Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.
Once again, on Dec. 3, Elizabeth Rosenthal made eyes pop with her front-page article “As Hospital Prices Soar, a Single Stitch Tops $500.” The article is part of her series in The New York Times on the high prices of health care in the United States (see, for example, “American Way of Birth, Costliest in the World”).
As I noted in an earlier post, there were news reports more than a decade ago on the distress that high prices of health care can visit on Americans with either shallow health insurance or none. Furthermore, some colleagues and I in 2003 drew attention to the high prices of health care in the United States in “It’s the Prices, Stupid.” We pointed out that “higher health spending but lower use of health services adds up to much higher prices in the United States” than in any other member country of the Organization for Economic Cooperation and Development.
But a decade ago most Americans were still well insured by comprehensive coverage with low deductibles and coinsurance, so these stories affected only an easily overlooked minority of uninsured fellow citizens. For the most part, these stories on prices were ignored by the general public, by the rest of the news media and even by most health policy analysts and the sponsors funding them.
Things have changed and continue to change.
With ever higher deductibles, coinsurance and exclusions from coverage, employers have been shifting more and more of the cost of employment-based health insurance into the household budgets of their employees. The latest move is a shift toward “private health insurance exchanges.” Under that arrangement, employers simply make a defined contribution toward their employees’ health insurance, with which the latter purchase coverage on a privately organized health insurance exchange similar to those under the Affordable Care Act.
Lost in the rhetorical war over the rollout of that law has been the fact that even if it had gone smoothly and everyone seeking health insurance for the basic package of benefits specified in the law had obtained it by now, the silver option on which the federal subsidies are based still leaves the insured open to hefty cost-sharing that, on average, is 30 percent of the actuarial full cost of that option (in other words, the policy assumes that they will pay 30 percent of the expected medical services out of pocket, though some may pay more and some less).
So in either case, insurance coverage at the job or procured on the law’s insurance exchanges will leave Americans more exposed to out-of-pocket spending. That raises interest in greater transparency on the prices charged for health care and its quality.
Indeed, the appearance of Ms. Rosenthal’s article fell neatly into the middle of a three-day conference in Washington, funded by the Robert Wood Johnson Foundation and a large number of other sponsors, under the theme “Health Care Price, Cost and Quality Transparency.” Slides of most of the many illuminating presentations featured at the conference are available to the public (click on “faculty materials”).
This quest for greater transparency on health care prices is a distinctly American preoccupation. In most other developed countries, prospective patients do not need to know the prices charged by individual providers of health care, because these are predetermined by uniform fee schedules that apply to all providers. Furthermore, cost-sharing by patients at point of service in those systems tends to be negligible.
We have inconclusively debated the pros and cons of these more regulatory approaches to price setting in health care for more than half a century in this country, under the general theme of “regulation vs. market.” With the exception of Parts C (the Medicare Advantage option administered by private insurers) and D (prescription drugs, also administered by private entities), the Medicare and Medicaid programs have followed the regulatory route, although not without constant and vehement protest over government’s Soviet-style pricing policies. For Parts C and D of Medicare and the entire private health insurance market, however, we have slouched more heavily toward what some people may call a “market approach” to health care – which in reality is a grotesque caricature of how a genuinely price competitive market would operate.
In a truly competitive market, both the prices and the inherent qualities of the goods or services being traded are known to all parties ahead of any trade. By contrast, in the American health care market, both the price and the quality of health care have been kept studiously hidden from patients.
As I put it in a recent article in The Journal of the American Medical Association, imagine a department store whose customers are blindfolded before entering. A shopper might enter the store seeking to buy an affordable dress shirt and a tie, but exit it with a pair of boxer shorts and a scarf. Sometime later, he would receive an invoice, whose details would be incomprehensible to him, save for one item: a dollar amount in a framed box with the words: “Pay this amount.”
Broadly speaking, and with few exceptions, this is the kind of “market” that our “market approach” has bestowed on American health care consumers (formerly “patients”). Only the wedding-industrial complex, as Catherine Rampell calls it, comes even remotely close in the opacity it affords sellers.
Here is how Michael E. Porter and Elizabeth Olmsted Teisberg described in 2006 the price system begotten by this opacity in their book “Redefining Health Care”:
The current system has resulted in pervasive price discrimination, in which different patients pay widely different charges for the same treatment, with no economic justification in terms of cost.…The administrative complexities of dealing with multiple prices add costs with no value benefit. The dysfunctional competition that has been created by price discrimination far outweighs any short-term advantages that individual participants gain from it, even for those participants who currently enjoy the biggest discounts [off list prices called “charges”].
Payment actually made by an insurer to various providers varies by as much as a factor of 10 within a state (see Tables 6.3 and 6.5) or even smaller region. To my knowledge, no one has ever shown that these price variations are positively correlated with the quality of health care delivered.
As the many interesting presentations at that recent conference suggest, the shroud of secrecy hitherto surrounding American health care may soon be a thing of the past. In recent years there have emerged a number of entrepreneurial start-ups and other entities, forcing more transparency on prices and quality onto the providers of health care. Their clients tend to be some employers who, of late, seek to see the veil of opacity lifted from health care, to help their employees economize on out-of-pocket spending. Some insurance companies seem poised to join that effort, although others seem worried that greater price transparency and new pricing policies might disrupt their relationship with the providers of health care.
Greater transparency of prices and quality in health care will not solve all of America’s problems in health care. Nor do they guarantee better cost control, if the supply side of the health care sector continues to consolidate at the pace it has in the last decade or even faster, under the convenient cover of accountable care organizations.
But if a market approach instead of a more regulatory approach – e.g., an all-payer system with uniform prices – is what the powers who shape health care in the United States want, then continued opacity on prices and quality is simply intolerable.