Competition and Choice, Part B: Cost Transparency

Exploring the Common Ground Principles: Health Care

Principle #3: A competitive and accountable health care system would help control costs by (i) ensuring that consumers pay a portion of the cost of medical services and products; (ii) allowing consumers to shop competitively for health insurance coverage or contract directly with health care providers for services, as they choose; and (iii) leaving room for health care providers, insurance companies, and the states to experiment with different methods for delivering services and reducing costs.

If you’ve spent any time in a hospital, you have a sense of how little you know about your own health care, even as you’re receiving it. A question like “What’s this blood test for?” or “Why do I need a second MRI?” may or may not result in a satisfactory answer, or any answer at all. With so many interns, specialists, nurses, and techs of all varieties buzzing around, it isn’t always clear who is responsible for which decisions, and you may find that asking a lot of questions doesn’t help your customer service experience. All too often, only the most persistent advocates, patients or their families, understand the care they receive.

But there’s another reason we often don’t get into the weeds when it comes to health care services we’re receiving. If you have health insurance you are not the first payer for services; your insurance company is. Even though you (and if your plan is subsidized, your fellow taxpayers) are ultimately paying for these services through your insurance premiums or tax dollars, you as a consumer probably spend little time thinking about what each service costs and whether or not it is really necessary.

Most insured consumers of health care have some degree of cost-sharing, through co-pays or deductibles, but that model still obscures the cost-benefit analysis most of us would do when purchasing any other kind of service. It can be daunting to think about how we might spend our health care dollars in a regular marketplace, where prices were transparent and our dollars were our own to spend as we saw fit, but that might be one way to help control the spiraling cost of health care.

Currently, most of us have no idea what our health care actually costs. Many people pay a monthly premium for insurance along with some kind of co-pay for individual services, like doctor visits and lab tests, with the rest paid by their insurance. For people who have insurance through an employer, the costs are even more opaque. Economists generally agree that for any fringe benefit an employee gets through an employer, there is a roughly equal reduction in salary, an effect known as the wage-fringe trade-off. So while you might know what you pay each month or year for health care, you probably aren’t factoring in the income you’re losing that pays for the rest.

Kate Baicker, a Harvard economist who served on President George W. Bush’s Council of Economic Advisers, said in an interview that “The employees ultimately bear the full cost of the health insurance plan they get form their employer…Even though they’re only writing a check for a part of it, they’re bearing the full cost.”

What if, instead of forfeiting a chunk of your salary to your employer, you kept those dollars and spent them in a more transparent marketplace? If a doctor in a hospital recommended an MRI, you might ask more questions, and make a more informed decision about whether to go ahead with the test. And if you did decide to spend $2500 (ouch!) on that MRI, it might hurt your wallet less than you imagine, considering that you would have more spending power through your salary. You wouldn’t necessarily lose money on that transaction, and you might make a better choice than you would have without that level of transparency. Over time, moreover, that MRI might not cost $2,500.

Of course, reality isn’t always that simple. You don’t have much bargaining power in an emergency situation, and you may not have the expertise to determine how likely arthroscopic surgery is to cure your knee pain. There’s major information imbalance between patients and medical providers, and cost is only one factor in making a decision about your health. But people faced with major medical decisions can and do take time to speak with different doctors, consider different treatments, and even compare different clinics and hospitals.  There is no good reason to exclude cost from these considerations.

Resources

You’re Spending Way More on Your Health Benefits Than You Think by Sarah Kliff (Washington Post, August 30, 2013)

Overkill by Atul Gawande (The New Yorker, May 11, 2015)

How Price Transparency Can Control the Cost of Health Care by the Robert Wood Johnson Foundation (March 2016)