Can We Reform Health Care Without Price Transparency and Consumerism?

In the coming month, I'll address the elements of the health care reform bills under consideration in the US House and Senate, their pros and cons, alternative models around the world, and the issues that should get more attention to reduce cost and improve heath care for Americans.  Today's post centers on my biggest frustration with the health care as it stands and the current debate- the bizarre lack of price transparency and consumer empowerment.

What’s it Cost?  Who’s on First?

My biggest problem with the health care reform debate is that not a single plan under consideration in DC introduces price transparency into heath care.  I just don't believe that health care as a whole is too complex to allow consumers to have clear information on price to allow them to impact the market.  In fact, if we don't rework our system in a major way, cost trends will persist.  When you’re spending someone else’s money, why would you hold back?  When you’re providing services to someone paying you with someone else’s money, there’s just not enough pressure on you to reign in rates.  The current bills under consideration in the House and Senate really only expand the third party payer system with its complete lack of pricing transparency and subsequent lack of power for American consumers of health care.

Almost nobody on a health plan, Medicare or private sector, understands what any health care services covered by their plan actually cost.  Nor do most people care because they aren't paying for the vast majority of care.  Even more amazing, doctors and other providers almost never know the cost of the services they provide.  Doctors, especially primary care physicians, often feel that they lose money on Medicare patients, so they bill private carriers as much as they can to make up for it.  Private carriers never really pay them what they’d like to receive, but at least it’s more than they get for Medicare patients.  As a result, arriving at real prices

There’s no better example of how price transparency empowers consumers to impact markets than Lasik surgery.  Lasik is generally not covered by health insurance plans, meaning most patients pay almost entirely out of pocket for it.  As John Stossel notes in a great piece for ABC News, Lasik surgery prices have dropped 80% as the market for the procedure has matured.  This is how other industries function.  New technologies and innovations gain traction, providers compete for a growing market, and consumers drive pricing down over time. 

Contrast that reality with the world of health insurance.  Not long ago I spoke to a friend working in the bio-medical field.  One of his firm’s devices has the potential to revolutionize a number of procedures, one of them representing a billion dollar a year market.  That surgical procedure could be done in half the time with dramatically shorter recovery time and far less complications.  Intrigued, I asked if hospitals and doctors would then be able to see twice the patients and charge far less per procedure.  No, he smiled, that’s not how it works.  Unless they can charge the same price or more for the procedure with the new technology, they won’t adopt it.  Technology, you see, increases costs in health care.   I have to wonder if this would happen if people were paying out of their own pocket for such a procedure. 

I recently gave a speech on health care reform to the University Area Rotary Club of Austin.  A woman that works or a nonprofit mental health organization got up to say she worries about the poor.  I expected that.  I did not expect what came next. She said she worries that when people pay no share for care, they overuse and misuse the care.  As an example, she described helping a woman that day to set an appointment for a non-emergency, non-urgent doctor visit 2 days later.  The woman would not be paying a dime for the visit.  Irritated that she'd need to wait 2 days, she went straight to the emergency room, as she apparently does on a routine basis.  The Rotarian, someone dedicated to the cause of mental health for the poor, was vehemently in favor of some amount of cost for routine care for everyone. 

This is not a new idea.  Dr. Jeffrey Flier, now Dean of Harvard Medical School, co-authored an article on this topic in 1994.  Describing the fact that US health care expenditures rose in excess of that of other countries since the 1960s, he wrote that a major factor was public policy that “undermined market cost containment mechanisms by excessively shielding most consumers from exposure to or even knowledge of the actual cost of health care.”  In 2001, Milton Friedman wrote in his article “How to Cure Health Care”: “Two simple observations are key to explaining both the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party—an insurance company or employer or governmental body. The second is that nobody spends somebody else’s money as wisely or as frugally as he spends his own.”

Consumer Driven Health Care

There was a time when health insurance was like auto insurance.  It covered the catastrophic.  However, over the years health insurance has evolved to the point where it covers run-rate basic care.  Can you imagine your auto insurance covering oil changes?  Tire rotations?  Windshield wiper replacement?  Most health insurance plans cover their equivalents. 

One trend in health insurance, called consumer driven health care, is predicated on the concept that people act as better consumers of their care when they have “skin in the game.”  When they have a share in the cost and manage their own health care funds, they ask questions, demand results, and spend wisely.  Such programs get results.  Carrier after carrier has shown in actuarial studies that consumer driven plans show better cost trends.  But don’t take their word for it.  John Mackey, CEO of Whole Foods, noted in a recent thought-provoking op-ed in the Wall Street Journal how a health savings account strategy drove costs down for Whole Foods.  Employees were given control of an account to manage their spending under a high deductible health plan.  They had protection from catastrophic situations, but they managed the more basic and preventive costs themselves.   In interviews, employees described how they became better consumers of their health care.  We’ve seen this behavior shift in our own clients. It's amazing the difference between clients with health savings accounts and those with more traditional plans.  The H.S.A. clients demand more info, challenge pricing, and even succeed in negotiating in a system largely set up to prevent that type of thing.  

