Can Health Care Transparency Make A Difference?

There’s been a lot of discussion of transparency in health care recently, e.g., a USA Today op-ed and a counterpoint by Paul Ginsburg. The appeal of transparency is obvious. As movingly documented by Steven Brill in Time, prices are high and often differ quite substantially, even across close by providers. However, we don’t know the prices for the health care that we consume, and it’s extremely difficult to find out what these things cost (e.g., this recent study in JAMA).

While the appeal of transparency is obvious, it’s important to realize that buying health care is not like buying milk at the grocery store. A key factor is health insurance. Health insurance is very important — people need to be insured against the catastrophic expenses that can occur with serious illness. Thus people with high health care expenses won’t be exposed to most of those expenses (and shouldn’t) and therefore will have no reason to respond to information about health care prices.

Further, the distribution of health care expenses among the population is very uneven. Fortunately severe illness is relatively rare. What that means is that most of us will have quite low health care expenses in a given year, while a very small number of people will unfortunately be very sick and have very high health care expenses. The figure below illustrates this. It shows the distribution of health care spending in the US population for 2009 (source: data brief by the National Institute of Health Care Management). While this is a few years old, the distribution has remained essentially unchanged over a long period of time. The first thing to notice is that the vast majority of spending is accounted for by a small fraction of the population. The top 5 percent of spenders account for about half of all health care spending, and the top 50 percent account for almost 97 percent of spending.

What this means is that most of the spending on health care in the US is accounted for by people with very high expenses. Further, many (but not all) of these people have expenses so high that they are well beyond the cost sharing features of any health insurance plan, even a high deductible plan that features extensive consumer cost sharing.

Using the query tool for the Medical Expenditure Panel Survey, I found the expenditure levels associated with various percentiles of the 2010 spending distribution. Individuals in the 90th percentile of the spending distribution, who account for almost two-thirds of all health spending, have spending levels of $9,512.76 and higher. These people are almost certainly going to be beyond the cost sharing limits of their health insurance plans. As a consequence, two-thirds of health care spending is unlikely to be responsive to transparency efforts.

Since these people are beyond the cost sharing features of their plans, they have no incentive to pay attention to the costs of care, either in total or cost differences across providers. In addition, people who are spending this much money on health care are unfortunately likely to be quite sick. The demand for care of people who are very ill tends not to be very responsive to prices.

Does this mean that there’s no point to transparency efforts? No. Forty nine (.999…) percent of the spending is accounted for by people who spend (just under) $814.86 or less. For these people, cost sharing can make a difference — large, but conventional, deductibles (e.g., $1,000, $500) would be relevant to many of these people. However, for transparency efforts to work, price information has to be presented to people in a way they can understand and use — the total cost to them of obtaining care, as opposed to the individual components. Further, there have to be alternative providers. Many health care markets have become extremely consolidated. If there are no good alternatives, then transparency efforts will be of little practical use.

In addition, transparency with regard to the quality of care is both important and valuable to all, regardless of spending level. Providing accurate and informative measures of the quality of care is challenging, but a lot of progress has been made and there are ongoing efforts in this area.

Last, there’s some concern that by making prices public transparency efforts will facilitate collusion by providers. If so, this could unintentionally make things worse by reducing rather than increasing competition and leading to higher, rather than lower, prices. There’s evidence that this has happened in other industries (e.g., cement), however I don’t think it’s terribly likely in health care (although not impossible). Even with transparency efforts, health insurers will play a major role as buyers of health care. Insurers’ ability to direct large numbers of patients means that providers have large incentives to make deals to obtain those patients. Creating and maintaining collusion becomes difficult under these circumstances.

In sum, trying to achieve greater transparency in health care is a worthwhile effort, but it has to involve usable measures of both price and quality. Further, it’s unrealistic to expect consumer shopping alone, and hence transparency efforts, to drive the health care market. Transparency is but one ingredient — much more is required.

