The Black Box at the Center of Health Economics

When Michael injured his knee, he did what any responsible person would do.  He was not incapacitated, and though the knee was painful and swollen, he could get around pretty well on it.  So he waited a few days to see if it would get better.  When it didn’t, he saw his primary care physician, who examined it and quite reasonably referred him to an orthopedic surgeon.  The orthopedic surgeon considered ordering an MRI of the knee but worried that insurance would not cover a substantial portion of the $1,500 price tag, so he suggested a less expensive alternative: a six-week course of physical therapy that would cost only $600 – a quite responsible course of action.

At the end of this period of time, Michael was still experiencing pain and intermittent swelling.  The orthopedic surgeon made another quite responsible decision and ordered the MRI exam, which showed a torn meniscus.  The orthopedic surgeon could have recommended arthroscopic surgery, which would have earned him a handsome fee and generated revenue for his physician-owned surgery center.  Instead he again acted quite responsibly, advising Michael that the surgery would actually increase the pain and swelling for a time and probably not improve his long-term outcome.  Based on this advice, Michael declined surgery.

Though everyone in this case proceeded responsibly, the ultimate outcome was inefficient and costly.  Many factors contributed, but perhaps the most important was the fact that Michael’s physician outlined choices based on an inaccurate understanding of the costs associated with his recommendations.  The orthopedic surgeon thought that the cost of six weeks of physical therapy was 60% less than the MRI.  In fact, however, the actual payment for the MRI from the insurance company would be only $300, not the “retail” price of $1,500.  What appeared to be the less expensive option was actually twice as expensive, and it delayed definitive diagnosis by six weeks.

This story is emblematic of a larger problem in contemporary healthcare.  No one – not the patients, the physicians, the hospitals, or the payers – really understands in a thorough way the true costs of their decisions.  After receiving care, patients routinely receive by mail multi-page “explanations of benefits” that show huge differences between list prices and actual payments.  Most find it baffling to try to determine who is paying how much for what.  Physician practices and hospitals get calls every day from panicked patients who believe that they are being billed for exorbitant costs, when in fact most or all of the charges will be paid by insurance at a huge discount.

Likewise, physicians often have a poor understanding of the real costs their healthcare decisions generate.  Many do not know the retail prices of the tests, medications, and procedures they prescribe and perform.  Even the ones who do often have little idea how much will actually be collected for such services.  For one thing, the costs are difficult to pin down – price lists are hard to come by.  And many medical schools and residency programs make little effort to help physicians understand the economics of their practice.  Besides, people go into medicine because they want to use their knowledge and skills to heal the sick and relieve suffering, not because they love business.

Everyone has heard the horror stories: the single dose of aspirin for a hospitalized patient that costs $25, or a charge of over $100 for diapers for a newborn baby.  Of course, hospitals have justifications for such charges.  Some patients cannot afford to pay, so paying patients and their insurance companies subsidize their care.  Moreover, some healthcare service lines, such as radiology and surgery, produce high revenues that that help to help pay for money-losing services, such as the 24-hour emergency room and in-patient psychiatric services.  But from the point of view of patients and the public, such charges seem absurd.  Physicians are often dismayed, as well.

In the minds of the two most important people in health care decision making – the patient and the physician — the economics of healthcare resembles a black box, or perhaps a dark and tangled web.  And when neither has a good handle on the economic dimensions, both find it next to impossible to make well-informed and responsible healthcare choices.  Some simply don’t care – they are too sick or too busy to pay attention.  But even the ones who would like to know frequently can’t seem to find out.  Patients who are tempted to inquire may worry that their doctor will take offense, and physicians who ask too many questions may be branded troublemakers.

The goal here is not to reduce the cost of healthcare, or even to slow its rate of increase.  The goal is simply to make sure that people know what they doing.  When we are too insulated from the benefits and costs of choices, it becomes very difficult to choose effectively.  Consider a hypothetical car shopper or salesman who does not know the list price of the vehicles, the amount of money that will ultimately change hands, or who will pay for it.  When so many important factors in the purchasing decision are hidden, it becomes nearly impossible to choose responsibly.  In emergencies, there may be no time to explore the options, but what about the vast majority of cases when there is time to deliberate?