Safeway provides another example of the power of “skin in the game.”  The company realized that four chronic conditions- obesity, diabetes, cancer, and cardiovascular disease- drive 74% of health care costs.  The supermarket chain understood that personal behavior is a huge factor leading to these conditions, so they took advantage of a provision in HIPAA (the Health Insurance Portability and Accountability Act) allowing them to differentiate employee premiums based on behaviors.  In their voluntary health plan, employees choosing to participate are tested for four factors- weight, blood pressure, cholesterol levels, and smoking.  Employees get premium discounts for each test they pass, earning up to $800 for individuals and $1600 for families.  This program resulted in obesity and smoking rates 30% lower than the American averages, and Safeway’s costs have remained flat for four years.  In other words, people changed their behavior when they had a financial stake. 

Our system has a long way to go to allow consumer driven plans to impact costs the way they could.  In fact, doctors, hospitals, and carriers have dragged their feet in releasing pricing for services and make it incredibly hard to consumers to discover costs.  The good news is that as this trend grows, they will be forced to be clearer with their pricing.

The most common argument against health savings accounts and consumer driven plans is that people will forego care in order to avoid the expense under a high deductible plan.  I just don't buy it.  In fact, I’d argue that we could subsidize those in need in a system that leverages or empowers consumers of health care far more efficiently than the expansion of the current system of blind spending. 

Another argument against consumerism is that emergency care and critical services are too complex to be allow patients to act as consumers.  In other words, health care is too complex and different than other industries for consumerism to work.  To those who espouse this argument, I would ask have you shopped for a mobile phone plan or a high definition television lately?  Consumers navigate highly detailed markets all the time.  I am not suggesting that a patient in the ER needs to price-shop.  However, so much health care does not take place in an emergency or on the catastrophic level.   It’s a copout to say consumers cannot demand value, shape the market, and drive pricing down in health care.

Insurance Carriers and Health Care Pricing

People often assume that insurance carriers set pricing in health care.  While they might influence pricing, they don’t set it.  On the one hand, they try to negotiate it down for the benefit of their customers.  On the other hand, in a system whereby consumers of health insurance are spending someone else’s money and providers are paid per claim filed, the entire system begets price creep. 

Another common assumption is that profits of private, for profit insurance carriers are driving the costs upward.  According to Fortune magazine, managed care health insurers ranked 28^th among the top 50 most profitable industries.  However, as David Goldhill points out in a fantastic article in The Atlantic, if you add up all of the profits of all health insurance companies, it amounts to only a few days of health care expense in America.  In fact, adding up all of the profits of all companies in the US would amount to the equivalent expense of about 5 months of health care in America. 

Don’t get me wrong.  Insurance companies have done plenty to earn the ire of the American consumers.  In the individual market, the practice of rescission, going back to find even small discrepancies in an insured’s application to justify termination of the policy when the insured needs it most, needs to be regulated.  Likewise, the fact that people with pre-existing conditions cannot find carriers to cover them in the individual market has led to thousands of bankruptcies.  However, both of these issues are addressed in all the bills under consideration and have reached consensus across the spectrum of stakeholders, including insurance carriers.  My point here is that looking to health insurance carriers as the source of price creep in health care without considering factors like the power of price transparency and consumerism is a serious mistake.

Lack of price transparency is certainly not the only driver of cost in our system.  Research and Development, especially in the pharmaceutical industry, is a driver of cost, particularly with the US subsidizing so much of the world in this area.  Defensive medicine, the practice of excessive and even unnecessary services to avoid lawsuits, is a serious problem.  Poor health and unhealthy behaviors contribute to chronic conditions such as obesity, heart disease, and diabetes that drive the lion’s share of medical costs in America. 

Hospitals do their part to add to the cost of health care.  According to Goldhill’s Atlantic article, from 1975 to the present, hospitals in the US have had no meaningful increase in total admissions, a 35% decline in the number of hospital beds, and a 50% decline in the average length of stay.  Despite all of that, annual hospital care costs for patients in hospitals for that period rose from $28 billion to almost $650 billion.  Meanwhile, in a survey of 500 nonprofit hospitals by the IRS, 60% reported providing charity care equal to less than 5% of their total revenue.  In other words, even the nonprofit hospitals are making money.  Whether in public programs or private carriers, a system that pays providers per procedure encourages quantity, not quality.

Many other countries have singler payer and government driven health care systems that don't feature price transparency or consumerism.  Their systems are funded by taxes without many additional costs to patients at the point of care.  It's true that health expenditures in the US have increased at faster rates over the past four decades than other countries.  However, most developing countries are now struggling with increasing health care costs.  According to David Goldhill, from 2000 to 2005, per capita health care spending in Canada grew by 33%, in France by 37%, and in the UK by 47%.  That figure for the US during the same period is 40%.

Price transparency and consumerism will not solve the problems noted above.  However, they will have an immediate impact and won't require massive governmental spending.  More importantly, they are among the only suggested solutions that give the patient control in their health care.  Failing to incorporate them in a proposed reform package makes cost control considerably more difficult if not impossible.