Chicken & Egg in Consumer-Driven Health Care

debtAn advocate of consumer-driven health care will often be challenged by this question: “So, when I am hit by a bus, or have a heart attack or stroke, or am suffering from dementia, you want me to go shopping around for medical care?”

Obviously not. Nevertheless, this is a serious challenge and invites the question: How much of our health spending can be meaningfully controlled by discriminating patients? Researchers at the Health Care Cost Institute (HCCI) recently addressed this. The HCCI has a unique advantage in producing such research, because has access to a database of claims for employer-based plans run by a number of insurers.

The research categorized “shoppable” versus “non-shoppable” services. It found:

  • At most, 43 percent of the $524.2 billion spent on health care by individuals with employer-sponsored insurance in 2011 was spent on shoppable services.
  • About 15 percent of total spending in 2011 was spent by consumers out-of-pocket.
  • $37.7 billion (7 percent of total spending) of the out-of-pocket spending in 2011 was on shoppable services.

So, it looks like only 7 percent of health spending is subject to price-conscious patients spending their dollars wisely. The researchers concluded that “Overall, the potential gains from the consumer price shopping aspect of price transparency efforts are modest.” That would be true if we were talking about just forcing price transparency on the current benefit design. However, that is a distraction.

The current benefit design must be redesigned, but people who run health insurance will not or cannot see that. Why is only $37.7 billion of $225.4 billion of “shoppable” medical care under patients’ direct control? Should it not be more like $225.4 billion – the whole lot?

Take homeowners’ insurance. You have a flood and you have to act fast. You may not be able to make a fully informed choice about mitigation services you need immediately. However, when it comes to replacing your furniture, would you not want to control every penny of the insurers’ payment? There is no way you would allow your insurer to control 85 percent of the money spent on replacing your property, chosen from suppliers selected by your insurer at prices fixed by your insurer.

Further, the HCCI researchers give the example of colonoscopy as a “shoppable” service. Colonoscopy is a service most health services researchers believe is very well suited to shopping around. However, under Obamacare, colonoscopy for patients who benefit from it (those over 50) is so-called “preventive care.” Its entire cost is loaded onto premium, with no direct payment by patients. No rational patient would waste time searching out the best price for a colonoscopy.

The opportunity for price reduction in health services is huge. Unfortunately, those who operate within the boundaries of the status quo struggle to see it.

Comments (21)

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  1. Jacob says:

    Is there not also a problem with reporting the data as a percentage of spending, which is based on largely arbitrary pricing in our current system, versus utilization patterns? If 7/10 outpatient services performed are “shoppable” and cost $100 each, but the last 3 services cost $700 *because* there is no ability for consumers to shop for them currently, the HCCI methodology would say only 25% of services ($700/2800) are shoppable when really it should be 70% (7/10). This could also be driving their very poor-looking results.

  2. Devon Herrick says:

    A question I have for the Health Care Cost Institute is what is the proportion of medical spending on patients who encounter the health care system initially through the emergency room? I believe it’s less than one-quarter. As John said, one of the criticism of forcing patients to take more responsibility goes something like this… Do you really expect someone having a heart attack to compare hospitals prices on their iPhone from the back of an ambulance? No, but I don’t believe that much care has no little discretion as an emergency admission.

  3. Wanda Jones says:

    A good topic as few pundits who write about this bother to see it from the patient’s standpoint. As a frequent patient, let me weigh in. Pricing separate services implies that a patient would make a decision to choose the cheaper option. Setting aside “shopable” health cervices, tackling the most expensive services–an inpatient surgery, suppose my home hospital’s MRI was more expensive than the hospital’s 5 blocks away. Am I to leave, have the MRI, then return to my home hospital? Suppose the hourly rate charged for using the hospital’s surgery was too high, would I ask my doctor to use another surgery? If I had a series of services, both pre-acute and post-acute, would I shop for each one or follow the advice of my surgeon as to which was best?

