Code Red: Two Economists Examine the U.S. Healthcare System

June 7, 2013

The Pricing Transparency Puzzle

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:07 am

This past Wednesday, the Kellogg School of Management hosted its annual MacEachern Symposium. In the coming weeks I will tell you how you can view the proceedings, including the MacEachern Lecture given by Professor Martin Gaynor.

The theme for the Symposium was “Integration and Antitrust” and during the day there was a lot of discussion about pricing transparency. At the Symposium’s Healthcare Forecasting Luncheon, an amazing panel of CEOs and faculty unanimously predicted that pricing data will herald a new era of healthcare competition. No one thought to ask when this will happen. Had I been asked, they would have been disappointed by my answer: For a handful of medical services, pricing transparency may be just around the corner. For everything else, transparency remains off in the distance.

By now, everyone knows that the recently released CMS charge data are of limited value because few individuals pay full charges. A lot of the conversation about transparency has thus been about releasing actual pricing data. I think this grossly oversimplifies the problem. Even if patients saw actual prices and paid 100 percent of these prices out of their own pockets, we still would not have pricing transparency. The key question is not “what are the right prices?” It is “what are we pricing?”

By way of explanation, let me define three broad categories of medical services:

1) Commodity services. These may include MRIs, vaccinations, and medicines. Patients should easily be able to comparison shop for these services. For patients paying 100 percent out of pocket, they can turn to CMS data for MRI pricing, or phone up their pharmacy for drug pricing. A few companies are launching apps that will simplify the process. A number of fledgling companies are putting this data out into the hands of consumers, online and through smartphone apps.

2) Acute episodes of illness, with a well-defined beginning and end. Treatment of an infection, joint replacement surgery, and are good examples. Pricing for an episode of illness is far more complicated than pricing a discrete service. Take something as simple as the treatment of a child’s ear infection. A parent could ask various providers what they charge for an office visit. But there are five distinct billing codes for office visits and not every provider will use the same code. Even if they did, this would not be the “price.” Some providers will order tests, others may not. Different providers will order different drugs. Some providers will schedule a follow-up visit. The price of the treatment should include all of these “add-ons.”

That is a “simple” example. Consider a patient pricing out a hip replacement. Someone in the hospital billing department might quote the charge for a day in the surgical ward, an hour in surgery, and a day in intensive care. But this is hardly enough to determine the price. The patient would need to know how many days and hours, which will vary by hospital. And then there are prices for supplies, tests, drugs, therapy, and home care, not to mention all the physician fees. Even that is no enough. The full price should include the expected cost of dealing with complications. A very small number of hospitals are willing to quote a blanket fee for inpatient care. Even fewer include the physician and home care costs. Only a small handful covers the costs of follow-up care.

Trying to figure out the total cost of an acute illness by looking at prices for individual services is like trying to figure out the total cost of a car by looking at prices for individual nuts, bolts, belts, tires, wheels and spark plugs. No one in their right mind would buy a car piecemeal, yet that is what patients must do when buying medical care. Pricing transparency for acute care requires that we redefine the product as the episode of illness and work out the full price for the episode. This requires specialized software and access to insurance claims data; patients cannot do this alone. Insurers have the data and some have taken steps towards generating usable pricing comparisons. They need to pick up the pace.

3) Chronic conditions such as diabetes, asthma, or COPD. All of the issues associated with pricing acute illnesses apply to chronic conditions, and then some. It is much harder to define the episode of illness, figuring out when it begins and when it ends, and deciding which treatments are related to the chronic condition and which are not. It probably makes sense to define the “episode” as a year; it is much harder to sort out which specific treatments are parts of that episode.

Providers have some experience pricing out the treatment of chronic conditions – this is pretty much what capitation does. But doctors in HMOs are capitated for only a fraction of all the treatments delivered to chronically ill patients; inpatient care is rarely included in the capitated fee. I don’t see too many providers going public with all-in prices for a year’s worth of chronic care. (There may be one exception; DaVita is contemplating a “Diabetes ACO” that would assume shared risk for the all-in costs of diabetes patients.) Even if we had all-in prices, they would be suspect, as it would be crucial to risk adjust. (Risk adjustment might also important for acute episodes, but that discussion must be postponed.)

Pricing transparency is the God, Mother, and Country of health policy. Everyone is in favor, no matter their political stripes. But on this issue I am agnostic, orphaned, and exiled. I have for the past decade been writing about the need for meaningful prices. I am glad I didn’t hold my breath waiting for change.

1 Comment

  1. your comments are spot-on; policy makers tend to think in simplistic binaries: having price information versus not having price information in affecting consumers’ purchasing decisions. There is yet another layer here: what is the quality of care associated with these prices? Without that (complementary) piece of information, consumers are still making decision in the figurative dark.

    Comment by Erik — June 8, 2013 @ 8:21 pm

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