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  • Price Transparency in Health Care: Will it Bend the Cost Curve?

    Recently, the New York Times highlighted a booming trend toward greater price transparency in medicine thanks to up-and-comers such as Castlight, a new company aiming to create a search engine of health care prices.  Others sharing in this endeavor include both public and private entities in Tennessee and New Hampshire, as well as several insurance companies.

    Lack of transparency regarding pricing of medical services has often been attributed as one of the factors contributing to skyrocketing spending in the health care system, a concern which drew considerable attention during the recent debate over health care reform.

    According to the Times, “The lack of price information in health care has been a big driver of ballooning health care costs, analysts say, because costs are opaque to patients and heavily subsidized by employers. The patient has no incentive or responsibility to keep costs down. But many employers are switching to health plans that require patients to pay more out of their own pockets.”

    But lack of transparency in pricing is only part of the problem driving soaring health care spending.  The bigger problem is that patients are completely disconnected from the cost of their medical bills because of the growing role of third party payers.

    Heritage expert Robert Book, Ph.D, and Jason Fodeman, M.D., write:

    A major source of these spending increases is a third-party payment system that often leaves the physician and patient insulated from and even unaware of the costs of the various treatment options. Often, the patient faces the same co-payment regardless of which treatment is chosen, and the extra costs are passed along to the insurance company, Medicare, or Medicaid. These payers may appear to have an incentive to encourage efficient use of resources, but ultimately they do not pay the price for inefficiency. Insurance companies offer “generous” benefits and pass on the increased spending to patients (and often their co-workers) through increased insurance premiums, and government programs pass on the spending increases to taxpayers.

    Since price transparency is only part of the reason for the broken link between patients and the spending on their medical care, it can only be part of the solution.  To be effective, transparent prices must be accompanied by allowing consumers to own and control their health care choices, including type of plan.

    Consumer-driven care is the key to making transparent pricing work.  This is currently available to a growing number of Americans through the combination of high-deductible health plans with health savings accounts, giving individuals greater control over the flow of their health dollars. As the Times reports, “A study published last month by Mercer, a human resources consulting firm, found that people on high-deductible health plans, with more exposure to the prices of doctor visits, spent less.” Unfortunately, the recent passage of Obamacare severely threatens the future of consumer driven health care through its tangled web of new rules and regulations, creating a situation where high-deductible plans may not able to comply with the new law.  If this is indeed the case, price transparency will have little effect on growth in health spending.

    Posted in Obamacare [slideshow_deploy]

    8 Responses to Price Transparency in Health Care: Will it Bend the Cost Curve?

    1. Alex Fair, New York says:

      Very good points Kathryn.

      Indeed the final version of the healthcare reform bill may suppress sites like mine that allow people with HDHPs, HSAs, or no insurance to shop and price compare for care. On the other hand, reading between these two lines (see below), I think we may find people willing to take the penalty and then go out and buy HDHPs and HSA and deal with costs directly, and save money overall.

      (from an excellent summary on Yahoo Finance http://finance.yahoo.com/family-home/article/1092
      Line 1: A new 40% excise tax, beginning in 2018, on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families.

      Line 2: A new tax on individuals who don't obtain adequate health coverage by 2014. The tax is be phased in over three years, starting at the greater of $95, or 1% of income, in 2014, and rising to the greater of $695, or 2.5% of income, in 2016.

      The 2.5% of income penalty fee will likely be far less than the cost of insurance. Furthermore, based on current rate increases most plans that are not HDHPs or HSAs will be taxed at 40%.

      Obamacare is most certainly a mixed bag but with companies like http://www.FairCareMD.com and the five others I am aware of the environment has changed already. Providers are fleeing participation in insurance and government networks and a great deal has yet to be worked out in the new laws. The fact that one of the founders of Castlight is at HHS (Todd Park) and that they have attracted 60M in funding is indicative that direct payment and greater transparency are here to stay.

      It is not clear exactly how all this will play out, but one thing is certain: medical marketplaces are having a measurable impact by cutting out the middlemen and getting doctors and patients better fees and prices. Now that is a change we all can believe in!

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    7. Mike L., Roswell, GA says:

      This is the most coherent set of statements I've yet seen in the health care "debate". The government should get completely out of health care, and should disallow third-party payment. The market could then correctly set prices and we would all be better off.

    8. ChristineWithRegence says:

      Why is the cost of health care procedures and treatments so mysterious? How come I don't know the cost of a test or an office visit? Check out this funny video about the problem:
      http://whatstherealcost.org/video.php?post=45-sec

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