    Rather than mess about with inpatient pricing, it is much more prudent to use any possible service rather than an inpatient facility; that is automatically cheaper by a huge percentage. Then, get your services at a well-known location that is not in a building constructed in the last five years.

    Then, negotiate for a price that is discounted for cash.

    If you have to go to a hospital and want to save a fair amount of money, look for one that is not continually in a labor dispute that leads to higher wages and salaries. This can be discovered by diligent research in business journals for the region.

    Also, one can ask for a price estimate before elective procedures and ask to be put on a payment plan by the business office.

    To avoid costs that do not add much value, ask not to go the ICU after surgery–go directly to the floor. Ask to not have excess medication, such as antibiotics. And ask to go home in 1 or 2 days rather than 4 or 5.

    Economists need to watch out for the dark side of the various bundled payment methods–they can lead directly to under-service and are not simply guarantees of greater efficiency.

    If you are associated over a period of time with a single hospital, you can probably help future patients by asking whether they are following “Patient-focused Care” which creates labor efficiency and more responsiveness to the patient, or are practicing “Personalized medicine” which attempts to fit therapies to a patient’s own DNA, or Precision medicine” which attempts to cure the patient by used of custom therapies. The last one is actually more expensive, but the chance of being cured is higher for some conditions.

    Finally, attempt to get any treatment as early as possible in the course of an illness–it’s more apt to cost less and cause less absence from work.

    Seriously, before advocating for capitation, bundled payments or block grants, work through a simulation that compares expected cost savings that could come from higher patient compliance vs lower patient compliance. What incentives would work here?

    Regards to all..

    Wanda Jones
    San Francisco

    • Devon Herrick says:

      Rather than mess about with inpatient pricing, it is much more prudent to use any possible service rather than an inpatient facility; that is automatically cheaper by a huge percentage. Then, get your services at a well-known location that is not in a building constructed in the last five years. Then, negotiate for a price that is discounted for cash.

      All interesting points Wanda. A point I would like to make as an economist is that economists don’t have to tell doctors and hospitals how to perform surgeries more efficiently. It’s our jobs to give doctors and hospitals the appropriate incentives and let them figure out how to best profit under those conditions.

      I reported in another blog post how hospitals are beginning to feel the bite of patients with high-deductible plans — and patients who ask about prices. Hospitals (at least according to Modern Healthcare) are having to figure out how to be more competitive for those services patients can shop for.

  4. Barry Carol says:

    If you look at healthcare broadly whether it’s typically covered by traditional health insurance or not, lots of care is shopable. I would put the following care in the shopable category: imaging, labs, prescription drugs, physician fees, including surgeon fees, dental and vision care, physical therapy, home healthcare, and nursing home care.

    The big problem area is hospital based care, especially inpatient care whether it can be scheduled in advance or not. Try getting a price from a hospital that they are actually willing to accept for operating room charges per unit of time or any tests that need to be performed while you’re there. Try getting a price that they are willing to accept from an ER doctor, a radiologist, pathologist or anesthesiologist all of whom the patient generally has no role in choosing.

    Last November, I had a six hour procedure at a leading NYC academic medical center that required an overnight stay in their cardiac observation unit and I went home the next morning. The list price for the hospital portion of the bill was an astounding $222,000 but Medicare paid only about 7% of that amount or $15,700 which was accepted as full payment. About a year and a half ago, I was in my local ER for several hours and had an MRI at their facility a week later. The total charges came to $15,000 but Medicare paid them $1,800 which I thought was reasonable to maybe even slightly high. Again, that was accepted as full payment.

    Note to Wanda: I hear that Sutter Health commands prices that are about 40% higher than what’s typically charged in Southern CA. How do they get away with it? It must be pure market power.

    In my experience, at least here in NJ, it’s darn hard to even get a binding estimate of out-of-pocket costs from a hospital for any procedure including those that can be scheduled in advance. I’m certain that they could provide this information if they wanted to or if they had to but it has never been a priority so far and their management systems aren’t built to address the issue as far as I can tell. As I often say only half in just, when hospitals aren’t killing us with infections, they’re killing us financially. That needs to change.

