Economics

The Transparency Trap

flying cadeuciiOn a recent shift in the Emergency Department, a resident boasted to me that she had convinced a patient to have an MRI done after discharge, rather than in the hospital. She was proud of this achievement because MRIs cost much more in the hospital than they do elsewhere – sometimes thousands of dollars more. To advocates of “cost-conscious care,” a new movement in medical education that aims to instill in young doctors a sense of responsibility for the financial consequences of their decisions, this story seems to belong in the ‘win’ column.

But this story also raises troubling questions: Why wasn’t the resident more concerned about how the hospital’s charging practices were leading her to delay care for her patient? What about the prolonged anxiety the patient would suffer? What about the extra day of work she would have to miss? And most importantly, why does an MRI cost thousands of dollars more in the hospital than it does across the street?

Like many doctors, she had fallen into the ‘transparency trap.’ This phenomenon is an unintended consequence of price transparency efforts that have come in response to patients and doctors being kept in the dark for decades about the prices of common services. Unfortunately, as the CEO of one large hospital put it, “the vast majority of [prices] have no relation to anything, and certainly not to cost.” In fact, studies have shown that in a functional market, MRIs would cost somewhere around $250, and we wouldn’t be nearly as concerned about doing too many of them.

When we forget how arbitrary today’s prices are, and start anchoring our medical decisions to the prices we see, we risk reflexively ordering fewer ‘expensive tests’ for patients who would otherwise get them. We start believing that MRIs really are that expensive, rather than recognizing that they just seem so expensive because of the dysfunction of the health care market. That’s the transparency trap.

To be sure, price transparency is mostly a good thing – it helps patients avoid sticker shock, and may give providers a reason to make their prices competitive. Without question, doctors also have a responsibility to reduce wasteful spending and to consider the “financial side effects” of care, especially when patients bear much of the cost directly.

But not every MRI is unnecessary or wasteful. And patients shouldn’t be penalized for the dysfunction of the health care system. Instead, doctors should focus on advocating for an end to price gouging in health care. At the very least, we need to change the questions we ask, and alongside “cost-conscious care,” we need to teach medical students and residents to take today’s prices with a hefty grain of salt.

As more and more hospitals agree to make their prices publicly available, we risk more doctors falling into the ‘transparency trap.’ When we see that a hospital charges some sky-high amount for a test, let’s not just think: “Wow, that’s an expensive test! I should order less of those,” — but start asking: “How on earth do we let them get away with charging so much?”

 

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Paul @ Pivot ConsultingLLCEdgardo TenreiroNir HarishJohn IrvineRobert Parker MD, MBA, FACP Recent comment authors
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Paul @ Pivot ConsultingLLC
Member

The “buyer” is the insurer who negotiates prices. In many markets it is the dominant BC/BS org….and too often they act more as a funder of hospital systems rather than as a representative of employers/patients. The history of BC/BS organizations was that they were set up as a mechanism to fund hospitals….not as a purchasing agent for companies/patients. This legacy continues, as the dominant insurer usually fails to push hospitals to eliminate non essential programs, and only allow hospitals to charge market based prices.

Edgardo Tenreiro
Member
Edgardo Tenreiro

There is nothing “unfortunate” about costs not having any relation to prices. Why should they? Prices, not just in health care but in all markets, are not determined by the costs of production. Prices are determined by the actual exchange between a particular seller and a particular buyer. The costs to the seller in producing the good exchanged have already been incurred prior to the exchange so the price has no causal relation to his costs. The seller’s ability to estimate what the market price will be in the future after his costs have been incurred simply determine the level… Read more »

Nir Harish
Member
Nir Harish

Edgardo, I actually don’t disagree at all. And I don’t argue with the right to profit-maximize. I do think that health care regulation is set up in such a way that it is very difficult for innovators to create new business models that would create some price competition.

John Irvine
Member

Great post. Two comments.

1. Transparency is relative.

2. Transparency is generally unevenly applied.

Robert Parker MD, MBA, FACP
Member

While transparency may have a trap, the story used to exemplify is uncommon as a matter of fact. Most hospitals are paid on a bundled basis when patients are hospitalized and a fee-for-service basis for outpatient services. Hence, the MRI would have been part of an inpatient bundle and likely the hospital would have received no new revenue. This is one reason hospitals want to push imaging into the outpatient setting when presented the option. Outpatient services generally cost the patient more as well because of the associated co-pay and deductible expenses that would have already been paid once when… Read more »

Nir Harish
Member
Nir Harish

Robert, you’re absolutely right. But patients discharged from the ED are considered outpatients, so the MRI would have been paid separately. For inpatients, I couldn’t agree more. The hospital benefits when we push care to the outpatient setting, and we need to be willing to push back.

William Palmer MD
Member
William Palmer MD

Docs should get together in that hospital and form a patient agency group. Then, it schedules a meeting with administration and forcefully argues that these prices are harming medical care and that they can’t be sure that local media keep distant from this story.

We are so skittish around anti-trust. This a proper exercise of our patient-agency role and getting together to work toward patient beneficence can hardly be illegal as long as we are not doing anything to feather our own pocketbooks.