Friday, January 22, 2010

The Price is What?

Many in the US believe that a free market in health care is a good idea.  Some actually assert that the US health care system amounts to a free market. 

More evidence against that assertion was provided this week by an article in our local paper, the Providence Journal, by Felice Freyer. For the first time ever, the Rhode Island state health insurance commissioner published a report comparing what insurers pay different hospitals for the same services:
If you had surgery at Kent Hospital, your insurer would pay Kent significantly more than if you had the exact same procedure at South County Hospital –– even if the same doctor did the work.

On average, Kent is getting paid nearly twice as much as South County for inpatient care, according to a new report from the health insurance commissioner that is causing a stir across the state’s health-care industry.

It is well-known that hospitals get paid different amounts for the same services. But the report, for the first time, reveals the winners and losers, and quantifies the disparities –– with numbers showing the differences to be greater than many people thought.

The factor determining which hospitals are paid the highest rates, according to the report, is whether the hospital is part of a group. Such hospital systems have the clout to negotiate higher prices than independent hospitals.

'We’ve never had this kind of data [before],' said Christopher F. Koller, state health insurance commissioner. 'The results and analysis show that higher payments to hospitals are associated with system affiliation, and the current contracting method does not appear to encourage the fair treatment of providers.' There is no evidence connecting higher pay to higher quality, he said.

What is striking is the reason why such a comparison has never appeared up to now:
Koller’s report shines a flashlight beam into the murky world of hospital finance. Hospitals negotiate privately with insurers to establish how much they will be paid for each service. These talks are largely unregulated, and always private, so that no hospital knows exactly what its neighbor is being paid. All are forbidden by contract to reveal their rates.

Koller collected data from Blue Cross & Blue Shield of Rhode Island and UnitedHealthcare of New England concerning payments to 11 acute-care hospitals in 2008. He is the first public official to obtain this confidential information, saying he was entitled to it because a 2004 law requires him to promote the affordability of health care and ensure the fair treatment of providers.

Thus, the prices of commonly used medical services provided by hospitals were largely secret.

On obvious requirement for the function of a free market is price transparency. When making a purchasing decision, one needs to know what prices different sellers charge.

In a recent commentary in the Wall Street Journal, Alan S Blinder, a Princeton economics professor, and former Vice Chairman of the Federal Reserve Board, described the basic requirements of a free market:
When economists first heard [movie character Gordon] Gekko's now-famous dictum, 'Greed is good,' they thought it a crude expression of Adam Smith's 'Invisible Hand' — which is one of history's great ideas. But in Smith's vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call 'asymmetric information' (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.

Clearly, one cannot have appropriate incentives when prices are secret. Secret prices are also a glaring example of "asymmetric information." (Hospitals know what different insurance companies pay them for specific services, but not what the companies pay other hospitals for those services. Insurance companies know what they pay to different hospitals for the same services, but not what other companies pay. Patients, physicians, policy-makers and the public heretofore had no idea what any hospital was paid by any insurance company.)

The question begged is why neither hospitals nor health insurance companies wanted to make the prices public. One wonders if it were fears of looking incompetent (by paying to much, or charging to little), or worse, of revealing collusion. One also wonders if it were fears of revealing how anti-competitive is the current way of doing business.  At the time of data collection, Rhode Island had only two health insurers.  As noted above, large hospital networks got the highest prices.  Price differences did not obviously relate to quality of care, or costs of teaching programs. 

Note that we previously discussed secret agreements between a dominant health care insurance company and the largest hospital system in our northern neighbor, Massachusetts, and how these agreements resulted in payments to that system far greater than those paid to any other hospital.  I suspect that secret deals resulting in wide pricing discrepancies are the rule, rather than the exception in the US, and that such deals overwhelmingly favor the largest organizations, but not the best care. 

As we have been saying repeatedly since we started Health Care Renewal, the leadership of the large organizations that now dominate health care lacks accountability and transparency, and often fails to exhibit integrity and honesty.  Deliberately concealing price information obviously is an example of failing to be accountable and transparent. 

Now that the events have conspired to slow the US health care reform juggernaut, maybe we can reconsider whether meaningful health care reform can be accomplished without improving accountability, integrity, transparency and honesty of health care oganizations and their leaders.


Anonymous said...

I appreciate this post, and agree that we have a completely dysfunctional health care market in the U.S. I don't agree, however, that "secret pricing" is the primary problem. Rather, it is the natural result of monopolies in health care.

A car dealership doesn't tell you that they sold the same car you're buying to someone else for less. You can call this "secret pricing." But the difference is, there are many car dealerships. I can shop around, and my friends can tell me that I've been ripped off.

In health care, government prevents the building of hospitals unless there is "need"; impenetrable regulations discourage start-ups from entering the insurance market, shielding insurance companies from competition. Consumers don't know how much health care costs because their employers pick up the tab.

What we have today in health care is nothing like a free market. Make hospitals and insurance companies compete with each other and you'll see prices fall and quality improve. Dismantle the employer-based insurance system, and prices will become instantly more transparent.

Government involvement in the health care market is the problem, not the solution.

Roy M. Poses MD said...

Anonymous, I don't understand from your comments how "government involvement" lead to secret pricing.

I also don't understand how in the example above "monopolies" resulted in secret pricing. In RI, there is one large hospital system that has the most market share, but it is not a monopoly. There is also one large health insurer that has the most market share, but it isn't a monopoly either.

Elkym said...

I agree Mr. Anonymous-- I think that transparency is the solution-- but you fail to show us how. You've just made claims without supporting them-- I'm not saying you're wrong, just give us some evidence/reasoning.

Unknown said...
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The Medical Contrarian said...

Beyond being transparent, prices must convey information regarding value and scarcity. Without pricing mechanisms which execute these functions, there is no other substitute for mechanisms which coordinate human activity. Perhaps a more apt description of markets are price-coordinated economies. For an interesting viewpoint from a few years back, see: