they would need in the future.

Worse still there are significant legal questions associated with transparency laws that conflict with gag clauses, most favored nation/provider arguments and possible trade secrets. Gag clauses are the most concerning challenge disallowing the publication of provider-insurer contracts. Arguments on the grounds of trade secrets and most favored providers are usually fairly soft and are cited more for their ability to act as a litigation threat versus their legal viability; however, courts have become more corporation friendly in the past decade and could buy an argument regarding the way a price is negotiated between insurance company and healthcare provider as a form of trade secret as strange as it sound intuitively for revealing a final price would not reveal any negotiation strategy.

Other concerns are that such a pricing tool would only be applicable for preventative or chronic care versus acute/emergency conditions for individuals suffering from a stroke could hardly compare prices on the Internet or telephone on which hospital to be rushed to for lifesaving surgery. Also unlike airlines, prices for medical services are influenced by geographical cost of living because they are not as volume flexible. Therefore, it must be guaranteed that new competitive transparency does not lead to such a great price reduction that it hurts healthcare workers. Clearly due to their earned skill set physicians will have salary security, but nurses, medical technicians and other “more disposable” hospital personnel could be fired or receive a cut in salary in order to maintain hospital profits if prices drop significantly due to increased competition. This salary cut could damage the overall care in the hospital because cost of living for a given region would create an inherent price and salary floor creating staffing shortages.

One concern that may not be imperative to address is the alteration of hospital and insurance billing practices. Some individuals believe that hospital and insurance billing need to be changed to more specific invoice-like documents with less medical and/or technical jargon so consumers can easily identify what goods and services are charged at what prices. However, an itemized breakdown of price may not be necessary because consumers don’t care about what each individual item involved in a medical procedure costs, they only care about the total cost of the procedure. For example patients staying overnight for observation do not need to know how much hospital food, catheters and pain medication cost individually, just the total cost of spending the night.

However, there is an important consideration for multiple pricing in a transparent real-time marketplace. By necessity hospitals outsource certain responsibilities to other medical service providers (radiologists, anesthesiologists, etc.) where some of the large price tag procedures require multiple bills from these multiple service providers. Therefore, diligent maintenance of transparency will be required to track each time a specific provider changes the price for his/her/its services to ensure accuracy in the overall price.

Fortunately one of more easily solvable concerns is that prices need to be intertwined with quality of the service. There is a natural psychology for consumers to equate a lower price with lower quality, especially if the difference in price is hundreds to thousands of dollars. Therefore, safety records for hospitals will need to be referenced in addition to the price for their services otherwise individuals may be reluctant to select lower priced service options defeating the entire point of price transparency.

Another significant concern that is seemingly never considered by PrMa proponents is that these direct price comparison tools may actually increase costs instead of reducing them. The idea of transparency functions on a general principle of capitalism that businesses with a common product will compete against each other because it is generally thought that consumers should migrate to the lower priced good, quality being similar; however, what individuals typically forget about this principle is that a goal of modern capitalism is to maximize profits.

Current gag clauses between hospitals and insurance providers limit the information that insurance providers and hospitals have to maximize profits. For example suppose hospital A charges $1,000 for a service and hospital B charges $2,500 for a service. In the current environment this difference is not readily known even between hospitals. In most versions of the transparent environment desired by proponents this information would be available to all parties. What stops hospital A from raising their price on the particular service from $1,000 to $2,000 instead of hospital B lowering their price from $2,500 to $1,250? This possibility should be a serious concern for transparency proponents.

Currently it appears that a dream of creating an Expedia-like website for comparison of prices and quality of care for various medical procedures will be very difficult, if not impossible to achieve. A better option would be focusing on expanding the transparency procedure comparison websites that some health insurance companies have already set up. Creating state and federal statutes to expand the details, features and accuracy of these websites on an individual basis should effectively deal with large disparities in price between hospitals and other medical providers. The reason this strategy will work is that individuals cannot jump between insurance companies and their respective coverage easily and the ACA demands all individuals have health insurance or face a fine; after a few years this fine will be of sufficient size that almost all individuals will have health insurance. Therefore, if all insurance companies have effective price transparency websites, those run by Cigna and United Healthcare are a suitable start, then consumers who are already “locked-in” to company will have a website that will help them plan for more cost effective medical treatment. Overall transparency procedure proponents should focus on the creation and optimization of these individual websites and phone information tied to specific insurance companies due to their ease of establishment and greater effectiveness versus a broad all-encompassing system.

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