Health Care Price Transparency and Economic Theory

Citizens inmosteconomicallydevelopednationshavehealth insurance coverage that results in only modest cost sharing at the time health care is used. Furthermore, physicians, hospitals, and other clinicians and entities that prov ide health care within most systems outside the United States are paid on common fee schedules uniformly applied to all clinicians, health care organizations, and insurers. That approach spares the insured the need to seek out lower-priced health care and obviates the need for transparency on the prices charged by individual clinicians and organizations that provide health care. Not so in theUnited States,where everyprivate health insurernegotiatespriceswith everyhealth carepractitioner and organization,where largepublichealth insurancesystemssuch as Medicaid and Medicare pay fees that do not cover the full cost of treatingpatients coveredby theseprograms, andwhere uninsured, self-payingpatients canoftenbeasked topaywhatever can be extracted from their household budgets, sometimes with the help of debt collectors and the judiciary.1,2 Economists call the approach price discrimination, which means the identical service is sold to different buyers are different prices. This approach to pricing health care has led in the United States to a system in which, at one end of the spectrum, hospitals and physicians are expected by society to treat lowincome patients free of charge, on a charitable basis,3 or for modest fees that donot cover the cost of those treatments and thento finance that informalcatastrophichealth insurancesystem for the poor out of the other part of their enterprises that they can operate as profit-maximizing business firms. This is true even in some of the large segment of institutions referred to as not-for-profit. The harsh excesses that this quest for profits in health care can unleash—even among not-forprofit hospitals—havebeenwell reported in various articles in the popular press. Private employers in the United States have played a pivotal role in the evolution of this system. They hired as their agents in health care the private insurerswhohelpedput that system into place, and they supported it.4 To gain better control over the growthof their health spending, employers have of recent resorted to a technique long recommended to them bythemarketdevoteesamonghealtheconomists,namely,putting the patient’s “skin in the game,” as the jargon goes. It is done with health insurance policies imposing on the insured very high annual deductibles before insurance coverage even begins, followed by significant coinsurance, perhaps requiring patients to pay 10% to 20% of every medical bill, up to a maximumtotal annualout-of-pocket expenditure that canpotentially exceed $10 000 for a family. This approach of shi f t ing more of the cost of employment-based health insurance visibly and directly into the household budgets of employees amounts to rationing parts of US health care by price and ability to pay and delegates the bulk of the hoped-for belt-tightening to lowincome families. Because the word rationing is anathema in the US debate on health policy, the strategy has been marketed instead under the felicitous label of consumer-directed health care,5 presumably designed to empower consumers in the health care market to take control of their own health care. However, this strategy, based mainly on economic theory, so far has put the cart before the horse. In virtually all other areas of commerce, consumers know the price and much about the quality of what they intend to buy ahead of the purchase. This informationmakes comparison shopping relatively easy and is the sine qua non of properly functioning markets. By contrast, consumer-directed health care so far has led the newly minted consumers of US health care (formerly patients) blindfolded into the bewildering US health care marketplace, without accurate information on the prices likely to be charged by competing organizations or individuals that provide health care or on the quality of these services. Consequently, the much ballyhooed consumer-directedhealthcarestrategyso farhasbeenmoreacruel hoax than a smart and ethically defensible health policy. Part of the problem is a technical one. A large number of distinctgoodsandservicescompriseallbut thesimplestmedicaltreatments.The“chargemasters”(ie,schedulesof listprices) usedbyhospitals tonegotiatepriceswith individualhealth insurers contain roughly 15 000ormoreof thesedistinct items,6 most of them with names that virtually no lay person could ever understand. The nomenclature for physician fees containsapproximately7000distinct itemswithgenerally incomprehensible terms.7 It is technically daunting to distill these thousands of items into larger aggregates for medical treatments—eg, heart valve replacement or knee-replacement operations—withnames of procedures that prospective patients might understand. A secondproblem involves the contracts onprices that insurers negotiate with health care entities. Typically, contract stipulations formally bind health care organizations and insurers to secrecy. Although it is possible to understand the quest for secrecy on prices from the commercial perspective of insurers and health care entities, that secrecy certainly interferes with creating the priceand quality-conscious consumer of health care services (about whom economists have dreamt in their philosophical musings). Related article page 1670 Opinion