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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49 replies »

  1. 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 or Expedia and buy a ticket. Do I know how much the pilot, co-pilot, purser, or flight attendants are getting paid for the flight? Do I know the cost of the jet-fuel burned during the flight? Do I know how much SFO or IAD charges the airline to use the airport? Do I know the terms of the leasing contract between the airline and the vendor of the airplane? Do I know how much corporate overhead is charged to my flight?
    No, no, no, no, and no. Imagine if I were to receive a bill for each of these things individually, with a code attached to it! But that’s what would happen if we allowed the government to run flights the way it runs health care.
    And we’d have a whole bunch of people writing at this blog about how to pay Accountable Flight Organizations to deliver “episodes of air travel”, wouldn’t we?

  2. “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 of measures nationwide with a huge variation in definition, scope, target, etc. It was a pretty stark assessment on just how far quality reporting has to go in this country yet.
    There has been some marginal progress made but the US is a long way for having this information available. Basically your answer is that ‘we’ll do it when consumers make us.’ In the lengthy interim period, good luck because you’ll need it.

  3. 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 am not inclined to demand that others do either.

  4. “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 already a step forward from traditional plans.
    As to your questions more info will be available when people ask for and use it. Its demand driven, I’m not going to spend a fortune of my money to aggregate and pass data no one uses.
    “I have no preconceived notions regarding anybody’s partisanship.”
    no ones Margalit? lol
    “It’s just that I am skeptical of solutions that add financial burdens to people already burdened beyond their abilities.”
    Then you oppose PPACA for the burden it places on the tax payer who is already overburdened and the 40+ year history of government healthplans failing, blowing budgets, and not achieving their goals?
    The one thing we can be certain of is government run plans will be costly and inefficient, shouldn’t we oppose any expansion of them then?
    I hear what you say about the poor not being able to make decisions but how do they do it in all other aspects of their lives? When it comes to housing, food, cars, utilities, everything else they are able to make informned decisons but suddenly you get to healthcare and they are incapable of even basic common sense. Its these low expectations that create a class of people that live down to them. You either beleive poor people are genetically inferior and not capable to making the same decisions as predomintly white people or your just making excuses for them. Why is it rich(white) people can learn these things and poor(black,hispanic) can’t? I don’t beleivev that to be true and hope you don’t either, If they can learn then why don’t we stop making excuses for them not doing it and teach them?

  5. 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 way and others experience one significant event, like a heart attack, and then recover. If you happen to land in the sickest / neediest / highest cost group, an HSA isn’t likely to be of much help and could be an impediment to care.

  6. 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 card criteria is obviously in poor health – high BP, smoker, obese, etc. And yet it is this person who you will withhold money, i.e. care, from. I understand personal responsibility, but in this case it seems to me that the poorer you are, the more personal responsibility you are required to exhibit. At the same time, we know that many of those living in poverty lack the tools, the means and support system to keep themselves healthy or to make drastic lifestyle modifications. So in this system, the patient will get sicker and sicker until eventually he/she will become a Medicaid problem, at a much higher cost to the tax payer than would have been necessary.
    2) What does spending wisely/foolishly mean? and who decides? If a frightened poor patient decides to take the baby to an academic excellence center and consequently gets charged 5 times the amount he would have been charged at the community hospital, is that foolish spending? Is that type of “foolishness” only allowed if you are rich?
    Most docs contend that they themselves have no idea how much insurers pay them for services. Is the patient supposed to somehow find out in advance? How?
    Would it be considered “foolish” for a patient to have an abortion, or buy contraceptives for a teenage child? Or follow a doctor’s order to have an MRI every three months (at the imaging center owned by the doctor)? Are you expecting the patient to argue with the specialist and debate medical necessity, or are you going to “punish” (your term) the patient for the physician /hospital “foolishness”?
    Did you read Dr. Gawande’s article? It seems that the docs in that story found a much more efficient way to reduce costs, and it involved no carrots and no sticks. Would you agree to pilot some of those methods along with the HSA pilots and compare results?

  7. 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.

  8. 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.

  9. 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?

  10. 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.

  11. 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?

