The Business of Health Care

Crowdsourcing, Price Formation, and Health IT

From the perspective of the average patient, going about his life unconcerned about health policy or economics, what is the most frustrating characteristic of U.S. health insurance? Surely, it is the madness of the billing cycle: Never knowing how much a medical service costs until long after you’ve received it, and sometimes only after a flurry of phone calls and paperwork that can take months to clear up.

This is surely why Michaela Dinan’s “winning entry” in a national essay contest, which invited people to submit anecdotes “illustrating the importance of cost awareness in medicine,” has struck such a chord.  Ms. Dinan’s story concerned a billing error for inserting an IUD.  Before the procedure, the patient learned (via “a few keystrokes”) that the cash price would have been $843.60. Insured, her out of pocket cost was to have been about $200.  Instead, she received a bill for $1,100 that took months to sort out.  I suspect that most readers and contributors at The Health Care Blog will use this story as further evidence of the need for a massive national investment in Health IT, along with Patient-Centered Medical Homes, Accountable Care Organizations, adherence to “meaningful use” standards, et cetera.

But this fails to identify the real culprit: Over insurance. Adjusting claims always includes friction, largely because of moral hazard. That’s why insurance should be used rarely and only for catastrophic, unanticipated events — not birth control, which is planned, preventive care. For health care, the problem is even worse because very few prices are formed via normal market processes. Automobile insurers have it easy: The price of a car, and therefore every part of a car, is formed via normal market processes. Auto insurers are price-takers, not price-makers. My auto insurer’s liability to me is limited to buying a new Toyota 4-Runner, for which the price is readily available. (I’m oversimplifying here, referring only to collision coverage, not bodily injury.)

One of the most frustrating and misleading claims of health insurers is that they add value by negotiating network contracts with providers. In fact, these network contracts destroy value because they prevent patients and providers from using prices to signal value to each other. As a parallel, imagine that instead of buying our cars first and then insuring them, we did the reverse That is, imagine that we bought auto “insurance” and then went shopping for a “free” car from a network of dealers contracted with our auto “insurer.” The ability of drivers and carmakers to communicate value to each other would be hopelessly malformed by the bureaucratic friction imposed by such a “system.”

This is what health insurers do, and they support their claims to add value by (unwittingly) falling back on a version of John Kenneth Galbraith’s notion of countervailing power: The individual cannot effectively negotiate with powerful providers, so the health plan acts as a bulk-buyer, ratcheting down fees charged by powerful hospitals and organized medicine.

While never a robust claim, it is even less credible in an age where individuals can use technology on their own to get better prices from suppliers. For example, Groupon is an Internet-based business, launched in 2008, through which businesses offer discounts if enough people sign up for a deal within a period of time. For example, a restaurant might offer 50 percent off if 100 people sign up for it within 24 hours. Needless to say, potential customers madly e-mail, Tweet, and IM their friends in order to “tip” the deal. Last December, the business press reported that Google had offered $6 billion to buy Groupon. Investors rejected the offer, and Groupon is now preparing for an IPO in 2013.

With a little more sophistication, there’s no reason why such an approach couldn’t work for health care — especially in the area of preventive care. Suppose an annual physical for a middle-aged man costs $500. Imagine that Groupon collaborated with primary-care practices nationwide to buy an ad at the Super Bowl offering physicals for $200 if a certain number of middle-aged men in each neighborhood signed up within a couple of days after the big game. Surely, some fraction of Doritos-munching, beer-drinking, football fans would encourage each other to get their cholesterol, blood pressure, and BMI checked.

I expect that such a combination of peer pressure and price incentives would also improve adherence to therapy in communities of patients with chronic conditions. Unfortunately, we are unlikely to find out, because the government is more interested in using IT to empower various committees, commissions, and task forces, than to empower patients and entrepreneurs.

John R. Graham is Director of Health Care Studies at the Pacific Research Institute, & Senior Fellow at the National Center for Policy Analysis.

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John R. GrahamMGDeterminedMDBarry CarolMike MD Recent comment authors
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John R. Graham
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Mike MD, I agree with you fully. However, I can only get one (marginally) clever idea in each blog entry! I don’t think there’s anything wrong with fee-for-service (or “piece work”) as long as providers are free to combine their offerings in ways that satisfy patients’ needs. I think what Mike MD is getting at is that this is impossible in health care. Let me use another metaphor: When I want to fly from San Francisco to Washington, DC (as I do with some frequency) I go to United.com or Expedia and buy a ticket. Do I know how much… Read more »

nate
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nate

how do consumers with a traditional plan make these decisions?

