Economics

Prices Drop When Health Consumers Shop Around For Healthcare

Here’s a point most of us can agree on. Tackling ballooning health care costs requires more than insurance reform because the charge and cost structure for health services in the U.S. is inconsistent and irrational. The same quality CT scan that costs $500 at one outpatient facility costs $2,000 at a nearby teaching hospital.

Obamacare’s typical high-deductible insurance plans encourage many cost-conscious consumers to shop around for low-ticket items below their deductible — and that is good. However, the bulk of health care spending is attributable to patients who rapidly blow through their deductible, after which they have no incentive to shop for value. Those 5 percent of people — who spend a whopping 50 percent of the nation’s health care dollars — have little incentive to consider price. With the cost of multiple medications, frequent doctors visits, use of specialists and one or more hospitalizations a year, these 5 percent will exceed even the highest deductible in the first few months of each year.

So what might be the single most powerful tool to slow the seemingly intractable yet unsustainable increases in health spending affecting practically every family in America? “Referenced-based” pricing for health services encourages patients — most significantly, those with the highest costs — to act as smart consumers by seeking the most cost-effective care, even after they have exceeded their deductible.

Here’s how it works. Insurance companies or employers set a limit they are willing to pay for a specified service of excellent quality — say, $1,000 for a CT scan — and communicate that reference price clearly to consumers. If patients choose a location where the charge is below the maximum set reimbursement rate, they pay nothing. If they choose a provider where the charge is higher, they pay the difference.

As patient-consumers shop around for the best price and quality services, competition in the market pushes prices down and value up.

Tools already exist to facilitate cost comparison for relatively low-cost items. Reference-based pricing, however, has an impact on big-ticket items, the ones that drive overall health spending. Increasingly, companies and insurers are contracting with doctors, hospitals and provider networks to negotiate a reference price for services offered.

As our understanding of quality measurement and price transparency matures, reference pricing grows easier. This model works well for services that have small quality differences but wide cost variation, such as radiology and pharmaceuticals. Services like in-patient care and surgery are more complicated.

Large companies that are self-insured (meaning they are the payer) are already negotiating prices on behalf of their employees. For example, Lowe’s has contracted with the Cleveland Clinic to bundle care for high-quality cardiology services using a reference price. CalPERS, the California insurance for public employees, successfully uses reference-based pricing for knee and hip replacements.

When CalPERS allowed consumers to shop for services by site using a fixed price point above which they were fully responsible for all charges, the result was lower health care spending for equal outcomes. Moreover, as these consumers gravitated to lower cost facilities, other providers changed their behavior to provide higher value more cost effectively.

Reference-based pricing is true health service and cost innovation. It places the consumer at the heart of reform, making patients more sensitive to price differences across service providers.

Moreover, it has a system-wide impact that counters some of the unintended consequences of Obamacare, such as provider consolidation, resulting in increased bargaining leverage in the creation of accountable care organizations. And finally, it reduces spending most dramatically for the very populations responsible for the bulk of health care spending today.

Creative solutions like reference-based pricing move us to a system that ensures patients get excellent care at a price both they — and the nation — can afford.

William H. Frist, M.D., is a heart and lung transplant surgeon, former U.S. Senate majority leader and chairman of the executive council of Cressey and Co. Frist represented Tennessee in the U.S. Senate for 12 years, serving on both the health and finance committees. This post originally appeared in The Washington Examiner.

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22 replies »

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  10. @paul
    You’ve nailed it, Paul. And the ways money can go through the patient whilst maintaining some insurance risk protection are: 1. Use indemnity type insurance as much as possible. The money from the insurer goes to the patient who in turn pays the doc and others ( if possible). 2. Use HSAs as much as possible. Savings or employer contributions or vouchers for the poor go into the patients HSA account first, before he/she spends it. 3. Allow the patient to shop while paying down deductibles and other cost sharing. To maximize the effect on prices, patients should be able to spend OOP cost sharing money extra-plan, outside the plan …yet have it count and be tallied intra-plan. I think this would be revolutionary, but very difficult to do. With these low actuarial value plans very large OOP monies are going to be spent by the patient. If these could affect prices via shopping, we would have a winning device to lower prices.

  11. Most patients assume more care is better; since they pay little of the cost, they almost always go along with more tests and procedures. Also, doctors and hospitals are not free to set reasonable rates because of government and big-insurer regulation, so they have a big incentive to make this up by pushing tests and procedures they know will be approved. The ever present fear of a malpractice claim further pushes doctors and hospitals to test to rule out the “one in a million” condition.

    There are two ways to address the overspending problem: top-down bureaucratic control and regulation, or by empowering the consumer to take control. Bureaucratic control (whether by government or big insurers) always leads to unintended consequences: delays, rationing, fraud and creative “work arounds” like excessive testing. Giving freedom to consumers and providers is the better solution.