Martin S. Gaynor is a professor of economics and health policy at Carnegie Mellon University’s Heinz College. He blogs regularly at Compassionate Economics, where this post originally appeared.

34 replies »

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  4. Health care transparency provides consumers with the information necessary, and the incentive, to choose health care providers based on value.Transparency is a broad-scale initiative enabling consumers to compare the quality and price of health care services.

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  5. Why isn’t anybody addressing the salaries of the administrators? CEO’s are pulling down millions a year in a system that is supposed to take care of sick people who are helpless to negotiate costs. I’m all about price transparencies and I think the cost of an MRI in Timbuktu should cost similarly as one in NYC adjusting for regional differences but I do not believe that administrators are worth this kind of money. I’m a seriously good nurse who works on the floor with a lot of experience and education. My salary has increased three bucks over FIVE years and it has been eaten up by rising insurance fees so I have not effectively had a raise in five years but that’s ok because I don’t want to get a raise if its at the expense of the patient. Yet my hospital has frozen hiring and if staff leaves they aren’t filling positions ostensibly because they don’t want to lay off staff (which is clearly a scare tactic) . So really I’m doing more work for less. My thought is that maybe if a CEO gives up a million a year perhaps we could fill some positions. Really how much money do you need?

  6. American hospitals are a baffling combination of public institution plus private enterprise.

    We are not alarmed when a five star hotel turns away anyone who cannot pay for their room in advance.

    But we passed the Emtala law in 1986 precisely to prevent hospitals from doing this for emergency care.

    In the 1950’s there were more community hospitals, but they were not well funded by taxes. They were expected to get charitable donations and use more volunteer labor.

    One reason that we are holding back on transparency is that if prices were fully disclosed, a fair number of hospitals would just plain close their doors.
    Who would pay $15,000 for a treatment that could be done for $3,000 in an ambulatory setting, or for $1,000 in a foreign country?

    But hospital closings would mean a big loss of middle class jobs, and
    in an emergency your ambulance might have to drive further to find an open bed. (as happens in Canada at times.)

    I am just touching on the ambivalences here.

  7. Bob, you bring up a great point about the current state of payment mechanisms and hospital price setting, which has indeed created enormous departures from how we might want or at least expect participants in health care to behave. And currently, no one in health care–patient, hospital, or payor–responds to what you might call regular rules of economics. However, we should not be surprised by this when there is no transparency. When they are not forced to disclose their prices, hospitals are free to make a patient, insurer, or Medicare a price taker. American hospitals are not by nature exempt from economic rules, but rather decades of misguided regulations have allowed them to create a fertile environment completely divorced from any real response to resource utilization–something that will go away when we bring transparency to the market.

    Do you think this is correct? Do you think hospitals are just currently incapable of responding to traditional economic factors like incentives and margins or do you think this departure is more fundamental to health care? or just American health care?

  8. Mitt, your post is well written, but I am not so sure that the regular rules of economics apply to American hospitals.

    Due to better drugs and better surgical techniques, hospitals already have lost millions of patient days over the last 15-20 years.

    However, hospitals take in more revenue than ever. They do this often by upcoding every episode to the highest-paying category of every fee schedule.

    And most insurance plans, including Medicare, tend to be dumb and undemanding payors. Hospitals operate in a world of cost-based pricing,
    while the rest of the economy must use price-based costing.

    To put it more graphically, insurers usually accomodate to what hospitals say their costs are. But does Walmart accept higher costs? Does Walmart pay a factory in New York City more than a factory in Arizona, just because labor and real estate cost more in New York?

    When health insurance plans start giving their subscribers free airplane tickets to the Phllipines for surgery, then we may see hospitals pay attention to pricing in the way you describe.

  9. I love that this article is addressing transparency but was disappointed with how it undercut its importance. The author did not properly describe how incentives and margins work–the two fundamental factors underpinning the field of economics–and thereby discredits the power transparency will have.