  12. 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 to support the patient in achieving the best outcome possible?”
    Should these be provided by the physician or outside of the doctor relationship? It would be much harder, and less likly to happen, but the over-reliance on providers seems to be an issue causing problem already. We need to become more self reliant. I haven’t seen any studies to support it but I would assume people are considerly less medically educated then they were 40 years ago and treat far fewer ailments at home then we use to. Sometimes that is good but processing claims and dealing with people the decisions people make some times really amaze me. Its like grandma didn’t pass anything down when it comes to caring for kids and ourselves.

  13. “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 harder to quit smoking than it is to have your nurse ask every patient about smoking and provide them with a one page of “cessation counseling”.
    I do agree that it’s all about having the right support system in place, for doctors and patients alike. For docs it translates to reimbursement reform, and for patients it translates to someone(s) really caring and willing to go the innovative extra mile (see my link early above to the New Yorker).
    I just don’t think that shifting risk to those least able to deal with risk is a workable solution.

  14. 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 a study I can point to that would support or contradict my belief, that patients will respond better to incentives than physicians. A pilot program might answer the question.
    Physicians don’t like being graded on measures of numbers that reflect patient behavior. It seems to be that most of the measures that have been tried so far are choosen only because of the hope that money will be saved. You would think they might, but it is instructive to look at the British experience
    The P4P question usually is something along the lines of “Will lowering A1Cs to 7% save money” but you could try a different angle and ask, “Will it save money if the physician prescribes Metformin, then Glyburide, then Insulin, all in succession if the A1C remains high?” This would at least only measure behavior totally under the control of the physician, but leaves open the possibility that the physician could be rewarded when the A1C is still high, and we all know we can’t have that! /sarcasm. But If you consider the linked article, it would seem to me that it might be very worthwhile for the policy wonks to look to other areas for savings than the questions they have asked so far. Maybe start with something along the lines of, “Does the physician have in place the systems needed to support the patient in achieving the best outcome possible?” Let your P4P measures flow from there. This of course would require a reworking of the way PCPs are paid.

  15. Mike,
    I am curious as to your opinion regarding incentivizing physicians to elicit “appropriate behavior”. Making a “score card” with similar data points, such as BP control, diabetic measures, etc., and paying them according to such performance indicators.
    The usual reaction from physicians (and I agree), is that it’s not that simple and these things don’t really measure relevant things and that we would need to change the system, if we really want to change physician behavior.
    I would submit that changing patients behavior is not simple either and throwing a few bucks at them will not make any more difference than it does for doctors.
    What you are suggesting here is pretty similar to a voucher system. It works fine if you don’t need it. If you happen to have a bunch of chronic conditions, smoke, drink, are obese and live in squalid conditions and can’t hold down a job, the voucher will not help you much and punitively taking it away won’t make any difference either.

  16. Barry –
    I know you know, but someone reading you post might not know – that HDHP’s are not HSAs. Hight Deductible Health Plans are, however, best paired with a Health care Savings Account, unless you have the means to financially survive an illness that costs the same or more than your deductible. You are right that primary care is only a small piece of the pie, but what we are talking about involves speciality care as well since the HDHP/HSA combo would be used for all outpatient services. I think that the “silver pebbles” you talk about are all that is likely to happen, if even that, but one can dream can’t they?
    Barry and Margalit –
    The HDHP is true insurance – it is there for the rare but devastating chain of health events that could wipe you out financially. For everything else, there is the HSA. The HSA is not insurance. Purchasing insurance on another’s behalf will never change the beneficiaries behavior, and it is this behavior that drives cost. I know that many people think that the poor ignorant patient is only at the mercy of the greedy arrogant doctor, but people are not that dumb.
    We have a “progressive” tax system – it uses a “sliding scale” if you will. The PPACA uses a similar mechanism in reverse – the less you make, the greater the portion of your health care premium that will be returned to you. My idea is the same – IF, and I mean IF, you are going to be giving away money with the goal of providing access to health care to those who otherwise could not afford it, why on earth would you buy them insurance? They don’t need insurance, they need care. Place the money in an HSA that they control. If they make a little, fund it a lot. If they make more, fund it less. Then reward the patient for spending wisely, punish them for spending foolishly (I know, that’s not a politically correct thing to say). 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.). Control is the issue here – some believe they must control the providers behavior because the patient is too dumb, others like me think that patients are smart and will make good choices in the right system.
    So, taxpayer subsidized HDHPs/HSAs for the poor, self/employer funded HDHPs/HSAs for the not so poor, together with reform of the insurance industry to allow a greater variety of HDHPs to better meet individual needs. All pie in the sky, but hey, comments are free.

