OP-ED

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.

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Guest

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morgan123
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morgan123

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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AngryRN
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AngryRN

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… Read more »

Bob Hertz
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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… Read more »

Bob Hertz
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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… Read more »

Mitt Coats
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Mitt Coats

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… Read more »

Mitt Coats
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Mitt Coats

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… Read more »

bob hertz
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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.

Barry Carol
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Barry Carol

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… Read more »

bob hertz
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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.

Barry Carol
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Barry Carol

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… Read more »

Margalit Gur-Arie
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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… Read more »

Vikram C
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Vikram C

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… Read more »

steve
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steve

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.

Steve

Martin Gaynor
Guest

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

steve
Guest
steve

Difficult to get comments through on your blog, at least for me.

Steve

Peter1
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Peter1

“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.