The Mystery of Health Care Pricing

Many economists, think tanks, and politicians have been agitating for more consumer-driven health care in the US. They argue that if consumers have to spend their own money for care, they will tend not to waste health care resources, and they will shop around for cost-effective care. The first part of this argument appears valid, as individuals will always spend their own money most carefully. Studies have validated this hypothesis, showing that individuals with high-deductible insurance and health savings accounts (HSAs) tend to spend less than those on traditional insurance.

But are individuals able to shop for health care in a competitive marketplace? Personal experience and numerous reports indicate otherwise. In the US, most health care providers can’t tell you the price of any particular health care service until after it’s been performed! I recently shopped around for a health care service, and called four doctors’ offices in total. One office told me that they “aren’t allowed to provide that sort of information.” Two more offices were flabbergasted, and attempted to ease their way out of the conversation. Only one office was able to answer with an actual price quote.

Why is this so difficult for medical providers? Virtually all chargeable medical services have associated CPT Codes, which are defined by the American Medical Association [1]. Hospitals, labs, and most medical practices have a chargemaster, which is essentially a price list. Even small practices without explicit chargemasters know the rate their doctor charges for his time. When insurers and medical providers negotiate payment structures, they negotiate using the chargemaster rates (and usually Medicare rates) as starting points for negotiation.

The currently proposed health care reform plans have missed this essential element: require all health care providers to publish standardized price lists, and market competition can begin [2]. For doctors, a simple hourly rate should be enough to satisfy this requirement. Hospitals and labs should be required to initially publish online price lists for their most common charges, with the list expanding over time. While this information is irrelevant to patients in emergency situations, the great majority of health care spending is pre-planned [3].

Put another way, why not include a mandate on medical price lists as part reform? The cost of the mandate to providers is extremely low, as the information is available, and publishing the information online eliminates distribution costs. While price transparency is making slow progress, Congress has an opportunity to make this happen, and should do so as part of the health care reform package.

[1] The AMA would likely be a primary opponent of free publishing of CPT code-based price lists, since it derives signicant ($70M per year) income from its copyright on CPT codes. If the government is to open up the pricing market, it may have to break this monopoly by buying the copyright at fair value and putting it in the public domain.

[2] Consider a scenario in which all doctors are required to provide price lists. Since most small practices would find this difficult, they might just quote a maximum hourly charge. One surgeon might quote $1000 per hour, and another $2000 per hour. And there you have it, competition on price can begin, just as it occurs for plastic surgery, Lasik, and other out-of-pocket services today!

[3] According to the Kaiser Family Foundation, roughly 70% of health care expenditures are non-hospital expenses. Since many hospital expenses are planned, it appears that significantly less than 30% of health care expenses are emergencies in which consumers have no choice of provider. According to ACEP, only 3% of health care costs are emergency-related.

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