  17. Mike MD and Nate –
    While I’m a supporter of high deductible health insurance plans, I think they work best for the upper half of the income distribution. If it were up to me, as I’ve said numerous times, I would eliminate the tax preference for employer provided health insurance and replace it with lower income tax rates and a higher standard deduction. I think people would purchase health insurance more prudently if they were spending after tax dollars instead of pretax dollars.
    Primary care, though, is not what’s driving health costs through the roof. According to a recent article in Health Affairs, primary care accounts for only about 10% of total health costs incurred by a typical patient panel of an integrated health system. It’s the cost of the hospital based care that’s killing us and that’s what everyone needs insurance for.
    Back to high deductible plans, though, a $5,000 or even a $10,000 deductible would not change my behavior at all in the way I access health care because I can afford a deductible in that range with or without a tax subsidy. For someone making $8 or $10 or $12 an hour, though, it’s a different story. Experts keep insisting that high deductibles and even moderate co-pays can inhibit lower income people from seeking necessary care as well as unnecessary care. That’s why some employer plans eliminated co-pays for certain maintenance drugs and PPACA eliminates them for an array of preventive care services.
    There is no magic bullet that will substantially lower healthcare costs but there are lots of silver pebbles. My own preferred strategies include (1) eliminate the tax preference for employer provided health insurance, (2) disclose contract insurance reimbursement rates for all healthcare services, tests and procedures, especially hospital based care, (3) robust tort reform that will take medical dispute resolution out of the hands of juries in favor of special health courts and give doctors strong safe harbor protection from lawsuits when they follow evidence based guidelines where they exist, and (4) a much more sensible approach to end of life care.

  18. “If people would just drop their knee-jerk opposition to any idea that even hints of financial risk to the poor, we could make some real progress in this country.”
    Medicare was passed so the 13% of seniors who had trouble paying for some part of their lifetime care would not lose the shirt off their back. Medicare didn’t cover catastrophic illness and 19% of Medicare members are now on Medicaid. And the 13% where not dying in the street at the time. If people really cared about the poor they would get government out of healthcare not keep expanding their role.
    “But I do know that the chances are very slim that common sense will prevail.”
    This is where I get in trouble, for to long intelligent people just shook their head and maybe chuckled at the people that held these baseless beliefs. Since Medicare was passed and Medicaid expanded they have never been aggressively attacked for the failures they are and the people that blindly support them never shown for the idiots they are. Every Congressman that voted to pass Medicare should have a dunce cap added to their picture and forever be known as someone with such little intelligence and so much political ambition they would pass something so terrible. Democrat and Republican alike should be shamed for the lack of common sense.
    The same people doing the most harm to the poor somehow also get away with claiming to be the protectors of the poor. Those showing any passion in dismantling the chains of slavery that tie them to poverty, Medicaid, Welfare, housing projects are immediately branded as anti poor and cruel.

  19. Absolutely agree Nate, although I suspect many reading your words would assume, even though you didn’t say it or mean it, that you were advocating for keeping the current system. I don’t know that, even if PPACA were repealed, that there would be the will in this country for reforming the private healthcare system in a meaningful way, and you would still have to deal with the ingrained erroneous idea that “50,000” Americans are going without health care. (No insurance does not equal no health care)
    If people would just drop their knee-jerk opposition to any idea that even hints of financial risk to the poor, we could make some real progress in this country. HSAs are one such concept, as you well know, that evokes such an emotional response in those who oppose it. Even if they read the words that follow next, it seems like they have a genetic kill switch that shuts off the brain when the letters H,S, and A follow each other in succession. Substitute mandated insurance in the PPACA with the gift of a taxpayer ‘progressively subsidized’ HSA, and you would have the start of a uniquely American solution to the problem of inadequate healthcare access. Sorry for repeating this from another thread, but I am passoniate about the possibilities of this idea and its potential to benefit the POOR in this country. But I do know that the chances are very slim that common sense will prevail. The concept that the money the patient controls and spends does not have to all come from the patient is a concept that eludes those who think that every idea reflects a partisan bias.

