Healthcare prices in the U.S. are often hidden. Some people think this price opacity contributes to our nation’s high healthcare spending. If people don’t know how expensive healthcare is, they won’t have much reason to restrain healthcare utilization.
A recent study tested what would happen if physicians were immediately informed of the price of lab tests that they were planning to order for their patients. The study took place in three Philadelphia hospitals. The researchers randomized whether or not the electronic health record gave physicians price data on specific lab tests. For some lab tests, the computer never gave doctors price information; for other tests, they always got price information (after a baseline, so the researchers could establish how often doctors normally ordered the tests).
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Pharmaceutical companies have been charging way too much for way too many of their products. Both Donald Trump and Hillary Clinton complained about drug prices during the election campaign, but neither political party has taken action since November to tackle the problem. Insurance companies aren’t doing much about this problem either, despite having a huge incentive to tackle high prices.
But there is someone who appears to be up to the challenge – employers. According to a recent study in the New England Journal, a consortium of 55 Catholic organizations decided to redesign their employee healthcare benefits in 2013. Before that time, these organizations provided their employees with tiered co-pays for their medications. Under formulary tiers, a patient might pay $10 a month for generic drugs, $25 a month for brand-name drugs, and $100 or more per month for expensive specialty drugs and biologics. Tiered formularies are designed to motivate patients to use less expensive medications, because they carry lower co-pays. But such formularies are usually blunt motivational instruments. They might convince a patient to choose a generic medication rather than a brand-name cholesterol pill, but the patient will have no further incentive to choose the least expensive generic medication. Similarly, a patient with rheumatoid arthritis will face a significant co-pay for a biological therapy, but that co-pay won’t change from one biologic drug to another, even if those drugs have very different price tags.
That’s where reference pricing comes in, a topic I have written about before. The Catholic organizations got together and looked at different categories of medication, and decided how much they would pay for drugs within each category, with the understanding that patients would pick up the rest of the tab. For example, medications for stomach reflux range in price from $26 a month to almost $300 a month. The employers promised to cover $26 of the cost of whichever reflux medications patients chose to take. Similarly, patients who wanted to take $400 nasal inhalers for their allergies could go ahead and do that, but the insurer would only cover $34 of that price, given that an equally effective inhaler was available at that price.
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They both had shoulder pain, persistent despite weeks of physical therapy. Both received MRI examinations at reputable radiology facilities, looking for things like rotator cuff tears, labral disruptions and other anatomical abnormalities. What was different was the price they paid for the MRI, with one patient paying $1000 more than the other. Welcome to the crazy American medical marketplace!
Health care prices in the US vary substantially across providers, in part because those prices are so often opaque. When primary care physicians order MRIs for their patients, for example, few patients shop around for affordable radiology centers. There is no reason to shop, because most probably wouldn’t find out what the price was anyway.
That may soon change, if promising results from a recent experiment hold true. The experiment was launched by AIM Specialty Health, an insurance-like company that tries to manage the cost of expensive tests and procedures. The company decided to call patients up on the phone whenever the patients had scheduled MRIs that were either substantially more expensive than competing providers, or were going to be performed by a radiology group rated as significantly lower in quality than its competitors.
After receiving these phone calls, some patients shrugged their aching shoulders and went to whichever facility they felt like going to, realizing they weren’t going to pay out-of-pocket for their MRIs anyway. For example, if a patient had reached her out-of-pocket maximum for the year, then going to a high priced MRI facility would not affect her pocketbook. So she might stick with her originally scheduled test. But other patients, once they learned about the price and quality of alternative providers, canceled their originally scheduled scans and rescheduled with a competitor.
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In a healthy consumer market, people compare the price and quality of goods inside whether it’s worth paying extra money to get the best possible products. In healthcare, it’s often almost impossible to figure out what things cost. And when you figured it out, the price variation often makes no sense at all – having no relationship to the quality of the good in question.
Consider this picture, which we came across thanks to @zackcooperYale. It shows almost a 6-fold variation in the cost of MRI tests in Miami, Florida: This is not what a healthily functioning market looks like!