    The author is correct in saying that patients who exceed their cost sharing limit no longer have financial incentives to pay attention to cost, but that falsely assumes both that no patients past their limit would remain price sensitive if given transparency and that only financial incentives matter. Regardless of whether people still respond to a price tag when they are not paying the bill, something indeed debatable, everyone will be sensitive to things like convenience, timeliness, and perceptions of care–very real costs to which people will respond when presented with transparent options. While the other mentions these as quality measures, he doesn’t seem to emphasize their significance.

    More importantly, you do not need anywhere near a majority of patients to be savvy, price sensitive consumers in order to drive change. Markets work on the margin. A business does not need to lose 50% of its customers to go bankrupt, they only need to lose 5% or 10% before they become insolvent! Health care works in much the same way with enormous fixed costs associated with providing care (facilities, insurance, staff, technology, etc.) that make them sensitive to even small fluctuations in volume. (Without looking at the books of hospitals, evidence of this can be found in the aggressive lobbying efforts against specialty hospitals or in favor of “non-profit” status.) If you introduce transparency, and 5% or 10% of patients respond by going somewhere else for a lower price or higher quality, provider groups will be forced to provide higher value through some combination of lower costs or higher quality. Billions of decisions like this would happen in a price transparent market.

    What happens at the margin is what will drive change in health care. Meaningful decisions at the margin require transparency. Failure to understand this is a principle source for the failure of so many well meaning, but misguided health policies. Transparency is not a panacea for healthcare, but it is the nudge for all the other ingredients of health care to properly align.

  10. Good points, Barry, thanks as always.

    California has a law that limits non-network billings in emergencies. Why oh why does this depend on one state at a time?

    The ACA took the position, I am inferring, that if we could get everyone into an insurance plan then everyone would have some level of protection against price gouging.

    Of course in my writing I take the position that we should have attacked balance billing for all patients, insured or not.

  11. Bob –

    I hear that CMS may be considering not paying hospital facility fees for care that could have easily been safely delivered in a non-hospital setting such as a doctor’s office even if the practice is hospital owned. That would be a good thing, in my opinion.

    Also, my understanding is that most insurance contracts require providers to accept the insurers allowed amount (contract rate) as full payment except for the standard patient coinsurance amount and any patient liability under the terms of the policy deductible. Providers cannot balance bill under these circumstances.

    They can balance bill, however, for care provided outside of the insurer’s network. This can be a significant amount, especially for surgical procedures. New York State, which took over the non-network allowed amount database that used to be operated by the Ingenix Division of UnitedHealth Group, sets the non-network allowed amount at 140% of the Medicare rate. If the surgeon or other provider charges 5X or 10X the Medicare rate, he/she can balance bill for the entire difference.

    Interestingly, in the NYC metro area, many surgeons, including most of the well established docs, don’t accept ANY commercial insurance or Medicaid. I don’t know how many don’t take standard Medicare. One would have to be pretty well established among the well heeled population to get away with this it seems.

  12. Barry you are correct that capitation will be tough to adapt.

    We could solve the issue of overpriced outpatient care in about 3 days if doctors were liable for a patient’s costs above what the insurer considers a usual and customary fee.

    I would feel great pleasure if hospitals and doctors were put on the hot seat for the facility fees and other outrages that they charge.

    We are heading for a conflict between what hospitals must do to just cover their bloated budgets, versus the fair treatment of all patients.

  13. “One of the prime reasons for transparency is to make costs apparent to everyone.”

    Great point Steve. I’d just like to know the price before I get to the checkout counter, or in the case of health care, before I get the bill in the mail.

    But transparency with concentration of ownership or influence is simply an opiate.

  14. Bob –

    I wasn’t following the healthcare scene in the 1990’s so I can’t really speak to your question. As I understand it, though, HMO’s probably focused too much on price / cost back then and not enough on quality. Moreover, they also threw up roadblocks like requiring patients to get an authorization from a primary care doctor before they could see a specialist. It retrospect, it’s not surprising that there was a backlash against them.