  20. “I have trouble seeing how this could be implemented in a manner that would be acceptable to CMS,”
    I think it would be in the best interest of providers, insurers, employers, and patients if we all got as far away from CMS and their dictates as possible. Until government healthcare dies we need two systems, one nightmare, inefficient, overly expensive government mess, then in the other lets all start using some common sense and do things the way they should be done not how some politician thinks they should.
    ” I maintain that the only way to reduce health care costs is for the patient to pay the physician/provider directly”
    Agree fully, patients have to see what they are spending and have to feel a connection to it.

  21. Nate, thanks for clarifying. I agree that providers do have more power than they realize, although how much power and in what manner to weld that power depends greatly on which class of provider we are talking about. Larger organizations have more clout, but policy wonks would do well to realize that the larger the organization, the more likely they are to twist any great idea into something that benefits them.
    The current system does indeed benefit someone. To understand who one only needs to look at who funds the politicians campaigns. It really is that simple (keep in mind that less than 20% of practicing docs belong to the AMA). Insurance companies and hospitals are right up there with the best of them, and it is no coincidence that they are the entities that benefit most from PPACA. Doing what these groups want will never lead to healthcare system savings or improvements.
    Maybe the politicians are ignorant??? Surely that was not a serious question….the best we could say of them is that they are not stupid, but they are willfully ignorant of any information that might raise the possibility of a moral conflict, thus they can always claim to have tried to make the best choice with the “limited” information they had at the time.

  22. Barry –
    I understand your points which are well made. Your first paragraph would not apply to solo practitioners such as myself, because third party payers would never trust me to bill them on the basis of time. Employed physicians can be payed by their employer on the basis of time, with the employer then collecting payment from the third party based on some other metric.
    Now the idea in your last paragraph is interesting, and might work with private insurers, but I have trouble seeing how this could be implemented in a manner that would be acceptable to CMS, unless balance billing were also part of the package. It would be closer to price transparency, but does not solve the problems created by the CPT code set. Patients that cared to learn the appropriate codes would be more informed, the rest would remain just as blissfully ignorant as they are now. I say blissfully because truly most patients are not interested in what my fee is, they are only interested in what their portion of my fee is, and for the majority of patients there is no correlation. Having my fee based on RVU x negotiated conversion factor would not change this.
    I know that it is a somewhat different discussion, but I maintain that the only way to reduce health care costs is for the patient to pay the physician/provider directly, with subsidies paid directly to the patient progressively. Paying for care instead of paying for insurance will always be cheaper. It is the patient as payer who should be incentivized to seek savings (and there are many ways to do this), everything else will follow.

  23. tried to squeez that in before boarding the plane. If doctors started simplfying their treatments insurance would be forced to deal with it to a large extent. There are numerious things providers do that drives insurers nuts, we, for the most part, can’t stop you from doing them.
    I think providers have more power then they tend to beleive. If providers decided they wanted to only charge standard and extended I think they could. I think if you went to insurance and said you wanted to simplfy things they would even be on board with it. I assume the present system benefits someone but I have no idea who, unless you count the politicians and who knows if they have alterer motives or are really just this ignorant.
    “Nate, what information can payers obtain (buy) across payers?”
    Directly nothing, there are some EDI gateways, check processors, and other ancillary companies that aggregate their clients data and resell it but there is not much available at all.