If she had been eligible for Medicare, the hospital would have charged the government $10,000 for the services it provided to her, with Medicare picking up most of the tab. But lacking insurance, she was billed directly from the hospital, and not for a mere $10,000. The total charge: $120,000!
That 1200% markup is extreme. But out of the 50 U.S. hospitals with the largest price markups, 49 are for-profit institutions, marking up charges 9 to 12 times above what Medicare would pay. That is the conclusion drawn in a recent study published in Health Affairs. The U.S. hospital industry has a price problem. And as it turns out, that problem is especially problematic at some of our largest for-profit hospital chains.
Before I dig in to the details of these markups, let me provide a quick refresher on hospital pricing. If you call up the nearest hospital and ask what they charge for, say, a hip replacement, you will quickly learn that most hospitals don’t charge a single price for this procedure. (To keep things simple, let’s ignore the physician fee part of this equation, and just stick with the hospital charge.) The hospital will have a Medicaid price, and a Medicare price. They will have a price they charge BlueCross, and another they charge Cigna, and yet other prices for yet other insurance companies, each price the result of company to company negotiation. And finally, they will have the charge master price – the amount they bill for people without insurance, or for people receiving the procedure outside of their insurance network, or for people paying for the procedure with workers’ compensation insurance. These charge master prices were the main focus of Steven Brills’ influential Bitter Pill essay in TIME Magazine. And as I’ve written about before, charge master prices are often arrived at capriciously. Some experts might even contend that such prices don’t matter much because so few patients, or payers, pay this full price.
But as it turns out, these prices are not completely capricious, and for-profit hospitals raise their prices for very savvy financial reasons. You see, the charge master can be a starting point, what behavioral economists call an “anchor,” for negotiations with payers. In addition, high charge master prices pad the bottom line for hospitals, whenever they serve patients who pay the full price. And there remain a large number of people in the United States who, despite the Affordable Care Act, do not have health insurance and therefore will be charged this full price. (To read the rest of this article, please visit Forbes.)
California is in the middle of an historic drought, with the government setting limits on how long people can sing in the shower. Farmers in the state may soon need to cut back on planting or production, as ground water dries up. But California is still fruitful ground for testing promising ways to improve how healthcare consumers, otherwise known as patients, shop for healthcare services. Specifically, California has shown that healthcare markets can be whipped into shape through the power of reference pricing.
In reference pricing, patients are given a maximum number of dollars from insurance to cover a given healthcare procedure with the understanding that if they choose to receive care from a more expensive provider, they will be responsible for any charges exceeding that limit. As I wrote in a previous post, California already used reference pricing to address high costs for knee and hip replacement. While many healthcare providers were charging $25,000 or $30,000 for the procedure, some were charging $60,000, $70,000, even $100,000.
The state of California realized it couldn’t continue to pay these exorbitant prices. It could have decided to force people to receive care from affordable providers. It could have regulated the price of these procedures. But instead the state took a different approach. It set a $30,000 limit on what it would reimburse patients. Overnight, state employees became discerning shoppers, avoiding high cost providers. Almost as quickly, providers began lowering their prices.
The wonders of efficient marketplaces. (To read the rest of this article, please visit Forbes.)
Here is a great piece on my former student, Jessica Harris, who now works in health care price transparency at Aetna. She visited my class this summer, and here are some of the things she taught them:
The evolution of transparency in the industry: “2013 and 2014 have been really important years for transparency and for discussion on this issue. There were many articles in the mainstream press that discussed all sides of this issue. You also saw where some states have mandated transparency and have actually created websites to show transparency. You also have some advocacy organizations — like the Catalyst for Payment Reform — that represent big companies and released a report card for state transparency laws for the first time in 2013.
