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Price Transparency … What’s the Catch?

05/13/19

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Tom Robertson, Executive Director, Vizient Research Institute

In his watershed novel originally published in 1961, Joseph Heller chronicles the experiences and probes the psyche of a World War II bomber squadron. A former B-25 bombardier himself, Heller has the story’s protagonist confront a military rule that typified bureaucratic operating and reasoning, and in the process, creates an enduring idiom – Catch-22 – which has become a part of mainstream vernacular.

When a member of the flight crew, whose psychological well-being is under question, considers a request to be removed from combat, the fact that he is afraid constitutes evidence that he is mentally fit, making it impossible to request relief. A passage from the novel reads:

“There was only one catch and it was Catch-22, which specified that a concern for one’s safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions.”

The dictionary defines Catch-22 as a problematic situation for which the only solution is denied by a circumstance inherent in the problem. Insurers and policymakers, relying on classical economic theory, have made significant bets that price transparency – coupled with higher deductibles – would cause patients to shop for lower-cost services, in the process reducing health care spending. It turns out there’s a lesson in Heller’s novel that casts doubt on the likelihood that those efforts will be successful.

Nearly half of the insured population is healthy; those individuals spend less than $500 in any given year and account for only 2% of total spending. The infrequency and small size of their purchases makes price shopping unlikely and any savings would be negligible. About one-third of the insured population spends between $500 and $2,500 per year – enough to suggest that prices may be relevant – but this cohort only accounts for 11% of the overall spend. Eighty-seven percent of the spending by an insured population arises from patients who incur more than $2,500 in expenses; 76% of the population’s expenditures come from individuals with more than $5,000 in spending. For the overwhelming majority of health care spending by an insured population, deductibles and out-of-pocket limits make unit prices completely irrelevant. Only 11% of commercial sector spending is incurred by patients who spend enough – but not too much – to care about prices.

Patients who will not hit their insurance deductible (those who are exclusively spending their own money) account for little more than a rounding error on overall population expenditures. Patients who spend $5,000 or more, who account for 76% of total expenditures – the patients whose purchasing behavior payers and policymakers most desperately hope to influence – are completely insensitive to unit prices. The minority of patients who spend enough but not too much to care about price, account for far too little to generate the savings hoped for.

Like a bomber pilot caught in the circular logic of Catch-22, price transparency is an intuitively appealing idea with virtually no hope of working. The pilot, by virtue of admitting that he is afraid, precludes the system from offering him relief. Price transparency, by having relevance to only a sliver of private sector spending, has little chance of slowing the pace of health care spending. Some days, you just want to curl up next to the fire with a good book.

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.

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