How Price Transparency Could End Up Increasing Health-Care Costs

Cost/quality comparisons don't work in the same way for health care that they do for other big purchases.
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Getting your appendix out can cost between $2,000 and $180,000. Hip replacements run from $10,000 to more than $100,000. Hospitals, we have also learned, frequently mark up the price of cotton swabs and routine X-rays by 300 or 400 percent, with most patients oblivious to the reason their health care bills are so large.

As a response to the hidden variability in health care prices, an increasing number of states have passed price transparency legislation. Federal legislators have even introduced several bills into Congress to make health care prices more transparent. Expect more such bills to follow.

But will health care price transparency help reduce costs? Seems it would. But health-care can be a strange and unique sect of economics. Could price transparency backfire and cause spending to increase?

In the traditional consumer marketplace, price transparency is a powerful force in incentivizing producers to raise the quality and lower the price of their goods. When a consumer decides to purchase a flatscreen television, for example, she will be hesitant to buy an expensive model when a less expensive alternative exists that is just as good. As a consequence of such consumer scrutiny, the average price for a 32 inch LCD TV dropped from $1,566 in 2005 to under $400 today, at the same time as the quality of those products increased dramatically.

Expensive pain pills reduce pain better than the same pills listed at a lower price.

The same kind of consumer pressure rarely exerts a similar influence on the cost and quality of health-care goods. For starters, most patients have little inclination, or motivation, to shop for health-care bargains. Insurance companies pick up most of the tab for patients' health-care. A patient who pays a $150 co-pay for an MRI (like I do with my insurance) won't care whether the clinic she goes to charges the insurance company $400 or $800 for that MRI. The MRI is still going to cost the patient $150. Even patients responsible for 20 percent of the tab (a phenomenon called co-insurance) face a maximum bill of only $160 in this circumstance. That is not an inconsequential amount of money, but it is still not enough money to prompt most patients to shop around for less expensive alternatives, especially when most consumers don't realize that the price of such for services often varies significantly, with little discernible difference in quality.

To make matters worse, patients often don't shop for health care in the kind of rationally defensible way that economic theory expects them to. According to neoclassical economics, when making purchasing decisions consumers independently weigh the costs of services from the quality of those same services. If toaster A is more expensive than toaster B, the consumer won't buy A unless it is better than B in some way -- unless it is more durable or has better features -- and unless these improved features are worth the extra money.

Sometimes, however, cost and quality are not perceived by consumers as being independent attributes. Instead, people assume the cost of a good or service tells them something about its quality. For instance, blind taste tests have shown that consumers rate the flavor of a $100 bottle of wine as being superior to that of a $10 bottle of wine, even when researchers have given people the exact same wines to drink. Other studies show that expensive pain pills reduce pain better than the same pills listed at a lower price. Price, then, leads to a placebo effect.

Such a placebo effect is no major concern in the context of wine tasting and pain pills (even if it suggests that consumers could save themselves some money if they didn't hold this strange belief that higher cost means higher quality). But suppose your doctor asks you to get a spinal MRI to evaluate the cause of your back pain, and you decide to shop around for prices before getting the test. Would greater price transparency cause you to choose an MRI provider more rationally? Or would you instead mistakenly assume that higher price means higher quality? There is reason to worry that price transparency won't lead consumers to make savvy decisions. It is too difficult for people to know which health-care provider offers the highest quality care.

If patients are not going to make savvy use of price information to choose higher quality, lower cost health-care, some health-care providers, like doctors and hospitals, will probably respond to price transparency by raising their prices.

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Presented by

Peter Ubel

Peter A. Ubel, MD, is a physician and behavioral scientist at Duke University and the author of Critical Decisions: How You and Your Doctor Can Make the Right Medical Choice Together. He writes regularly at PeterUbel.com.

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