Can Knowing What You Pay Bring Medical Costs Down?

Authored By 
Nicholas Downing
Blog contributor 
Policy Fellow

Would you walk into a restaurant with your family and order a meal from the menu if the prices were not listed? Probably not. But every day, thousands of Americans who undergo elective medical procedures effectively do just that.

Prices, perhaps surprisingly, don’t always factor in to people’s decision-making with respect to health care. Perceptions of hospital reputation and past experience appear to be particularly important reasons that patients choose particular hospitals for surgical procedures. Research suggests that such considerations may be more important than monetary factors like the expected out-of-pocket cost and the distance between the hospital and their home.

Nevertheless, cost reduction is the driving force behind President Obama’s effort to reform the United States’ healthcare system, which is the world’s costliest but far from the best, according to several core measures such as infant mortality. Reducing costs in this system will not be easy. Clinical costs associated with in-hospital care represent a particular challenge: would you want your doctor worrying about cost of an additional dose of an important medicine if you were critically ill? Most doctors working in hospitals rightfully insist that they must focus on what is best for their patients’ health and that cost is a secondary consideration.

In contrast, elective procedures, such as joint replacements or cesarean sections (in certain circumstances), present clear opportunities for savings. Costs should clearly factor into patients’ decisions about whether to undergo elective procedures. Often insurers treat such procedures differently by requiring patients to pay a higher proportion of the cost. One would imagine that this would compel patients to shop around. Unfortunately, this task is virtually impossible in the current health care market.

Consider the hip replacement, a common elective procedure that is usually performed in a hospital and requires an overnight hospital stay. Researchers recently sought to determine the cost of this procedure at two randomly chosen hospitals in each state. This was hard work. More often than not, they had to call both the surgeon’s office and the hospital before doing some math to compute the likely cost. In 15 percent of cases, they were unable to obtain any price information at all. To make matters worse, the prices they were quoted prices ranged from $11,000 to over $125,000. Clearly, hip replacement pricing is neither transparent nor consistent.

Unfortunately, the Affordable Care Act, which is beginning to take effect, will do little to improve this rotten situation. Private companies, most notably Castlight Health, have sought to make price information more accessible. While these solutions appear promising, they are only available to employees and enrollees of subscribing companies or health plans. Insurers sit on a treasure-trove of historical reimbursement data; starting with common elective procedures, this information should be made freely available. Grants are needed to encourage programmers and researchers to synthesize this information into free patient-centric tools. What’s more, such transparency would finally allow hospitals to compete on cost for these procedures.

Hospitals may oppose broad availability of their pricing schemes for several reasons, but this approach is a stepwise process starting with the least medically necessary, but often the most lucrative of their services: elective procedures. Physicians and others may worry that broad transparency will lead to adverse selection and worsened health outcomes if patients choose price over quality. Only time will tell if this concern is valid. If we learn that price transparency is an effective cost containment tool for elective procedures and there is no deterioration in overall quality of care, perhaps it will work more broadly.

Virtually every other business in a modern economy clearly posts the price of their product. Healthcare should be no different.

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