If we are to remedy what ails contemporary healthcare, we need to take steps to facilitate well-informed and responsible decision making.  This means informing key decisions makers, and especially patients and physicians, of the economic implications of their choices.

The intent is not to supplant clinical and ethical considerations, but to ensure that the key people grasp the cost dimension.  As patients and physicians like Michael and his orthopedic surgeon weigh healthcare decisions, they need to know the answers to three basic questions:

Who will pay, how much, and what for?

Richard Gunderman, MD, PhD, is Professor of Radiology, Pediatrics, Medical Education, Philosophy, Liberal Arts, and Philanthropy at Indiana University; he was a past president of the faculty at Indiana University School of Medicine and currently serves as Vice Chair of Radiology. Gunderman is also the 2013 Spinoza professor at the University of Amsterdam, the author of over 380 scholarly articles and has published eight books, including Achieving Excellence in Medical EducationWe Make a Life by What We Give,  Leadership in Healthcare and most recently, X-Ray Vision.

11 replies »

  1. Great post. We are attacking this problem head on. At this time we have obtained and published pricing information from US hospitals. Our goal is to get pricing for every procedure from every provider for any insurance plan on our system. Our goal is to enable patients to make informed economic decisions about their care, and to allow providers to market themselves to the type of patients they want.
    See http://www.medluma.com

  2. This is a great post and shares such important insights about the price transparency problem. Last spring, Catalyst for Payment Reform (CPR) released a Report Card on State Price Transparency laws which revealed most states failed to make the grade when it comes to getting consumers meaningful information about the cost–and price they will pay–for their care. There is clearly a role for public policy in assuring better price transparency. To answer Tom’s question, HCI3 has some model legislation for price transparency. And as a follow-up to Barry’s comments, CPR has an issue brief that examines private and public strategies to combat provider market power, which can often raise prices–this can be found on our website: http://www.catalyzepaymentreform.org.

  3. I recently had a frustrating experience where my family doctor prescribed a 2-view xray for my hand, just to see whether I may have broken a finger joint, though it wouldn’t really affect treatment. Quite responsibly, she advised me that it could be filled at any imaging provider. I called a local imaging provider beforehand and spoke to their billing department to get a cost estimate: $68.00 pre-insurance, but $37.50 after my insurance discounts applied (I have a HDHP and HSA). I decided that $37 was worth knowing whether it really was broken. But when I got the bill from the provider, it was for $447.00 pre-insurance, and $348.66 after my insurance discounts applied. Even when you make a concerted effort to be an informed consumer, you still can’t get to the bottom line. This is extremely frustrating…

  4. Thanks Barry. Once again we see that four or five states have reasonable laws that would benefit the entire nation. (NJ, NY, Mass, Col, MN, Cal, etc)

    I have never conducted a search of the literature, but I would guess that most of the health care billing horror stories occur in the unregulated states.

    One might ask, why are there states unregulated in term of health care billiing?

    Is it from libertarian ideology, or just more bribery and payoffs, or just a paucity of legislators who care about these things?

    In my observation, Republicans get nearly all their votes from persons with Medicare or secure corporate insurance. They have no motivation to care for the uninsured. George Bush won two landslides as gov of Texas when his state had the highest percentage of uninsured in the nation.

    You know how Republicans used to advocate for healthy persons to pick the state where to buy their insurance, in effect to chase after favorable laws.

    Well, it would be nice if the uninsured could also pick which states to go to for hospital care. They would stampede to the blue states noted above.

    That is not serious. But making the laws of NJ and NY into federal laws is a very serious and worthwhile project.

  5. Bob –

    You’re correct. I have advocated for special rules to govern how much can be charged for care that must be delivered under emergency conditions. Specifically, I recommended limiting charges to 115% of Medicare. That’s the limit in NJ for what hospitals can charge uninsured patients with incomes equal to or less than 500% of the federal poverty level (FPL). The state legislature originally wanted to set the limit at 100% of Medicare but the hospitals claimed that they couldn’t make money overall at Medicare rates so the legislature agreed to the 115% figure.

