The introduction of high deductible health plans (HDHPs) was predicated on the assumption that price transparency would compel patients to shop for health care services much like they do for major appliances or automobiles. With computed tomography (CT) scans priced similarly to refrigerators and elective surgeries approximating the cost of a new car, the presumption that price transparency would curb health care spending was not, in theory, unreasonable.
The 2018 economic research study conducted by the Vizient Research Institute tested the hypothesis by examining commercial insurance claims data of the prices actually paid for elective procedures and diagnostic tests. The study uncovered a five- to sixfold variation between the upper and lower quartiles within metropolitan markets.i Price transparency tools for these markets are readily available, and insurer tools even calculate patients’ share of the allowable price based on their real-time standing with respect to deductibles and out-of-pocket limits. In spite of available comparative pricing information for health care services — presented in much the same format as is used in other sectors of the economy — transparency has largely failed to induce the consumer behavior hoped for by payers and policymakers.
“Health care is one of the only things in the country we buy that we really don’t know, nor do we ask, for the most part, what the price is before we buy it,” said Tom Robertson, executive director, Vizient Research Institute. “And, as it turns out, high deductibles don’t trigger the kind of price shopping that they were intended to.”
To understand why, the Vizient Research Institute conducted a national survey of commercially insured beneficiaries, followed by a series of in-depth consumer interviews and five focus groups in collaboration with NORC at the University of Chicago. Specific questions addressed through this research included:
- What do consumers consider when choosing a doctor or hospital, and what matters most?
- How do patients evaluate quality?
- Will patients pay more for better quality?
- Do consumers shop based on price?
- Does price transparency work?
“The polarity of consumer reviews of health care providers reflects a key discovery in the study, which is that quality is not a linear function in the minds of health care consumers — in fact, it’s a binary variable. Their buying switch is either ‘on’ or it’s ‘off’ when it comes to providers and facilities. It’s ‘on’ if there are enough five-star ratings and it’s ‘off’ if there are too many one-star ratings. Price doesn’t matter,” said Robertson.
Understanding patient perspective on quality
Consumer reviews of health care providers are significantly more polarized compared to other industries, a condition that has serious implications in a market where reputation defines quality. When asked if consumers perceive major differences between doctors with respect to clinical success, more than 50 percent of survey respondents said ‘no’.ii
Interestingly, the findings in the study show that the vast majority of patients don’t understand the complicated scientific measures of quality, such as risk-adjusted morbidity and mortality, which hospitals are graded on. Robertson noted that patients aren’t looking at the same attributes that doctors and nurses look at when measuring quality. What they understand is their experience. What’s far more important in the minds of consumers is what their friends, their neighbors, their relatives or their kid’s soccer coach says about a provider.
“The lesson there for providers is, while it’s perfectly appropriate to pay very close attention to scientific measures of quality because that’s what the world is counting on them to do, at the same time, they have to pay closer attention to the experience side of the episode of care. What the patient felt or how they and their families felt when they left are critically important to how providers are perceived in the marketplace,” said Robertson. “Bedside manner, communication, convenience, availability and cleanliness outweigh objective measures of clinical performance.”
The study also revealed where patients do become more discerning when it comes to quality. The proportion of consumers deemed discerning increases with severity of illness or perceived risk of impairment or death. While 52 percent of consumers believe no major differences exist between doctors with respect to quality, nearly three-fourths believe their choice of cancer center would affect their chance of surviving and having a high quality of life.ii
The reality of price transparency in lowering costs
The inability of consumers to discern genuine differences in quality would, on its face, suggest even more sensitivity to price. As it turns out, prices are too high to matter. As soon as patients engage with the health system, they are well on their way to meeting their insurance deductible and any serious encounter will propel them toward their out-of-pocket limit, at which point unit prices are irrelevant.
As Robertson explained, 80 percent of health care spending in the country is incurred by 20 percent of the people, and 50 percent of the spending is incurred by only 5 percent of the people. They annually spend $5,000, $10,000, $20,000 per person, which means they have far exceeded their out-of-pocket limit on their benefit plan. For them, the cost of their care is no longer relevant to them personally.
For the healthy 40 to 50 percent of the population, price also doesn’t matter because they are spending less than $500 out of pocket per year. “For those folks, it’s not worth the effort to shop around for something that costs less than $500.They’ll just go get it taken care of.”
Only about 11 percent of the total amount of consumer spending occurs between $500 and $2,500, which is approximately the amount that someone could have as their deductible or their out-of-pocket exposure. “So if only 11 percent of the total spending occurs in that band of price elasticity, we shouldn’t be surprised that price transparency doesn’t really have a measurable impact on overall health spending,” said Robertson. “It isn’t that price transparency doesn’t work; it’s that it can’t, because only 11 percent of the money is spent by people who spend enough to care but not too much for prices to matter.”
With price elasticity of demand not applying to health care, Robertson recommends that providers develop strategies to relate financially to their most vulnerable patients in terms that are important to them. Partial relief from their deductibles or out-of-pocket responsibility would resonate with patients who repeatedly experience complex episodes of care. By encouraging those patients to more closely align with a health system, providers can improve their experiences, reduce fragmentation of care (and avoidable spending) and provide a more comprehensive, better-coordinated medical home for their most vulnerable, complex, chronically ill patients.
Health care is unaffordable for many Americans today and is on a path to overwhelm middle-class households over the next 10 years. Utilization and waste-reduction efforts by providers will only help to soften the blow. Price transparency won’t be the answer because patients can’t afford to be responsible for enough of the bill for prices to matter. It also foreshadows a dilemma for the country. With nothing on the horizon showing the potential to slow the rate of increase in spending, a long-term future without externally imposed price controls is difficult to envision.
For more information, the Vizient Research Institute developed this short video as a companion piece to the study findings.
i Analysis of Milliman commercial claim, 2016.
ii NORC at the University of Chicago survey, June 2018.