  5. Allan (formally Al), but due to the lefts propensity to disrespectfully and disruptively alter facts I will now refer to myself as Allan and the former Al Baun can keep his newest name. says:

    There is no reasonable reason people cannot shop for care. When one goes out to dinner and the waiter reads the specials one has an opportunity to ask for the price if they weren’t mentioned. Some people think it poor etiquette not to ask the price of those specials, but then complain when the costs are double the costs of the items listed on the menu. Instead of complaining that they should have been told the price in advance they should have made it their business to ask. If they don’t like the idea of being held captive in the restaurant while other eyes are staring they should have called up in advance and asked for prices. If those prices didn’t match their expectations they should have found another place that would have been more suitable.

    The same thing occurs in healthcare. One can always ask the prices, but many are embarrassed to do so. They feel they will be considered cheap. That is a major stumbling block, but they have the choice of price shopping or paying more. Some have the excuse, but what do I do in an emergency? Most care provides the individual with plenty of time to shop. But they say what happens if I go to the ER? That is a true emergency and one doesn’t have time to shop. That is true, but the ER is there to stabilize the patient and many times the actual expensive treatment is performed at a later date or could be performed at a later date giving the patient plenty of time to ask questions.

    It is not difficult to ask questions especially if one starts when they buy insurance. They should know the parameters of their insurance and what it covers. The big problem I hear on this list is that some doctors involved in one’s treatment don’t take the insurance the patient carries. Find another doctor or facility or sometimes get better insurance.

    • Ron Greiner says:

      If Barry and I go out to eat and Barry is picking up the tab I’m not going to ask how much the cheese cake costs because I don’t care.

      Also, when the consumer hits the maximum out-of-pocket for the year they don’t care about cost because it is paid 100% by Federal law.

      That Blue Cross Association news that Obamacare consumers are 22% more expensive than workers on employer-based plans is a big red flag. It’s socialism in crisis. Even Chelsea is saying Obamacare’s “CRUSHING COSTS” can be fixed with her mom’s Executive Orders.

      Chelsea wants 3 doctor visits paid 100% per person on Obamacare plans each year which disqualifies the tax-free HSA. This will make the insurance premium increase but these Clinton girls would never think of that.

      Hillary / Chelsea 2016

      • Barry Carol says:

        Ron – I read recently that the pre-ACA age distribution of the uninsured was 50% 18-34, 30% 35-49 and 20% 50-64. The age distribution of ACA exchange members, by contrast, is 37% 18-34, 23% 35-49 and 40% 50-64. It’s pretty obvious that the exchange plans are more expensive than expected because the age distribution is much more heavily tilted toward the 50-64 year old people as compared to their share of the previously uninsured population. Employer plans presumably have a much more normal age distribution and a more normal distribution of healthy vs sick people as well. The ease of enrolling in an exchange plan under one of the special enrollment period criteria just exacerbates the problem. Throw in the relatively modest penalty / fine for remaining uninsured and you get adverse selection. No surprise there.

        • Ron Greiner says:

          Barry, you say, “Employer plans presumably have a much more normal age distribution and a more normal distribution of healthy vs sick people as well.”

          Corporate America likes young people because they are cheaper and their health care costs are much cheaper. Employer-based health insurance discriminates against older workers because they cost more so they are retired, or right sized. I suspect that large employers will have a younger age for a majority of workers.

          When we get rid of employer-based health insurance then employers will like older workers more which will be better for everybody.

          Hillary is saying that Social Security discriminates against women, can you believe that? I guess that Social Security discriminates against black women because when their black husbands die young their wives are not getting the money. Currently, all of the Social Security money that black men give up, because they die younger than the other gender or races, goes to old white women.

  6. Bob Hertz says:

    After analyzing several claims at my insurance agency, I told a colleague in exasperation, “If we consumers could pay the amounts that Blue Cross actually pays, we wouldn’t need Blue Cross.” So many insurance claims that start out with a $5,000 bill are settled for a few hundred dollars.

