Wednesday, January 25, 2012

How Much Is That Appendectomy? Consumer-Based Market Strategies

Do you know what would really lower the prices of health care in this country? According to Peter Orszag it would be people shopping around for the best price, going to sales, looking for spare knees on craigslist and so on.

Let me hasten to say that making health care prices more transparent, as he advocates, is a wonderful idea. Wonderful. But it would have at most a very limited impact.

Why? Let me count the ways!

First, a considerable chunk of health care spending takes place at emergencies or when a person is critically ill. There is no time for shopping around, assuming that the patient is either conscious or has someone working on those price comparisons.

Second, price comparisons are meaningful only if they are for the same product and the same amount and quality of that product. It's pointless to try to deduce anything from the price differences of one pound of Idaho potatoes and a gallon of orange juice. It's even pointless to try to deduce anything from the price differences of one pound of fresh Idaho potatoes and one pound of very tired sprouting Idaho potatoes.

That looks a bit preposterous, right? But it truly is pretty similar to many choices in health care. Suppose two providers give you different diagnoses and recommend different treatments for those diagnoses. Are you going to decide on the basis of price?

Third, suppose your hip hurts a lot and you go to a physician who tells you an artificial hip is needed. Will you then just go out and compare the prices of hip replacement surgery in various nearby hospitals? But what if the initial diagnoses was all wrong and you have been given the script for a pound of potatoes when what you really need is a gallon of orange juice?

The problem here has to do with the fact that we go to the providers not only to get the treatment but also to be told what is wrong with us. Proper price comparisons require not only second and third opinions of the usual kind, but actually going to several physicians with the same symptoms to make sure that a hip replacement is the recommended treatment by all.

Fourth, quality comparisons matter when judging prices. Orszag argues that quality is not terribly correlated with price. But would that still be the case if consumers indeed were somehow made to be extremely price conscious?

I doubt that very much, because the easiest way to get prices lower is to cut back on some aspects of the treatment. This would not necessarily lower quality of actual care (in terms of health outcomes) because the current system may have incentives to over-treat. But it would certainly provide incentives for lower quality treatments, too.

The real problem with quality concerns in health care is this: Patients do not have the information to spot when wrong treatments are taking place and the consequences of poor quality care can be devastating. Without some sort of quality safeguards an attempt to judge by price alone leaves patients very vulnerable.

Fifth, the demand in health care can be very price inelastic, meaning that consumers are not just very price sensitive when it comes to seeking relief from pain, discomfort and certainly from life-threatening conditions. Combine this with local markets which are often highly concentrated, and what you get is a setup where price competition will not happen without something as "ominous" as, say, an outside agency which monitors prices and quality and outcome data.

But that's not what Orszag has in mind in his article. He's advocating that consumers actually shop around, learn humongous amounts of medical science and then construct carefully thought-out treatment strategies for themselves to use in price shopping. All this while possibly suffering from a debilitating disease.

Sixth, and finally, most consumers still have insurance. Insurance decreases price sensitivity, because the total payment will not be coming out of the consumer's pocket. Orszag notes that this problem will be gone in the future!
In the future, though, health-insurance plans are likely to shift toward a defined-contribution model -- in which the employee is given a set contribution toward buying an insurance policy -- and, in that setting, price transparency could become more effective. After all, when people bear more of the financial risk associated with their own health care, they are likely to become more responsive to information about price and quality.
Mmm. If you are not covered you will become more price sensitive! Whether that is seen as an advantage depends on whether you think that health insurance is a nifty idea or not.

But all the earlier problems I stated would still apply. The final consumers' ability to affect price competition in health care is minimal, and the reasons for that are in the basic attributes of the product, the lack of information consumers have when it comes to complicated treatments and the unusual aspect of medical care where the seller of the product also serves as the buyer's informant about how much to buy.

Having said that, it's obviously true that greater price transparency would be a good thing. It would help consumers to choose among certain standard packages of care such as basic checkups or routine dental care. But otherwise its impact would be very limited.

Now what would be nice is if we had something like a government agency which monitors the prices and the quality of medical care and then reports on that to consumers and providers! Such a third party agency (independent of both the consumer and the producer side) would not suffer from the limitations consumers of medical care have and could focus on studying the marketplace full time. It could make the prices more transparent and it could also take care of the price collusion Orszag refers to:
A 2008 Congressional Budget Office report, published while I was director of that agency, noted the same concern for health-care price transparency: “The markets for some health- care services are highly concentrated, so increasing transparency in such markets could lead to higher, rather than lower, prices because higher prices are easier to maintain when the prices charged by each provider involved can be observed by all the others.” The best way to mitigate this concern is aggressive antitrust oversight. But it would also help to make prices more transparent to consumers, but not providers.
On that last sentence: There's no way in hell that prices would not become known by the other providers under Orszag's scheme. No way. All they would need is one consumer's information.

But sure, apply aggressive antitrust oversight. Preferably with that price monitoring agency I mentioned above. Just don't expect consumers to to be the engine of price competition in health care.