Price transparency for health care

The high cost of health insurance in the US has been a longstanding problem; some experts have argued that the answer to lowering health care costs involves creating a competitive market for consumers.  The strategy is simple: drive health care costs down by forcing hospitals, physicians, and other providers to compete with each other on price.  Consumer-directed health care – often in the form of health savings accounts and high deductibles – is predicated on the success of patients being able to comparison shop between health care providers.

Source: Eric Kilby (Flickr/CC)

The New Hampshire HealthCost website, launched in early 2007, was the first state price transparency initiative; it reported the bundled median costs of provider-specific, insurer-specific health services for thirty common conditions. It is derived from claims data collected from health insurers. This study focused on the price variation of common health services after the initiation of the HealthCost website using a combination of quantitative and qualitative methods.  These methods included a three year (two years pre-transparency and one year post-transparency) review of claims data from all state commercial insurers and a collaboration of 17 interviews from state insurers, hospitals, outpatient centers.

The three-year review of claims data failed to demonstrate an impact on price variation across providers or a significant change in provider competition.  Among four common procedures – arthroscopic knee surgery, colonoscopy, back MRI, and ultrasound for pregnancy – the ratio of average payments (between inpatient and outpatient settings) increased for all from 2006 to 2008, indicating more price variation. When evaluating these procedural costs as median amounts, only the ratio for back MRI narrowed; however, getting this same procedures still cost over 7 times as much in hospital compared to outside the hospital. The data also showed that only five percent of insured state residents have high out-of-pocket deductibles, thus there were few incentives for consumers to compare prices.

The majority of interviewees stated that the New Hampshire health care market was not affected by the HealthCost website because competition between the major health care facilities was historically weak.  The geographical distance and number of health care facilities in the state has been postulated as causes for weak competition: health insurers had poor leverage when bargaining for cost reduction.  The HealthCost data itself has not proved to be an effective bargaining tool for negotiations because hospital administrators have debated the validity of the data.  The administrators stated various reasons such as outdated prices and limited amount of health services used in the evaluation to debate the significance of the study’s results.   Although there has not been a measurable significant change in price variation after the advent of HealthCost, the researchers still believe that similar cost comparison websites will be powerful tools in more competitive health care markets.

Commentary

The idea of driving down health care costs with competition and price transparency seems like good theory; however, the practicability of its usefulness will be limited by several factors.  One of these factors is the perceived notion that the more prestigious the health care institution, the better health care one will receive no matter the cost.  It is conceivable to expect individuals to seek these services regardless the cost just as individuals currently travel further to seek other types of services from more prestigious institutions outside their immediate communities.

Secondly, health care providers may secretly increase their prices on services not evaluated by price transparency programs to make up the difference for decreasing prices on services that are listed.  Unless price transparency can list all health care services provided, there will still be hidden and unknown costs.  Third, the development of national health insurance removes the driving force behind the competition by limiting out-of-pocket costs.  If Americans do not have a reason to compare health care costs, transparency programs will have little effect on price variation just as the study showed for New Hampshire.

Lastly, price transparency may work in other markets to reduce costs – such as cars, food, and MP3 players – but health care is a unique market defined by imperfect information between buyer and seller. As such, price transparency efforts can never be fully expected to respond to economic theory.

Tu, HT and Lauer, JR. The impact of health care price transparency on price variation: The New Hampshire experience. The Center for Study Health System Change. 2009; No. 128.

commentary by Tyree Winters, DO

 

 

 

 

 

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