    I also have found that the worst offenders in over-billing are always hospital outpatient departments. See a good article by Jeanne Pinder of Clear Health Costs on this topic:

    I believe that Medicare is timidly (as usual) looking at a single fee schedule for outpatient procedures. I would love to see this made into national laws.

    One more note:

    Price shopping is well suited for a one-off procedure that the patient initiates (like a colonoscopy at a certain age, or vision correction so as not to need glasses.)

    However, a patient with a serious illness and a long course of treatment will place a high value on trusting their doctor. They will not question his recommendations as to what they need or where it should be done.

    I know this from experience. I had a heart attack some years ago, and there were many follow up procedures. If the doctor scheduled these for a pricey lab or surgicenter, I went along. I would not have wanted to displease or bother the doctor.

    I am not saying this is good, but I think it is very common.

  7. Barry Carol says:

    Looking at some of the services I’ve received at my local community hospital, including outpatient procedures, over the past two years I found that Medicare generally paid 7%-11% of the list price.

    The list price for an MRI of the head and neck was $7,565. Medicare paid $776.53. That was for a 20 minute test that probably wasn’t worth more than $400 at most. I think $15-$20 per minute of MRI machine time should be sufficient to cover costs and earn a reasonable return assuming a respectable capacity utilization rate.

  8. Bob Hertz says:

    Thank you Barry. The interesting thing to me (as a supporter of national fee schedules) is what would happen if every patient with an MRI paid $776.53.

    Would the hospital go broke? If the $776.53 was paid promptly with no hassles, and no need to bill patients due to their high deductibles, would the hospital be as well off?

    Hospitals always bill the average cost of a patient, whereas outsiders like me look at the marginal cost. Getting $776.53 seems pretty darn generous if the hospital building is paid for and the MRI machine is mostly paid for. Getting $150 for an ER visit seems just fine to me, if the ER staff and physical facility is already paid for.

  9. Barry Carol says:

    Bob – I think every business has to cover its fully allocated costs to stay in business. They have to invest capital every year to at least maintain their existing capacity. That includes replacing the roof when it wears out and replacing HVAC equipment and keeping its building in compliance with building codes that may change over time. It has to keep its technology and information systems up to date and replace equipment as it wears out or becomes obsolete. Hospitals, like airlines, cruise lines and hotels, are both capital intensive and labor intensive. The marginal cost to fill one more seat on a plane, cabin on a cruise ship or room in a hotel is tiny compared to average costs but those businesses would quickly go broke if everyone only paid the marginal cost. One problem with hospitals is I don’t think they have very good or accurate information on just what their fully allocated average costs are for each service, test or procedure that they offer.

    Medicare, for its part, overpays for some billing codes and underpays for others. On average, I’ve heard hospitals claim that Medicare only pays them about 91% of costs. That means a payment rate of 115% of Medicare would be sufficient to produce a 4% operating margin. By contrast, the list price at my local community hospital apparently ranges between 900% to over 1400% of Medicare. If it actually collected those prices, its operating profit margin would be between 88% and 92% of revenue when a margin closer to 5% or maybe a bit more would produce a perfectly fine sustainable business. The list prices are arbitrary and have no basis in reality but they are still used by Medicare as a factor in its formula to calculate outlier payments for the most complex cases.

    The extent to which hospitals may be able to reduce their costs without sacrificing the quality of their care is a whole separate issue. Like colleges and universities, operating efficiency has never been a priority in the past.

  10. Barry Carol says:

    Bob – I’ll just make one more point on this. The reason that most of the hospital building and equipment is already paid for is that the hospital was able to raise capital to build the facility in the first place. The reason it was able to raise capital is that investors perceived that there was a viable business model that would enable the hospital to service and ultimately pay off its debt.

