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To Shop Smart, Patients Need to Know Price of Care: Peter Orszag

By Peter Orszag
January 24, 2012 7:00 PM EST
View Columnist Peter Orszag
View Columnist Peter Orszag

Over the past few years, the growth in health-care costs has quietly been slowing down. Naturally, we’d like to make this trend last. That means we’ll need to avoid betting big on just one strategy.

Last week, the Congressional Budget Office reported that many Medicare pilot projects that were designed to reduce costs actually haven’t done so. But the CBO suggested there may be promise in a “bundled-payment” approach, under which insurers pay a single comprehensive fee for treating a particular disease, rather than many fees for specific doctor visits and therapies. The health-care law includes provisions to expand bundled payments, and they should be aggressively adopted.

This is exactly how health-care reform should work: We try various approaches to generate better value from health care, many of which don’t pan out, and pursue the ones that seem to be working.

Another initiative, one that’s typically promoted by conservatives, is increased price transparency. For consumers to be able to play their role in keeping costs down, they need to know what those costs are.

Hidden Prices

The prices of many health-care services in the U.S. are extremely difficult for patients to obtain in advance. For example, when the Government Accountability Office anonymously phoned doctors’ offices to inquire about the price of diabetes screening, most could not provide estimates of the associated lab fees. And when GAO investigators called hospitals to find out the price of a knee replacement, they got similarly uninformative responses. One of the more responsive hospitals said it would take a week to obtain an estimate; most of the rest seemed even less helpful.

When prices are revealed, typically after the fact, they often vary widely -- depending on both the provider and the patient’s insurance plan. In 2009, for instance, the median charge for coronary-artery bypass surgery in Los Angeles County ranged from about $130,000 at Long Beach Memorial Medical Center to about $250,000 at Cedars-Sinai Medical Center and more than $300,000 at Garfield Medical Center, according to a California government website.

It’s worth noting that most studies have found little, if any, connection between price and quality.

Several efforts are therefore under way to provide more transparency about health-care prices, with the goal of helping people become smarter shoppers. The Centers for Medicare and Medicaid Services now collect and publish information on prices for prescription drugs (through the Medicare Plan Finder) and for common health services in various areas (through the Health Care Consumer Initiatives). And more than half of states now have publicly accessible websites offering health-care price information.

These efforts have not been overwhelmingly successful. California’s initiative over the past nine years to require hospitals to make certain price data available, for example, has done little to drive patients toward lower-price competitors or to narrow the price distribution, according to an analysis by the Congressional Research Service. A similar effort to increase price transparency in New Hampshire also had little effect. Simply posting prices online doesn’t seem to do all that much.

Consumer Approach

In the future, though, health-insurance plans are likely to shift toward a defined-contribution model -- in which the employee is given a set contribution toward buying an insurance policy -- and, in that setting, price transparency could become more effective. After all, when people bear more of the financial risk associated with their own health care, they are likely to become more responsive to information about price and quality.

(A consumer-driven approach, as I have written elsewhere, is unlikely to play the dominant role in reducing health expenses, since so much of the total cost of health care is driven by very expensive cases in which cost sharing is and should be minimal. But consumers nonetheless have a role to play.)

In addition, private health-consulting companies have begun promoting transparency in ways that may work better than the state government efforts. Castlight Health Inc., for example, helps employers analyze their payments to providers -- and then uses that data to offer personalized information to employees about out-of-pocket prices of health-care services and procedures. This company also provides information about the quality of service from individual doctors. The information is available only to the employee, not to the public.

Castlight’s private, individual approach might help to soften one of the concerns generally associated with price transparency -- that it can lead to provider collusion. In Denmark, for instance, when, in the early 1990s, prices of ready-mix concrete were published, companies found it easier to collude and prices rose 15 percent to 20 percent.

A 2008 Congressional Budget Office report, published while I was director of that agency, noted the same concern for health-care price transparency: “The markets for some health- care services are highly concentrated, so increasing transparency in such markets could lead to higher, rather than lower, prices because higher prices are easier to maintain when the prices charged by each provider involved can be observed by all the others.” The best way to mitigate this concern is aggressive antitrust oversight. But it would also help to make prices more transparent to consumers, but not providers.

Regardless of who wins the presidential election, the coming years will see dramatic fights over health care. Yet Medicare spending already seems to be slowing, in a manner that I increasingly doubt is due merely to economic weakness. Let’s not squander this progress. Providing more price transparency, through approaches like Castlight’s, should be part of the path forward.

(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

Read more opinion online from Bloomberg View.

To contact the writer of this article: Peter Orszag at orszagbloomberg@gmail.com

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net

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