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The Price of Admission

Last October something interesting happened, and it happened in Massachusetts. As of October 1st, 2013 insurers have been required to provide plan members with cost estimates within 48 hours for specific tests, procedures and office visits. And as of January 1st, 2014 hospitals and individual doctors will have to do the same thing. By October of this year, insurers won’t even have 48 hours—they will be required to provide the information instantaneously; this includes how much the patient will spend out-of-pocket depending on specific deductibles and co-payments.

Here’s the kicker: if the price quoted is higher than the estimated range that was quoted (and there was no unanticipated care required), the insurer has to make up the difference. Greater openness about the price and quality of medical care is a cornerstone of the state’s landmark health care cost control law passed in 2012. Backers believe transparency will lead to lower prices as providers compete with one another and consumers shop around. If insurers are going to have to make up the difference between their price quote and the actual cost, aren’t they simply going to quote high to prevent having to reimburse plan members?

Some will argue that if they do that, then they risk losing customers to other insurers whose provider networks are more price competitive. I argue that systems can be ‘gamed’ in such a manner that this is not likely to happen in large numbers. And just exactly what are consumers going to be ‘shopping around’ for? Health policy literature suggests that individuals are incapable of distinguishing between high-value and low-value health care services. In other words, the average person doesn’t know a good doctor from a bad doctor. Or a ‘good’ orthopedic procedure from a ‘bad’ one. And besides, if I have a $1,000 deductible or co-pay within my health insurance plan and I have to pay the first $1,000 for my procedure no matter where I go, then will this really lead to lower costs? If my child’s birth and the associated costs for that delivery are going to be, say, $15,000 at one institution and $25,000 at another, wouldn’t I choose the $25,000 facility given that I have to pay the first $1,000 anyway and the more expensive facility has got to give better care? Isn’t this the typical consumer mindset?

Now back to the original question—what are consumers going to be shopping around for anyway? The price of a medical procedure or office visit without context is meaningless. In other words, as healthcare consumers, we are not ‘shopping’ for price; we are ‘shopping’ for outcomes. And in reality no one can shop around for outcomes because providers and payers can’t guarantee outcomes because healthcare is stochastic.

On the subject of providers competing with one another, there is little empirical evidence that supports the theory that providers actually behave this way. The assumption behind provider competition in the face of price transparency is that price is the only criteria that matters to patients in the doctor-patient relationship and that providers will automatically lower their prices for fear of losing their patient base. We know that the complexity of the doctor-patient relationship involves far more variables than just price. This argument may work (although I’m still unconvinced of this) in a one-off situation where a singular patient is looking for a one-time procedure (hip replacement, cataract, etc.). The thought process in this scenario is that there is no pre-existing relationship and that, therefore, the only deciding factor can be price. But there is a relationship. And that relationship is called the referral.

By virtue of your primary care physician diagnosing your cataract or your degenerative hip condition and sending you off to a specialist, there is an implied relationship that exists. Your doctor knows a doctor who ‘does hips’ or ‘does eyes’. Very few people ignore a primary care referral because they think they can find someone better. They trust their physician and, by extension, they trust their physician’s referral.

Look, I think it’s great to give patients access to pricing. It’s important that individuals understand what they have to pay for a particular treatment. But the expectation that this is going to lead to lower prices as providers compete and consumers shop around is flawed. The argument minimizes the myriad of factors that go into healthcare decision making for patients. The argument subtly suggests that healthcare is a commodity. And if healthcare were a commodity, there would be no reason to bring this policy into law, no reason to monitor its success and no reason to write an article about it.

Rohit Khanna

Rohit Khanna

    Rohit Khanna is the Managing Director of Catalytic Health, a healthcare communications, advertising & strategy agency. He can be reached at: rohit@catalytichealth.com

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