The economist, Milton Friedman in “How to Cure Health Care” writes that one of the factors “explaining both the high level of spending on medical care and the dissatisfaction with that spending” is “nobody spends somebody else’s money as wisely or as frugally as he spends his own.” His observation is a crucial factor for what continues to plague healthcare costs in America and why price transparency alone will not lower healthcare costs. As long as patients don’t have to consider “price” when selecting healthcare, they’ll never have an incentive to shop for care to reduce their healthcare costs.
When price transparency is known, consumers compare products and services based on quality, price, and convenience to select the one offering with the best value. But healthcare pricing is opaque at best due to the secret deals between providers and payers. The lack of price transparency makes it impossible for patients to compare prices in advance of care, which leads to them overpaying for standard medical tests and procedures. Access to prices combined with a financial incentive to reinforce patient behavior will ensure price transparency’s success.
While lower-deductible, copay health plans are prevalent in America, they minimize a patient’s interest in shopping for care by shielding them from the actual cost of care. A $30 copay and $3,000 out-of-pocket maximum provide a minimal incentive for consumers to consider “price” when selecting care so long as they stay “in-network.” This renders price transparency tools ineffective as few consumers utilize them when their out-of-pocket exposure is the same regardless of the provider selected. Whether they get their MRI at the hospital or local imaging center, they pay $30 even though the cost difference could exceed 1,000 percent. Without a financial incentive to shop, consumer behavior stays entrenched, and consumers remain ignorant of the price of care.
On the other hand, consumer-directed plans (CDHPs), or HSA-qualified high-deductible health plans (HDHPs) do create a significant amount of “consumer interest” in shopping. Consumer exposure to a higher deductible along with a health savings account (HSA) to offset out-of-pocket expenses encourages consumers to include the cost of care in their decision-making when selecting providers. Unlike the lower-deductible group, patients in consumer-driven plans embrace price transparency tools to minimize their out-of-pocket expenses and total healthcare costs. For the patient with an HSA, a price transparency tool can lower the need for additional HSA withdrawals, preserving those funds for future medical expenses.
Shedding light on healthcare pricing puts patients in control of their healthcare spending and is why many in Washington see price transparency as a potential cure for runaway healthcare costs. It’s time for healthcare to operate like other markets where pricing information is known, and consumers have the desire and the ability to easily select providers based on price, quality, and convenience.
It’s also time for all of us to get educated about the real cost of healthcare and align on the right incentives that promote more consumer interest in shopping. One way to do this is to increase the adoption of consumer-directed health plans that include an employer-funded HSAs or rewards-based HRAs. Employers fund the HSA or rewards-based HRA with some of the savings generated from employee shopping; this reduces employee out-of-pocket expenses and promotes more consumer interest in shopping. Rewarding employees in this way supports medical consumerism behavior and reduces overall medical claims. We think this is a smarter approach than cash rewards that effectively pay employees to get care and can increase the utilization of unnecessary services.
We need to stop thinking of healthcare insurance as “other people’s money” and start treating it like our own money since it is. You wouldn’t buy a new car without knowing how much it costs beforehand, so why do so many of us do that with our healthcare?
Price transparency fosters market competition, increases innovation, and ultimately drives down the cost of healthcare for everyone. But without a consumer interest in shopping, price transparency alone will fail to reach its full potential.