    We have data from the health-savings-account (HSA) experiment that demonstrate that consumer and provider freedom is a better way. HSAs provide good catastrophic coverage while allowing health-care consumers the freedom to manage their own health care, and an economic incentive to reject excessive testing and treatment
    ……and to use tools like reference based pricing!

    The attacks on fee for service seem to have convinced many, as it sounds very logical. The only problem is, fee for service transactions have been the basis of almost all human trade since civilization began….and remains so to this day. The problem with medical care is the patient has not been the payor…..we don’t need to get rid of fee for service….we need to restore it.

  12. When major changes are initiated there is always a loser and winner in the bottom line- money! I would like to see leader and healthcare professionals who are more focused on the patients or the country without thinking about money. I know clinicians need to be paid well, but i think in the world of capitalism, the patients suffer everyday. If you have a premium insurance and one has none and both patients need surgery, changes are that docotrs will preferential treatment to the one with the premium insurance. Just my two cents.

  13. A couple of things:

    First, you have a distinctly negative tone when you write about people who are chronically ill. I have type 1 diabetes. I didn’t ask for it, it’s autoimmune. I am angered every time I get a bill from a pharmacy or a healthcare provider. This is not where I want to spend my money. And I have to say that I really resent your tone.

    Second, you assume that we’re all just spending as much as humanly possible and being as irresponsible as possible simply because we can. What a specious assumption. I don’t care about whether I’ve met my deductible. I still force my providers to cross lab tests off of my lab order if I don’t truly need them. I still force healthcare providers, who are the ones who are ultimately responsible for ordering services AND pricing services, to be good stewards of available healthcare services in the context of my care. I still choose to go to the lab that is 45 minutes away from me to get my bloodwork done because it is less expensive than the hospital lab that is 15 minutes away from me. Who are you to make blanket judgments about the way people with chronic illnesses operate and think? You clearly don’t know what you’re talking about because I, for one, think in terms that are exactly the opposite of what you state above. And I know that I am not alone.

    So, perhaps instead of placing all of the onus and blame on patients who have the misfortune of meeting their deductibles, you might consider turning your attention to the root of the problem –> the actual prices, which need to be lowered… and the actual providers who tend to check off everything under the sun on lab slips just because it’s what they’ve always done and it’s what they know. You hold just as much, if not more responsibility for the situation in which we find ourselves.

    Your thesis is not credible and your tone doesn’t buy you any points, either.

  14. The former Senator still has not regained credibility in my mind after his remote diagnosis of Terry Schiavo. He also blames ACA for high-deductible plans and provider consolidation, trends that have going on for quite some time now. He thus remains engaged in the political back-biting game. Needless to say, that makes it difficult to trust his figures.

  15. Reference based pricing is another mission around the edges of healthcare. It’s effectively rationing – albeit by a different name. It makes no attempt at fixing the root cause – fee-for-service and the price of those services. It does play on the popular notion of “consumerism” which tries to drive healthcare to a shopping metaphor. The trouble, of course, is that we don’t always know the healthcare we’ll need – or when we’ll need it – or how we’ll need it – and those are most typically the largest priced services of healthcare.

  16. Aaaa, if it were that easy to set reference prices. Providers have to try to estimate marginal costs and then compete with other providers to get the votes ( of purchasers) so that finally prices are taken and not made. Then we will have GOOD prices. But, alas , it’s better (the above) than the prices we have today that have no relation to costs.

    I’ve always thought that shopping whilst paying down a deductible might have a penumbra that spread out into other prices. The problem is that insurers naturally want that shopping to be within their narrow provider network. But with a HSA this requirement doesn’t hold and with a high enough deductible this shopping activity might bring down many prices of services and goods that are not demanded in that exact transaction.

  17. I think the most important thing is the Coordination and Cooperation between various teams that are present in the hospital. Hospitals should have have the ultimate goal of Patient Satisfaction.

  18. How exactly can consumers shop around for healthcare services based on quality?

    Healthgrades? Leapfrog? CMS quality measures? Even more worthless sources including US News and World Report list or data like patient satisfaction?

    It is ridiculously sad how little progress has been made since MMA Act of 2003 passed and what quality information is available to patients/consumers.

    Reference pricing has a place for certain select services especially on imaging and elective surgical procedures but even the favorable results from CalPERS on hip/knee replacements over 2 yearsshowed are a very modest part of overall spending.

    Need to see more examples that are able to demonstrate the CalPERS savings and that there aren’t any unintended consequences such as hospital facilities that charged low reference prices dramatically increasing their prices.

  19. I feel that health care costs will drop when doctors, clinics, and hospitals adopt a functional, integrative approach to treating patients. When you take into consideration all aspects of a patient, you can effectively treat them and often solve many problems with just a change in diet, or remove a toxic home environment. Today, it is too often the “treat one disease that has ‘x’ symptoms” approach, and that needs to be a thing of the past. 2 cents for what its’ worth. Thank you Bill Frist MD for your service to the US Senate.

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