  24. Mike MD –
    I don’t think paying for time is piecework. If you’re taking a history, reviewing treatment options, trying to diagnose the patient’s problem, etc., then paying for time is most appropriate, in my opinion. This is the way corporate lawyers are paid. It seems to work fine for them. Virtually all the large private clinics, with two exceptions that I know of, that pay their doctors a salary also incorporate productivity metrics to determine bonus compensation. The two exceptions are Mayo Clinic and Kaiser.
    As for specific procedures like surgeries, these lend themselves to payment based on a combination of a standardized amount of time the procedure should take plus an allowance for complexity and skill. If a normal gall bladder removal, for example, takes an hour, payment should be based on that amount of time. If an easy case takes only 45 minutes, you still get paid based on an hour. If you’re slow or the case is a little more complicated and takes an hour and twenty minutes, you get paid for an hour.
    This is basically how CMS’ RBRVS system works though RBRVS also incorporates allowances for practice expenses and malpractice insurance. Within the CMS formula, 52% of the relative value units relate to the physician’s own work, 44% to practice expenses and 4% to malpractice insurance. There are adjustments to reflect regional differences in costs. Finally, to determine the actual fee for a given service, test or procedure, the total of the RBRVS units is multiplied by a conversion factor, which, in 2010, was $36.0791 per relative value unit. In theory, if everyone used the RBRVS system and each provider were free to negotiate their own conversion factor with payers, it would be a cinch to determine which providers are expensive and which are less so. Then all we would need is a reasonable way to assess overall quality.
    For more detail, see Uwe Reinhardt’s Economix Blog post of 12/3/2010 here:

  25. Nate,
    I’m sorry but I don’t understand your question – what do you mean by “two office system”? What do you mean by “undo the visit”?

  26. Barry –
    The point is this – saying that fee for service has failed is misleading. Name another part of our economy in which a service is provided, a fee is paid, and the one receiving the service has no idea what the cost of the service was? Is that disconnect present because their was a fee for the service? No, the disconnect is there because of who paid the fee – someone other than the one providing the service. This is not what should be implied by the term “fee-for-service.”
    Piece work will exist in any payment system – it is inevitable otherwise it fails. The Soviets discovered this the hard way. “To each according to their need, from each according to his ability” simply does not work. I see 22 to 28 patients a day. Employee me, pay me an hourly rate, and that will drop to 18 to 20 patients. It cannot be otherwise, and to think so is to live in an alternate reality. It will not be long until my employer is either offering a carrot or a stick for productivity and I am back to piece work. And keep in mind that an hourly rate means EVERY physician is employed. The system you describe is piece work.
    To start equating the time it takes to perform a service with the worth of that service is a very dangerous concept. The slower or less skilled surgeon in your scenario is paid more for the same procedure than the skilled one. You would have to adjust for this through some mechanism – have to – and then you would be back where you started.
    “which was accepted as full payment.” This is an incorrect statement. The urology clinic was contractually bound to that payment amount and had no further choice in the matter. They are also contractually bound to bill you their usual and customary fee and to collect your co-pay without giving a discount.
    As for the uninsured, they do not pay full price in my office, and I have many uninsured patients. I am afraid to describe the mechanism because CMS has opaque rules for how this should be done and one can never be sure that CMS will be satisfied.

  27. Mike if you moved to a two office system what choice as a provider would I have but to accept it? I can’t undo the visit that was performed

  28. Mike MD –
    Perhaps you could explain the difference between piece work and fee for service.
    I’ve said many times that I think the system would work better if PCP’s and other docs who do mostly evaluation and management were paid for their time. So, when I see my cardiologist / PCP, it shouldn’t matter whether I need a consult, an x-ray, a stress test, and echo or whatever, the hourly rate should be the same with a minimum of between $50 and $70 if my issue requires just a few minutes to deal with. If a tech is required to assist, there could be an extra charge for that. Imaging and prescription drugs lend themselves especially well to price transparency. So do blood tests. Surgical procedures should be priced as a bundle incorporating all care from pre-admission testing through rehab and follow-up. Since different providers are paid different rates for the same procedure depending mainly on their market power, it would help to control cost if I or my referring doctor could identify the most cost-effective providers before services are rendered.
    Where do these artificially high list prices leave the uninsured? At my last urology checkup, a pelvic and abdominal ultrasound were billed at a combined total of $675 with insurance paying just over 25% of that which was accepted as full payment. Both procedures together took no longer than a couple of minutes. Blood tests are typically billed at 4-5X what insurance actually pays, but it’s virtually impossible to learn the real price ahead of time. Mercifully, no other part of the economy is this screwed up.

