Price Transparency Continues to Plague US Healthcare

Thu, Sep 5, 2013 - 1:11pm

Since we read Steve Brill’s exposé of medical pricing in the March 4 issue of Time magazine, we’ve noted a steady stream of news coverage about the ways in which a lack of price transparency cripples the U.S. healthcare market. We’ve commented on this subject a few times in these letters. Two similar stories recently caught our eye: one in the Wall Street Journal on August 21, and another in the New York Times on August 25. Both stories continue to bring to light how the disconnect and lack of transparency between producer and consumer has allowed the growth of a vast labyrinth of middlemen we call the U.S. medical system.

In the Journal, Dr. Jeffrey Singer, a surgeon in Phoenix, describes his treatment of a patient with a high-deductible insurance plan that had no provider-network requirements or preferred-hospital requirements. Had he opted to use his insurance, his provider would have paid only a maximum of $5,000 of the surgery’s $23,000 “list price.” This latter sum, of course, is a fantasy, since no one pays it, and it is unrelated to the hospital’s costs. The $23,000 figure simply represents a starting-point for negotiation with third parties.

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In this case, unbound by any legal agreements, the surgeon proposed simply to accept the man as a “self-pay” patient, and negotiated a reasonable price with him; he did the same for the services of the anesthesiologist. The total payment for the surgery? Just over $3,000. The only difference? Direct communication of price signals between provider and consumer.

Bear in mind that whatever portion of the “list price” actually paid by a patient with insurance simply serves to sustain an army of intermediaries -- and this is the fundamental reason why American health care is the most expensive in the world. It’s not the inefficiency of the market -- it’s the lack of any functioning market at all. Medical procedures that consumers pay for directly, such as Lasik, have declined dramatically in price, and increased dramatically in quality. That’s the basic mechanism of a market economy that has made us a wealthy society in the past two centuries.

As we noted a few weeks ago, many European governments require hospitals and physicians to make their prices public. Americans who try to find out a real price for medical services are often unable to do so -- lost in a maze of proprietary and secret negotiations between producers, distributors, and providers. This was the focus of the story we read in the New York Times, which like Brill’s story in Time magazine traced the path of a humble medical commodity from production to use. In this case, it was an IV bag of saline solution -- more than a billion units of which were used in the United States annually.

Data from Medicaid show the cost of this IV bag of saltwater currently at $1.07. When an outbreak of food poisoning struck eaters of tainted rice at a Buddhist festival in New York state, a lot of bags got used by the hospitalized victims. The article’s author set out to discover how much was paid for them. The answer? Although there was wide variation -- when the final price could even be determined -- the price typically ran to hundreds of dollars. One hospital that would go on the record defended the prices as “consistent with industry standards,” and noted that the price reflected other hospital expenses as well -- although the patient was also billed hundreds of dollars for the administration of the IV, and for general emergency-room services.

The bottom line is that the maze of contracts and preferred relationships and hidden negotiations, coupled with third-party payment, has allowed consumers to become frogs being boiled alive in a slowly heating pot of water -- with their health-insurance premiums funding an ever-expanding network of intermediaries comprising an industry with extremely robust growth. The only problem is that that growth ultimately comes at the expense of other productive sectors of the economy.

A growing number of American consumers will doubtless begin to “opt out” -- returning to insurance (properly so-called) for catastrophic events, and choosing to pay out-of-pocket for routine care. As we have noted before, they may also opt to travel to Europe or even Asia to receive major medical care.

We believe this reality is unlikely to change in the near term. The Affordable Care Act does not impose European-style price controls. Nor does it do anything to address the root cause of skyrocketing prices -- namely, the lack of price transparency. This is, for better or worse, the landscape within which healthcare delivery will continue to occur in the United States.

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About the Authors

Chief Investment Officer
guild [at] guildinvestment [dot] com ()

tdanaher [at] guildinvestment [dot] com ()