    Today, tiered networks take quality into account. Insurers claim that they won’t place providers in the preferred tier just because they are relatively inexpensive if they can’t also meet their quality metrics. It’s pretty certain that there is lots of relatively routine care that virtually all hospitals can do well. To go to a brand name medical center for such work and pay 2X or 3X what the community hospital is paid makes no sense. This is why we need both price and quality transparency and why doctors need to be more aware of the cost of their treatment decisions and which providers patients are referred to. At the same time, for sophisticated procedures like organ transplants and treatments for rare cancers, the big name medical centers are most likely the place to go and may be the only providers in a region that can perform such care competently.

    In health policy circles these days, there is much talk about the desire and the need to move away from the fee for service payment model so we can start to pay for value instead of just for volume. The big advantage of fee for service from a provider perspective, though, is that it doesn’t require them to assume any financial risk. Estimating costs to care for a patient population a year in advance is darn hard especially when some of those costs can be driven by patient non-compliance with doctors’ recommendations and advice. Capitation and bundled payments are worthy goals which I would love to see take hold but it won’t be an easy transition. That’s for sure.

  15. Health care services providers cannot compete on price.
    Would anybody here chose a hospital running ads for being cheap (and clean)? It’s not like Walmart where you can buy the same exact brand name peanut butter for half the price of a fancy supermarket. Health care is not a product. The brand name IS the seller.
    Certainly HMOs can force poor people to “choose” cheap and clean facilities. Good luck with that “culture” change….
    If we want lower prices, we should have national price controls. Medicare does, and it didn’t kill anybody yet. And those are publicly available by the way. As transparent as one could wish.

  16. Interesting point. It could be that having prices public and visible might increase consciousness of costs in general, which could have salutary effects.

  17. Insightful thinking. Let’s take it one step forward. Transparency should lead to price reduction. But then hospital costs are fixed. So maybe it will reduce where noticed and objected to and will go up elsehwere. On Amazon/ebay discerning power users make savings at expense of casual users. Overall cost is anyways the same.

    From one big bucket perspective iunder current circumstance quality is always a better bet to contain cost. The quality I refer to is where people get healed quickly. They consume lesser of procedures and of lower complexity. Hospitals can react to that and start with reduction of variable cost. No one is asking for lower healthcare procedures’ costs except uninsured and consultants, so reduction in price /unit is non-starter.

  18. One of the prime reasons for transparency is to make costs apparent to everyone. Most people, often health care providers also, have little idea how much stuff costs. If we are constantly exposed to prices we can begin to focus on them. At present, we really put very little effort into trying to decrease health care costs. Look at France. They post the prices for everything. When they try to raise prices, sometimes they have riots. While we dont need riots, we do need these to be more prominent in our thoughts.


  19. Question for Barry —

    when the old HMO’s in the 1990’s literally ordered doctors to send patients to the cheapest hospital in their network, there was great resistance from the public.

    Those HMO’s came fairly close to making hospitals compete on price.

    I am not really expert in the history here…….any comments?

  20. Martin- health care is about incentives— in most places, the same doctor providing the same procedure to the same patient using the same implants can have massive price variations– all depending upon 3rd party contracts the provider and patient and payer( big business) has played no part in…

    direct pay will make an impact here—

    real AZ data:
    uninsured avg price for total knee replacement – $19,000 (hospital payment)
    insured avg payment for same- $24,000

    why should a big business pay a 20% penalty for the procedure when they are supposedly doing everything ‘right’?

    on the outcome issue– I guess I would refer back to a THCB post of mine from ‘the old days’ – July 2006


  21. I think as ACO’s take hold and new payment models evolve, doctors will have to incorporate cost and quality consciousness and awareness as an important part of their job. They won’t have to rate hospitals or specialists for cost or quality. They just need to be aware of the ratings their main payers have already developed.

    I don’t think it would be that hard. How many hospitals do doctors send patients to in the area where they practice? It’s not rocket science to know that the local academic medical center is likely to be more expensive for routine care than a nearby community hospital.