  29. Nate: “is the problem the way providers are paid or the way they bill? Don’t bill 40 different 992 codes and we won’t have to reimburse you for 40 different amounts.”
    Nate, I don’t mean this rudely, but you obvously don’t understand. I bill the way I do because otherwise I won’t get paid. Why is this concept so hard to understand? If I accept third party payers, which I do – for now, I have no other choice but to bill “40 different 992 codes” or I won’t get paid. It’s actually 10 codes – 5 for new patients, 5 for established. But in reality it is mostly 2 codes – 99213 and 99214 – standard and extended service office visits for established patients. But do some research. I cannot publish my fees for these codes. It is illegal. ILLEGAL. And if I were to publish my “fee” for a 99214 it would looks something like this:
    My “Fee” — CMS — Ins A — Ins B — Ins C etc.
    $125 ——- $68 — $78 —— $92 —– $107
    Not particularly useful, especially when you consider that if I happen to use my $350 disposible can of cryo freeze for the pre-cancerous growth on your arm, there is another charge, or if you need your DTaP immunization there is yet another, etc. all paid at a different rate depending on your insurer. And you have to understand that my “fee” is arbitrarily set high so that I capture the highest payer’s payments, for if I charge less I lose money. If I worked in a fee-for-service system, my charges would be very transparent, with an extended office visit being about $85 and a standard office visit of about $65. Think about how much of your insurance premium goes to “cover” office visits, and think about how often you actually would need to visit me in a year, and you can see who is making the excess profit here. These same points apply equally well to the costs for lab sevices, X-rays, and ER visits. In a Fee-for-Service system, total costs would go down, way down, with insurance reserved for unexpected health problems, not ongoing health care.

  30. I repeat this comment at another thread, but tried to put it here first and nearly lost it, so place it again where I intended it in the first place:
    Speaking of internet sites and advocating for the PPACA, read this link and amaze at the sheer hypocrisy of the advocates:
    Yes, supporters and apologists will be quick to point out Michelle Malkin is a fierce Obama detractor, and some of her positions are so ridiculous to read, she does take away from any legitimate rebuttals to Obama. But, this column is stating factual information as to who is seeking waivers from participating in the legislation.
    This legislation, that is so wonderful and beneficial to the public, that so many unions and their members are literally fleeing to be as far away from it! Now there is consistency and dedication to your leaders and their philosophies, eh?
    Again, the more that is exposed about the specifics to PPACA, the less sincere and invested Democraps are to the public they resent, er, represent!

  31. Barry Carol: “We need to move away from fee for service”
    I would respectfully disagree. I believe we need to move towards fee for service. We do not have fee for service now – that is the whole point. This seems to be a favorite misconception of those who favor some sort of bigger system. Yes there are advantages to large systems, not one of which is doing away with fee for service, because we absolutely do not have fee for service. We do have piece work – i.e. more payment for doing more, but that is not the same thing. You say you are a believer in disclosure – disclosure to who? If you mean to the patient, the only way this is going to happen is if the patient has a reason for wanting to know the price, i.e. they are in a fee for service situation. If you are instead concerned about disclosure to others in the system then I am sad.

  32. Sorry for disturbing you, Nate, but big sales are actually aimed as much at non-consumers as they are aimed at taking away consumers from the competition.
    As to the transparency/EOB solution, why can’t Government mandate that insurers submit de-identified claim data to HHS on a regular basis? They are now Meaningfully mandating that doctors and hospitals buy software and report on various “measures”. Shouldn’t we be able to mandate that payers report too? After all, payers have much more structured data than providers.
    CMS is advertising a website where they are supposedly going to post “quality” measures for physicians, which comes from physicians’ reports (see Michael Millenson’s post). How about getting claim histories from payers and posting at least an average number across payers for most common procedures, or a range, or just a bunch of stars?

