Asymmetrical Information - Megan McArdle

10.22.12

Ask the Blogger: Can Transparent Health Care Prices Make Me Better Off?

Doctors don't post prices, so how is someone in a "Consumer Driven Health Care Plan" supposed to comparison shop?

Dear Blogger,

My company (as well as many others I'm sure) is pushing us toward a high-deductible health plan.  This year, I think the disincentives on the legacy PPO/HMO plans are finally enough to make the HDHP a better alternative financially, but this is not my question.  As part of the information they've given us about the new plans (its hard not to hear "Here is how we're screwing you on this"), they mentioned that the HDHP is to help encourage consumerism.  I agree with the market prinicipals behind it, but is there a way to price shop on health care?  

I'm not talking about emergency care where you have only one choice.  I'm talking about the routine stuff.  If my doctor sends me for an imaging or blood test, how do I know where I can get it the cheapest?  They don't post their prices on the street like gas stations, so it is very hard and time consuming to compare.  Could a government regulated price transparency measure help?  Or could a single large provider say, LabCorp (or maybe Walmart), start price posting as the norm such that they force others to do the same?  I don't know that there is an explicit law for gas stations, but would you stop at one that didn't post it on the sign (assuming you are price sensitive at all)?  Does Medicare already state what they pay providers for things?  Is that helpful at all if I am not on Medicare?

Also, what price do you list?  Doctors may not want to publish their "list" prices, but insurance companies won't want each other to know what they were able to arm-twist out of the providers.  What do you list for a hospital, where the menu of services is vast and varied?  Maybe a price list for the top 10 services over the last year, but I think it could be easily gamed with loss leaders.  Is that a bad thing?

It's more than one question and I can't say I have it fully thought out, so maybe I'll boil it down to "Hey Megan, what do you think of health care price transparency?".

Not-So-See-Through Health Care Consumer


Dear NSSTHCC:

Congratulations!  You have been selected to participate in yet another of our great national experiments in reducing health care costs.  The bad news is that virtually none of these experiments has actually succeeded in, y’know, reducing costs.  In our battle against health care inflation, you are like the guy who gets "selected" to go over the top of the trenches in the second reel of virtually every war movie ever made.

The good news is that occasionally, that guy gets to live, and when he does, he’s usually eligible for the Medal of Honor.   And over the past few years, analysts have been writing the citations for this one.  A 2009 metastudy by the American Academy of Actuaries found that Consumer Driven Health plans, as they are apparently known in the biz, saved money over traditional plans without causing consumers to avoid critical preventative care--an objection that is usually raised to these plans.  While a 1982 study by Rand did show consumers doing somewhat less preventative care, that was true only for the poorerst consumers in the study, and only for a subset of conditions (hypertension--which is largely asymptomatic until it kills you).  For the majority people who are not poor and hypertensive, a CDH seems to do at least as well as a traditional plan, at somewhat lower cost. And so far, this doesn’t seem to be a case of employer cost-shifting; rather, people are spending less and consuming somewhat less in the way of health care services, but without adverse effect on wallet or health.

But as you point out, this can be bewildering for the consumer who is driving all of this.  While there are places that have posted prices and cost transparency, this is a tiny minority of all health care providers.  Hospital administrators and practice managers have spent the last half century concealing costs and fudging diagnostic codes in order to maximize their reimbursements from insurers and the government.  You can’t expect them to overnight start telling you what you have and what the cost will be . . . especially since this threatens their ability to squeeze as much money as possible out of their core business, the traditional government and private insurance plans.  Perhaps someday, CDHs will push us to a broadly open model (though ObamaCare seems to have thrown a spanner in the works.)  But we certainly aren’t there right now.

But that doesn’t mean that you, the consumer, can’t excercise some downward pressure on your own health care spending.  The fact is that most doctors aren’t malicious, just unaccustomed to considering the “cost” half of the cost-benefit analysis.  In the ideal world of many doctors, all decisions about tests and procedures would be made by them, unsullied by any considerations of cost, liability, or fussy administrators demanding to know why you’re taking up a valuable operating room.  And over the last few decades, this is pretty much how we’ve let them make most of those decisions.  When some bumbling government panel or greedy insurer tries to gently suggest that perhaps they shouldn’t be doing quite so much stuff, we immediately march on Washington to demand that politicians stop those damn fools from getting between us and our doctor.

Since we keep passing laws saying that no one should ever be allowed to question their decisions, especially for such a crass reason as expense, doctors have understanably kept making decisions without reference to the expense.  And I think it's fair to say that they are often ordering far too many tests, in part because the one expense that does influence their decision-making is the spiking cost of liability insurance.  Remind me to tell you some time about the time my primary care physician ordered a test for lupus despite the fact that I had absolutely no symptoms of lupus.  After I had made out my will and seen the immune specialist, this ended with my phoning the doctor to deliver a high-volume lecture on Bayesian probability and false positives for rare diseases.

But I digress.  The point is that doctors have a fair amount of room to order fewer tests and do less stuff without sacrificing health--and often will, if you take the simple precaution of saying “This is coming out of my pocket, so how important is it?”  Doctors are mostly nice, honest people who do not want to cost us, or the health care system, more money than they have to.  It's just that it's a pain in the ass to always be thinking about cost, and since they don't have to, many of them don't.

I used this method repeatedly during the years I spent without health insurance, and as a result, I achieved a miraculous 50-80% reduction in X-rays, blood tests, and follow-up visits.  Your mileage may vary, of course--the overall reduction in health care spending thanks to CDHs is much lower than my experience, for the simple reason that most health care spending takes place not in the primary care physician’s office, but in the ICU.  Nonetheless, you can save real money this way, which benefits you and the rest of us.  

For people who go to the doctor a lot, like parents whose kids have an expensive chronic condition, these plans can actually be a money saver. That’s because the tax benefit of the HSA, and the lower cost of the insurance, mean they end up spending less out of pocket.  This is not true for everyone, but it is true for some.  In essennce, health "insurance" acting less like an absurdly inefficient forced savings plan and more like actual insurance that does what it's supposed to: transfer pooled resources to the people who are having a run of bad luck.

We often think of markets as requiring a bunch of "perfect" conditions, like information.  But as this illustrates, we actually don't need perfect transparency to make markets work.  We just need people to treat each expenditure as if cost mattered.