And then you also saw some big events happening in federal policy. In March, the Centers for Medicare and Medicaid Services released an in-patient data set for the very first time, and then in June they released an out-patient data set for the very first time, showing payment data for individual procedures. That was a big deal. It created a lot of interest from organizations like the Robert Wood Johnson Foundation encouraging start-ups to really innovate around this data and figure out how to show it to consumers.” Barriers to transparency: “Negotiated prices are historically considered trade secrets. Many hospitals or health systems have something called gag clauses where it forbids the payer to disclose the prices they negotiated. Actually a study came out in 2013 showing that only 16 percent of hospitals that were asked the price of a traditional hip replacement were able to give a price. And of those prices, they varied significantly.” Trends in employer sponsored plans: “There are two trends happening for employer sponsored insurance.
First of all, you’re seeing increased cost sharing. So 38 percent of employees face an annual deductible of over $1,000 per person, in plans that the industry calls “high deductible health plans”. So in 2012, only 13 percent of employers were considering offering only high deductible options. But in 2014, 44 percent were considering offering only high deductible plans. A high deductible model means you have to pay a certain amount before the health insurance even kicks in in terms of cost sharing. So you have to pay a certain amount before you even start paying a co-pay or a percentage of the service you are using.
‘Consumerism’ and out-of-pocket spending continues to increase: despite seeing health care spending go down overall and costs start to stabilize a little bit, we saw an increase in out-of-pocket spending; it was up by 4.8 percent in 2012 to $768 per person.” The impact of exchanges: “You are seeing a shift from a more traditional, almost like a pension model, to something more similar to a 401k model. Again when we think about health care consumerism, you see more responsibility but also more choice falling on the employee, but it also means the company isn’t defining the health care as much. They are saying go out on exchanges, we’ll give you a voucher, purchase your health care, but it is on you to decide if you’re purchasing a good plan for you and your family.
We’ve heard about the public health insurance exchanges for the uninsured, but there are actually several private health insurance exchanges that have cropped up, creating marketplaces for all those benefits you might traditionally get from your employer and having employees go out and be able to shop on the exchange to be able to get the care that they need.
It’s a really big disruptive force that we’re going to see in the next couple of years. According to one study, by 2017, nearly one in five Americans may buy benefits from an exchange. To put that in perspective, the public exchanges serve nearly 30 million uninsured. The private exchanges are going to rapidly change insurance purchasing for about 150 million people with employer sponsored insurance.”
A former student of mine who now works at the Advisory Board recently emailed me some figures her company put together, offering a snapshot of how many people are being hired in oncology practices to help patients with their financial concerns:
I am very eager to see what these figures look like over the next couple years. I will be surprised if these numbers don’t grow significantly. Cancer-related treatment costs are a really big deal!
A new study asks Orthopedic surgeons to guess the price of the devices they implant – “the amount your institution currently pays the vendor for the implant.” Despite a lenient grading system, in which the researchers counted as correct any guess within 20% of the actual price, surgeons estimated costs correctly only 1 in 5 times.
When I first glanced at this study, I wasn’t sure of its importance. But then I learned that orthopedic surgeons can often choose among a wide variety of devices to perform specific operations. There isn’t just one company making one type of pin, for example, to hold together a fractured fibula. Surgeons can choose between high cost and low cost alternatives. In a rational market, surgeons would consider whether the advantages of the high cost devices are worth the added price, a price, it should be noted, that is eventually paid for through tax dollars or insurance premiums, and in some cases is born by the patient receiving the procedure….(Read more and view comments at Forbes)
I recently learned about a company called OpsCost, which has a very user-friendly website designed to help people figure out how much different hospitals charge for a wide range of treatments and procedures. The company makes use of the data that the Medicare program has recently made available to the general public, and then presents those data more elegantly than many other sites I have seen. You can go here to look at the company website, and you will quickly find yourself looking up prices for hospitals in your region. (Disclosure: I have not received any money from any price transparency companies, nor entered into any business relationships.)
For example, I told the website that I wanted to look at hospital prices near Durham, North Carolina, for “Hip & Femur Procedures Except Major Joint Without Complications And Comorbities/Major Complications And Comorbities,” and the program showed me a list of hospitals and prices, with a Google map on the right-hand side showing where each hospital was located. Pretty nifty. But is it useful? …(Read more and view comments at Forbes)