  33. “Groupon schemes and Superbowl ads are not intended to decrease revenues for the seller.”
    Margalit your lack of economic awareness is disturbing. When someone advertises and gains new revenue that revenue ALWAYS comes from someone else. If Kansas Hospital advertises knew replacemtent for 50% less then what is being charged in NY and MA and people switch that would be a huge savings for the system. Why is efficient providers taking business from inefficient providers a bad thing?
    Should we outlaw Wal Mart advertising $4 generics becuase it leads to more expensive brand consumption or something? We can advertise more efficient utilization without advertising more utilization, in fact the ideal solution would be to drive the cost down to where the care is not insured. Again you seem to be focusing on a specific area of care and saying we can’t implement improvements anywhere else becuase they might not work there.
    Mike MD is the problem trhe way providers are paid or the way they bill? Don’t bill 40 different 992 codes and we won’t have to reimburse you for 40 different amounts. A doctor can charge $90 for new patients and $70 for existing no matter the code and simplify things greatly.
    I wish we paid .95 to 1.15 Medicare. The big insurers that I see are still 20-30% higher then Medicare. We pay claims under all the big ones and I don’t see discounts that deep at the hospitals. Physicans might be close, PCPs more likly then specialists.
    A lot of carriers have very easy access to downloading EOBs from their website, people could email the PDF to a site in a matter of seconds then automate the entire backend.
    I think expenses that trend more towards out of pocket would garner interest. Rx, office visits, lab test, dental, vision, etc. Doctors could pay to advertise based upon the patients location or medical needs. If I have an HSA and am sick on a saturday it would be cool to jump on a website and see offices with weekend hours, what it cost, and patient feed back. Any feedback on providers would actully be ideal, carriers will never go there becuase they don’t want to alienate the providers they are trying to get deep discounts from. Why contract with an insurer that post your office is dirty and your bed side manner sucks.
    it might also work grouped or targeted to specific alliments, an asthma site that post cost and different treatment methodologies. I see people all the time that are on super expensive treatment plans that have never heard of home remedies others have tried and swear by. If they could see a doctor charging 1/2 what they are paying and people saying they get results they might try it. I don’t think cost will or should be the main driver, its one part of a treatment decision.

  34. To clarify and amplify my last comment, BCBSMA includes a risk adjustment mechanism in its Alternative Quality Contract to account for patients of varying complexity and health status. Second, it probably uses a mechanism other than disclosure of actual contract rates to help referring doctors identify which specialists and hospitals are cost-effective (with good quality) and which are paid high rates based on market power so use of them can be avoided or at least minimized.

  35. “As you can see it is not price transparency that is the issue, it is the way in which physicians and other ‘providers’ are paid that is the problem, and until you change that, there will NEVER be price transparency.”
    I’m a big believer in the disclosure of actual insurer contract reimbursement rates as I think they would be helpful. I would love to be able to find out, for example, how much each of a half dozen local imaging centers is paid for a specific MRI or how much different drug stores are paid for a specific prescription drug. Even if my co-pay is the same wherever I go, if I know that my employer’s rising healthcare costs are hurting its ability to raise wages, I have a clear incentive to help control medical costs. I need easy to use tools to do that, however. For big ticket hospital procedures, especially surgical procedures, as we move toward bundled or episode pricing, the ability to compare contract payment rates among hospitals for those would be enormously helpful, though information about outcomes and other relevant quality metrics would be necessary as well. By the way, at a recent conference, Princeton professor, Uwe Reinhardt, told me that he also thought that insurer contract rates should be disclosed.
    That all said, the way providers are paid is a critical issue. We need to move away from fee for service. Blue Cross and Blue Shield of Massachusetts have some early adopters for its innovative Alternative Quality Contract which is described in the most recent issue of Health Affairs. For the networks that signed up to share financial risk, it works basically like this: A given patient is attributed to a specific PCP. The PCP is given a global budget to cover each assigned patient’s care including care from specialists and at hospitals. Everyone is paid fee for service over the course of the year. If the total cost of care comes in below budget, the provider group shares in the savings. If it’s over budget, the group is responsible for an agreed upon percentage of the cost overrun. Contracts run for five years. It appears that providers are also given information about insurer contract rates so, when they refer to a specialist or a hospital, they have an incentive to use the most cost-effective providers and avoid, to the extent possible, the providers who are paid above market rates because of their market power and not their care quality.