    Six chronic conditions account for as much as 75% of all healthcare costs. Those are CHF, CAD, COPD, asthma, diabetes and depression. Cancer treatment is a separate issue as is end of life care guidance, especially for those suffering from cancer, Alzheimer’s or dementia. Patients who need an organ transplant should be sent to a regional center that does enough volume to achieve good outcomes as compared to low volume centers.

    If the doctor is a salaried employee of an ACO and his or her bonus depends in part on effectively managing cost not by denying care but ensuring that patients get appropriate care in the most cost-effective high quality setting, awareness of cost differences among providers will be an important part of the job. In the past, doctors didn’t consider it part of their job to know or to care about costs. In the future, they will have to and they should have to in my opinion.

  22. Martin agrees with me that we should not expect the sickest patients to make cost-effective decisions about their care.

    Barry suggests it seems that doctors should be making cost-effective decisions about where to send their patients for care.

    I am not sure that doctors want to do this. Their professional lives are challenging enough without expecting them to rate hospitals on a complex mix of cost and quality.

    A better solution is this –deny balance billing in most instances.

    If the insurer pays $250 for a test, then the providers would be forced to accept that as payment in full, so long as the $250 was at least equal to Medicare rates.

    This will provoke wild protests from hospitals. Frankly, they have brought this on themselves in my opinion.

    I did not say this would be popular. True cost control never is, and I fear that much of the current discussion of ACO’s is an attempt to be nice about a situation that is not nice. Joseph White made the point in a recent article that it is easy to be in favor of bending the cost curve over the next decade….but no one wants to lower expenses right now!

  23. I have long been a big believer in the value of both price and quality transparency. The ultimate objective should be to ensure that patients, especially the high utilizers of care, get the care they need from the most cost-effective high quality providers in the most appropriate care settings. For patients, tiered insurance networks which require higher coinsurance for going to a higher cost hospital or specialist whose quality is no better than a less expensive competitor can positively affect patient choices. For providers, bundled patients, capitation arrangements and shared savings payment models can all help to encourage referring doctors to steer their patients to the most cost-effective high quality providers. Financial incentives matter for providers as well as for patients and there is room for improvement in the structure of both over the historical fee for service payment model and uniform copayments no matter which provider the patient receives treatment from.

    The quality issue is somewhat more challenging, especially for hospitals. Princeton professor, Uwe Reinhardt, suggests that quality measurement should be something akin to a college final exam with several sections each appropriately weighted. In a recent post on his Economix Blog, he listed four aspects of hospital care quality as follows:

    1. Process – following evidence based guidelines and protocols.

    2. Outcomes – ideally risk adjusted to reflect the patient’s age, socioeconomic status, and co-morbidities among other factors.

    3. Safety – minimizing infection rates, 30 day readmission rates and other avoidable harm.

    4. Patient Satisfaction – can be defined in numerous ways and can attach significant value to things that have little to do with healthcare like the availability of valet parking and flat screen televisions.

    I think an appropriate weight allocation might be 40% for risk adjusted outcomes, 25% each for process and patient safety metrics, and 10% for patient satisfaction.

  24. Well, sure, you have to consider things like substantive capital barriers to entry (as well as other barriers to entry — legal/regulatory, talent, etc).

    “Transparency” is to a great degree cliche Happy Talk. See Hypothesis, Efficient Markets. Other factors held equal, my Edge is inversely correlated with my “transparency.” It could not be otherwise in a private market.

  25. Bob, I think we agree. Insurance should provide coverage against really catastrophic events, like cancer or severe trauma cases. People who have severe and expensive health situations should be heavily insured. Since that’s the case, we can’t expect them to pay attention to costs. Something else is needed. One possibility is a third party buyer shopping for them on their behalf. This could be a private entity, nonprofit, or public.