    A viable business model includes charging fees that cover fully allocated costs including capital costs while writing off some bad debt along the way from some patients who can’t pay what they owe or can’t pay at all. At the same time, list prices that are 10, 15 or 20 times cost border on criminal in my opinion especially since patients don’t patronize hospitals because they want to but because they have to.

    Aside from a few wealthy foreigners who may seek care at one of our famous academic medical centers, there is almost never a meeting of the minds on price between the patient and the hospital before services are rendered. If the patient has insurance, hopefully the bills are covered less any deductible and coinsurance liability and without surprise bills from doctors who turn out to be out-of-network. If the docs are out-of-network, there was probably no meeting of the minds on price with them either.

  11. Bob Hertz says:

    I once read that the super-high chargemaster rates are helpful to a hospital when they declare how much charity care they provide.

    I agree that hospitals are not so great at determining what their actual costs are for each procedure.

    But a part of me says, “so what?” If we see the hospital as a necessary public institution, and fund it with enough tax-derived revenue to cover its annual global budget, then what difference does it make what each patient actually costs? Does the public library know which reader “costs” the most by checking out a lot of books? The fire and police departments do know what households cost the most, but they do not do anything about it. They just go to city council each year and request an annual budget.

    Actually I think it was Medicare itself that forced hospitals to adopt more precise cost accounting, starting in 1965. Medicare did not want to pay more than its exact share.

    I remain shall we say underwhelmed about the importance of precise user fees in hospital financing.

  12. Barry Carol says:

    Bob – Global budgets for hospitals would create worse problems than they solve. Both Canada and the UK use that approach and they both have rationing, at least for non-emergency care which is most care.

    Nobody uses more police or fire services just because no cash changes hands at the point of service. Police and fire departments try to solve crimes and extinguish fires and respond to emergencies. They also give talks on how to prevent crimes like locking your car at night, stopping mail delivery when you go on vacation, installing smoke detectors, etc.

    A lot of healthcare is at least somewhat discretionary. Doctors could perform an operation sooner rather than later. They could refer a patient for an MRI instead of a CT. They could recommend extra rehab or keep the patient in the hospital an extra couple of days if nobody is paying bills directly. Before you know it, demand for services will exceed supply leading to rationing / queues for non-emergency care. A lot of healthcare seems like a game of whack-a-mole. When you try to fix one problem, another problem or two pop up somewhere else.

  13. Jimbino says:

    All this discussion ad nauseam regarding proper pricing of physician and hospital billing would be totally unnecessary if Medicare, Medicaid and Obamacare payouts could be made for services in Mexico, Brazil, Argentina, Costa Rica and dozens of other countries in Europe and Asia.

    That’s the beauty of the market and price signalling. When Walmart offers blue jeans for $20, you can be confident that you’re not being overcharged by 1000%. Especially since they post their prices online for comparison with those of other providers.

    Another solution for the USSA would be to require that prices for all procedures by CPT-code be posted online; else, no payment will be allowed to be extorted from the patient.

  14. Allan (formally Al), but due to the lefts propensity to disrespectfully and disruptively alter facts I will now refer to myself as Allan and the former Al Baun can keep his newest name. says:

    “economists don’t have to tell doctors and hospitals how to perform surgeries more efficiently. It’s our jobs to give doctors and hospitals the appropriate incentives and let them figure out how to best profit under those conditions”

    That is the essential difference between the two differing factions on this list. One faction wants to dictate how everyone should function and the other faction recognizes that the appropriate incentives make almost all function the best they can.

  15. PJohnson says:

    John Graham has repeatedly written on price transparency – sorely needed. But I have yet to see a real solution proposed. His view of states that have tried is remarkably defeatist. So what IS the answer John?

  16. Robert Stehlin says:

    The first step in solving the problem is moving the power. power=f(dependence) and it can be done in JUST 8 words –

    Once the power has been shifted, then all options are in play. No shift in power continued dependence on a sinking ship. A la carte – all you can eat, it does not matter if the power has been distributed to the masses because the market will have to work and prove their worth.