    Another possible approach to hospital pricing in negotiating contracts with commercial insurers is that they would reach an agreement on a uniform percentage of Medicare for all of their inpatient and outpatient services except for those that must be delivered under emergency conditions. So, if a powerful hospital system thinks it can get away with charging 200% of Medicare across the board, then all patients and referring doctors should know that. If the hospital across town only charges 125% of Medicare and their quality for most services, tests and procedures is just as good, more business should be directed to them. Since hospitals are high fixed cost enterprises, the powerful hospital would not have to lose much business before it felt the negative effects on its bottom line.

    One way or another, commercial payers need to find as many ways as possible to create countervailing power against monopoly and oligopoly hospital systems. Tiered networks and narrow networks are a good start. Reference pricing is worth pursuing for procedures that best lend themselves to it and special rules dealing with care delivered under emergency conditions are imperative.

  6. So is there model state legislation that would encourage or force transparency in the marketplace?

  7. I was just tossing out the idea of 150% of Medicare.

    Honestly I do not quite know how we get there. Medicare itself has all kinds of separate rates for urban hospitals, teaching hospitals, not to mention the ‘outlier’ cases that are in a sense what the chargemaster is ‘living for.’

    One somewhat safe step would be to make a legal distinction between discretionary and non-discreatiionary care, based on urgency and lack of alternatives for the patient. Say a knee replacement vs a broken leg.

    The non-discretionary care would have the maximum legal prices.
    (Barry I think you have advocated for something like this.)

    The discretionary care would not have prices, but rather would have mandatory price disclosure in advance. If a patient or an insured requested a cost estimate and did not receive one, they would not be liable for the resulting charges.

    This is not terribly far from what consumer protection agencies do every day of the week in the auto repair and similar businesses.

    Hospitals have avoided such regulation, I suppose in part from their undeniable charitable activities, and perhaps from a natural reluctance on the part of civil service regulators to take on doctors. Regulators are not shy about fining and suing the rough-edged guys who run body shops, there is a class thing going on.

  8. “An analogy might be a car repair that the dealer’s service manual estimates should take 45 minutes. If the mechanic can do it in 30 minutes, he still gets paid for 45. If it takes an hour or more, he also only gets paid for 45 minutes.”

    Barry, the analogy is OK except it assumes a fair check and balance system. In fact the “flat rate” system is an industry rigged system in favor of the dealer – not balanced for both parties. The companies that produce those flat rate manuals sell more of them when the times are blotted, hence consumers pay at least 30% higher than actual, 99% of the time. The manuals also provide a non-competitive repair environment since everyone is using the same book.

    Bob Hertz is right, the “industry” cannot be left on its own to rig a payment system, it needs its feet held to a restraint fire of billings.

  9. This is another example of why we need disclosure of actual insurer contract reimbursement rates so both patients and referring doctors can more easily find out what services, tests and procedures really costs before care is provided.

    We also need more bundled pricing for procedures that lend themselves to the concept. For example, if I need a colonoscopy, it should be priced the same whether polyps are found or not. If I need my gall bladder removed, it should be priced the same whether there are complications or not. These procedures should be priced so that the hospital and doctor earn a fair fee on average. In effect, they will be overpaid for the simple procedures that go smoothly and somewhat underpaid for the more complicated cases which cannot be predicted in advance.

    An analogy might be a car repair that the dealer’s service manual estimates should take 45 minutes. If the mechanic can do it in 30 minutes, he still gets paid for 45. If it takes an hour or more, he also only gets paid for 45 minutes.

    Bob Hertz – I’m a bit unclear as to whether you are suggesting a maximum fee of 150% of Medicare or 101.5% of Medicare. Did you mean 1.5% above Medicare or 1.5 times Medicare?

  10. Good post, but this could be solved overnight if the government was willing to regulate hospital billings.

    The maximum bill for a particular service done involuntarily would be Medicare times 1.50%, or whatever is settled upon.

    Any larger bill could be set fire to with a match and ignored. i dream of a president who would have the courage to go on television and burn up bills.

    If hospitals cannot survive on Medicare plus 1.50%, either they are underused or their staff is too large, they have too much equipment, too much mortgage debt, and/or their staff is overpaid.

    if they are underused, there is argument that federal funds should keep them open. We may need them in the future, just as we need fire stations that are currently underused.

    Bob Hertz, The Health Care Crusade

  11. It would be interesting to do a study that looks at what people THINK things cost and how those beliefs impact their healthcare decision making …