  26. The basic point exists because of the underlying nature of the distribution of health expenditures, not because of current expenditure levels. Severe illness is (fortunately) relatively rare, so at any given point in time a small number of individuals will be very sick and have very expensive treatments. This is what gives rise to the situation I referred to in which a small # of people account for the majority of expenditures. Since the purpose of insurance is to insure against catastrophic events, those people will be heavily insured and so have little incentive to pay attention to costs. Since that’s the case, there’s a limit to what can be done with transparency, cost sharing, or other consumer shopping measures. These have the potential to be effective for people with lower expenditures. This is fine and worth doing, but these people don’t account for most of health spending.

  27. I don’t see many ways to have those with the highest expenses given meaningful incentives. People need insurance against catastrophic expenses, so those with very high expenses won’t (and shouldn’t) bear much of their expenses. Even a low percentage coinsurance rate can lead to extremely high out of pocket costs for expensive cases. One of the costs of insurance is reduced incentives. We can and should move that with more consumer cost sharing, but there’s a limit to what can be done without sacrificing insurance itself. As I said, we should do transparency, but let’s not expect it to transform the system on its own.

  28. If the 50% of any population who spend $800 a year are exposed to full transparency, maybe their spending goes down to $600 a year.

    Big deal, basically. Insurance premiums will not go down very much at all.
    Doctors will be more annoyed at patients who shop around. Hospitals will no longer make money on overpriced outpatient treatments, or facility fees that they add onto billings when they buy up medical practices.

    All it takes is a few premature babies to wipe out all the savings from transparency in ambulatory discretionary care.

    The real action in lowering overall health costs must come in major surgery and trauma care and heroic treatments like transplants.

    In this respect I agree with Dr Gaynor and most readers of this blog.

    Where I perhaps part company is that I think it is a mistake to have the cancer patient or the comatose car accident victim be the agent of cost control.

    If we believe that our local fire department spends too much money, we do not try and control this by asking a family to choose how many engines they want at the scene when their house is now on fire.

    Instead we look at the budget of the fire department at the start of the fiscal year. We do not try to micromanage each episode of care.

    Now this is easier said than done in health care. There is no public review of hospital budgets.

    One solution would be to set maximum prices for heroic medical care…..
    i.e. a transplant can cost no more than $50,000, heart surgery can cost no more than $20,000,

    This will take away some of the biggest paydays that hospitals count on,
    but at least it is a step toward cost control. I prefer this kind of overt price regulation vs. having the poor patient as the kamikaze of cost control.

    Bob Hertz, The Health Care Crusade

  29. While this piece is interesting and well written, I disagree with some of the analysis. One compelling reason to increase transparency in health care cost is to drive down costs. It does not make sense to use current expenditures to demonstrate that increasing transparency will not be effective because the costs of the highest users of health care will be beyond their ability to pay, therefore making transparency superfluous. If it works as it supposed to, the costs for these individuals, and for all individuals, will go down as health care groups compete and produce higher quality care at lower costs to attract more market share. I find it a little circular to say that transparency cannot be utilized to reduce costs because costs are so high that they exceed the limits transparency.

  30. Martin- one thing I believe you have over looked-
    60% of the commercial market is self-funded (and even more if you include all gov’t workers in self-funded plans).

    For them, with a likely attachment point of at least $25,000 (and in some cases much higher whether it be per episode for a given covered person in a year) — (attachment point the level beyond which the reinsurance component kicks in)…

    For these patients/companies — the negotiated rate = the cash price…

    changing the incentives for a percentage of these folks (avoiding the absurd arguments of polytrauma incidents and similar catastrophic events) — can make a measurable impact on total health spending…

    an ability to have the 5% of people who are high utilizers (50% of costs) be more engaged in their hc choices to where a 5% reduction in spending occurs, would reduce hc spending $70 billion in year 1 alone.

    even for low utilizers, saving $30 due to direct pay transparency in the era of higher and higher deductibles and copays means real money for single moms and families who are struggling (most of America)–

    no question quality matters, but defining quality in hc for the vast, overwhelming majority of conditions/presenting symptoms is extremely difficult, and subject to who is measuring what, and what is defined as quality…

    The one (transparency) is not being made out to be a panacea, but it would be a very important step in the right direction.