  36. @Nate — aggregation is exactly what I had in mind. I hadn’t thought about OCR. I’d thought I could make EOBs the “currency” of the paywall: upload one EOB, get some number of queries for some period of time. If you want more, gimme more EOBs — I don’t care whose they are as long as they’re real and you have the patients’ permission to share. Get `em from family, friends, neighbors. The OCR idea would make this REALLY easy for the public. There could be some education on the site to help lure people in. And I bet it would work reasonably well for closed heart surgery: CABG. But, no, it won’t work for everything. Maybe I could monetize it by selling access to hospitals and medical groups at negotiation time.
    Dunno whether it is worth it though: as Mike MD points out Medicare rates are public information and I am given to understand that most commercial insurance pays between 0.95 & 1.15 times Medicare for most things in most places. You’d know more about that than I would.

  37. Anyone who calls for price transparency does not understand the current third party payer system.
    But that having been said, if you have access to the internet you can look up the price for any cpt code in any locale for a medicaid or medicare patient. So have at it – grab yourself a CPT book for $69 and go for it. I’m sure you can find the code you want after flipping just a few pages. Most insurers rates are priced at some multiple of the medicare rate, so it shouldn’t be too hard to extrapolate the price from the rate you find on the CMS web site. Just make sure you have ALL the codes for the service you are pricing – there are usually more than one for each service encounter.
    As you can see it is not price transparency that is the issue, it is the way in which physicians and other ‘providers’ are paid that is the problem, and until you change that, there will NEVER be price transparency.

  38. Nate, Groupon schemes and Superbowl ads are not intended to decrease revenues for the seller. They are actually increasing revenue by cutting margins and increasing volume of items sold. Are you certain that this is what we need to do in health care? Lure more people into the system for unneeded services? People tend to buy more items they have no use for, if they are on sale.
    Besides pharma already figured this angle out to the clear detriment of overall costs.

  39. “This is tinkering at the edges, at best.”
    Margalit there is no golden government program that will solve this. We have to tinker at the edges of the healthy, then we tinker at the edges of the sick, tinker at the edges of providers, insureres, and employers. Our system is not dieing from one fatal illness, it is being killed by a million small things that combine to make it unaffordable and poor value.
    It wasn’t one bad government law/bill that got us here it was 45 years of them.

  40. This is tinkering at the edges, at best. The bulk of health care expenditures do not come from IUDs and physicals. They come from a small (and ever changing) population with enormous disease burden. Groupons are not going to work for them, although they may work well for entrepreneurs. And neither is IT or any other “get rich quickly” gimmick.
    If you read nothing else this weekend, please read Dr. Gawande’s latest piece here

  41. Somebody tried what the commenters suggested: was an effort launched a couple of years ago that encouraged patients to submit prices that they’d paid to the website. Unfortunately, it did not take off, probably because nobody had an incentive to supply their own information, so the database was thinly populated. (It’s called the free-rider problem in economics.)

  42. To Mr. Graham’s point we already seeing this working successfully in cosmetic care, dental, vision, and other medical services not covered by insurance. Before people jump on it no this wont work for open heart surgery but that doesn’t mean we shouldn’t do it for everything it would work for.

  43. Tom what would be interesting is to aggregate the data. When people upload their EOB link the insurer/PPO to the discount then report it to anyone that is interested. I can’t, off the top of my head, think of any way an insurer could prevent a member from sharing/disclosing their EOB with discount.
    With OCR and EDI that already exist you wouldn’t even need people to touch them, all the major insurers have standard EOB formats, people could scan or fax, system yanks out the peritenant data, then destroys the incomeing source document.

  44. But we don’t need the government.
    I’ve thought about creating a website where you can transcribe your EOBs and in return look up prices in your locale, but it doesn’t really solve the problem you’re describing. Since the stated charge is so stated to game the system, and since the insurers made the allowed charge by strong-arm tactics the prices are sort of bogus. But at least we could bound the problem for people.