A physicist from Oxford found himself the prisoner of a group of swarthy pirates who had commandeered the professor’s schooner. Desperate for an escape, the physicist hatched a plan. He struck an intellectual bargain: if the pirate correctly solved a riddle of the physicist’s making, the academic would walk the plank. If the pirate answered incorrectly, the prisoner would be set free.
Walking over to a pyramid of cannonballs, the professor struggled to lift one, then rolled it across the deck. With enormous effort, he hoisted the cannonball over the side of the ship and watched it splash into the water. Turning to the pirate, who balanced on one good leg and one wooden stump, the physicist asked, “Did the level of the water go up or down?” The pirate squinted at the professor, wary of a trick, and calmly replied that the ocean was far too vast for a mere cannonball to have a measurable effect. At that moment, the physicist had technically won the bet, but afraid of angering the pirate, he offered him a second chance. “To the naked eye, you’re correct, but technically, the water level changed – did it go up or down?” Although it was an infrequent occurrence, from time to time the pirate took the occasional bath and he clearly remembered the water rising each time he stepped into a tub. “Aye, then the water level rose,” the pirate answered with a self-satisfied smirk.
The introduction of high deductible health plans by employers and commercial insurers, and the unwavering faith in price transparency by policymakers are predicated on a combination of classic economic theory and common intuition. Colleagues of the physics professor on the pirate ship who studied and taught economics would assure us that demand falls as prices rise. Intuition, not unlike the pirate’s memory of his bath water, would reinforce the belief that higher insurance deductibles and price transparency would cause consumers to shop for lower-priced providers. Value has become the watch word of the decade. Value-based purchasing. The shift from volume to value. Value equals quality divided by price. It’s all consistent with basic economic theory. It’s all intuitively obvious. Or is it?
Despite the fact that middle-class households are struggling to make ends meet, and that online price comparison tools are readily available – including insurer tools that calculate the patient’s share of prices based on their deductible status – the overwhelming majority of patients do not shop for health care providers based on price. As it turns out, contrary to economic theory and intuition, prices don’t really matter. More than 75% of non-emergent CT or MRI scans are performed on patients who have already met their insurance deductibles at the time of service; 93% of patients receiving scans will have met their deductibles during that benefit year. Nearly two-thirds of CT/MRI scans are performed on patients who will hit their out-of-pocket limit during that benefit plan year. The price of the test is largely irrelevant.
From a policy standpoint, the distribution of health care spending across a population, coupled with traditional insurance benefit design, makes it virtually impossible for price transparency to have its desired effect. In an earlier essay drawing parallels between the iconic novel Catch-22 and the inherent intractability of health care spending, we observed that only 11% of an insured population’s expenditures arise from patients who spend enough – but not too much – to care about unit prices.
As the pirate gave the order for the professor to walk the plank, the physicist shifted his glasses on his nose and raised his index finger. An object floating on top of the water displaces its weight in water. By contrast, an object submerged in water displaces its equivalent volume of water. Cannonballs being considerably denser than water, they displace more water when floating than they do when submerged. Hence, when the cannonball rolled off of the deck of the ship and into the water, the level of the ocean went down, not up.
About an hour later, the pirate made his way over to the ship’s rail, his wooden leg thumping on the weathered deck, and he peered over the side. Disappearing in the distance was the physicist, alone and adrift in a lifeboat with one oar and half a cask of water. Intuition is right until it’s wrong, and pointing that out is not always popular.
About the author and the Vizient Research Institute™. As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.