MG
Guest
MG

“I would disagree with the entire premis of your question.” Really? HSA/HDHPs enrollees are largely are flying by the seat of their pants when it comes to getting the data they need. At best, they might need a CABG procedure and can use the NY state report cards if they live in NY. Hell, just take a look at the environmental scan that Mathematica did for NQF did on the various quality measures out there for public reporting programs late last year. There basic conclusions were that the data is overwhelmingly derived from claims-data yet, there is an overwhelming number… Read more »

Margalit Gur-Arie
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Nate, “rich white” people can’t make these decisions either. I know I can’t (not that I am rich or anything). The “beauty” of this is that rich white people are not required to make these decisions. They can go on spending “foolishly” with no report cards hanging over their heads. So the question becomes why should poor people be required to be so much more savvy than everybody else, and is that a fair expectation? I tend to evaluate other folks based on what I think I could do. I wouldn’t be able to function in such system, ergo I… Read more »

nate
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nate

“So when will the necessary quality, safety, and efficiency/pricing data be robust and readily-available for consumers to actually make HSA/HDHP work as touted?” MG I would disagree with the entire premis of your question. If this data is not available or inadequate then how are patients making these decisions now? Between a traditional plan and a HSA/HDHP what changes besides the name on the check? Hopefully with more information better decisions will be made but to say we lack the information now is inaccurate. As a starting point at least with a HDHP the patient sees the bill, that is… Read more »

Barry Carol
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Barry Carol

Margalit – I agree with your last post about all the issues related to caring for the poorest and sickest patients. I found Gawande’s article, “The Hot Spotters,” fascinating and was surprised to learn that, at least in one population he discussed, that a mere 1% of patients accounted for 30% of costs. For the Medicare population, the sickest 5% of patients account for a bit over 40% of costs in any given year and on a rolling five year basis, the sickest 5% account for 27% of cumulative costs over the five years. That’s because some die along the… Read more »

Margalit Gur-Arie
Guest

I can try, but first let’s lay out your proposed rules. 1) I personally would give them a small percent of their HSA in the form of cash, with the percent determined by a score card of their adherence to health care guidelines 2) reward the patient for spending wisely, punish them for spending foolishly I am further going to assume that you are not going to unconditionally fully fund the HSA up to the deductible. If you do, then you are back to buying them insurance. Here are the issues I see: 1) A person that fails your report… Read more »

Mike MD
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Mike MD

I apologize for the tone. But several times now you have spoken of “punishing” “or else” “financial burden” and yet it is no where to be found in what I have written. If its not careless reading, or a knee-jerk response to what sounds like a conservative idea, what is it? I know its all kind of pointless, but I would be interested if you could construct a scenario of a patient with an HSA/HDHP who would suffer punishment or financial burden as a consequence of having the HSA/HDHP instead of having purchased subsidized insurance on an exchange.

Margalit Gur-Arie
Guest

I can read, Mike, and I have no preconceived notions regarding anybody’s partisanship.
It’s just that I am skeptical of solutions that add financial burdens to people already burdened beyond their abilities. Just like you believe that financial incentives will work, although there is no evidence, I believe they won’t, based on equally absent evidence. I would not be opposed to a good pilot study though.

Mike MD
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Mike MD

Margalit, there was no “or else” and there is very little risk shifting – just a enough to make the consumers pay attention. Are your ideas so pre-conceived that you cannot comprehend what you read? Or do you assume that I too am a partisan, and have in mind some grand old party agenda?

Mike MD
Guest
Mike MD

What’s your goal here MG? Discussion of ideas is rarely a bad thing and sometimes provokes some thought in someone who can make a difference.
Where is the necessary quality, safety, and efficiency/pricing date on EMRs? Yes I know there is some, but it is not nearly robust enough and it clearly was not ready for the consumers of these products that have now been proven to have some deleterious effects on patients to go along with the potential benefits.
Yes my comments contribute very little – your comments contribute nothing.

MG
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MG

So when will the necessary quality, safety, and efficiency/pricing data be robust and readily-available for consumers to actually make HSA/HDHP work as touted? It wasn’t 2003 when the MMA was passed. Isn’t today. 2015? 2020? Ever?

nate
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nate

if its the patients behavior that ultimately needs changes, they would just change doctors if one says no, that should be where the incentives/penalties mainly target. Maybe some minor rewards for providers to keep them doing their job optimally but the focus needs to be the patient. And we should always make them penalties, studies I have been told about show something like 30% of people respond to a reward but 70% to a penalty. Losing something that wasn’t theirs isn’t nearly as bad as losing something they view was theirs. “Does the physician have in place the systems needed… Read more »

Margalit Gur-Arie
Guest

“There are a myriad of ways to incentivise appropriate behavior (I personally would give them a small percent of their HSA in the form of cash, with the percent determined by a score card of their adherence to health care guidelines – weight/BP/Smoking status/screening tests completed, etc.)” This is where I thought the concept of punishment comes in: adhere to guidelines, or else…. And that’s why I assumed that what’s good for the goose ought to be fine for the gander. Of course we both know that this doesn’t work at all for the gander. And it is a lot… Read more »

Mike MD
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Mike MD

Ouch, a voucher??? I hope you are not meaning to come across as partisan. I’m not sure where in my suggestion is anything that could be conceived as punishment for the individual you describe. I understand the tendency to see a failure to be rewarded as a punishment, but I do not agree with that line of thinking as it falls apart so easily under closer scrutiny. If there is to be punishment at all, the statement was “for spending foolishly” not for living foolishly. “Foolish spending” would have to be defined of course. I believe, but have not seen… Read more »