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Can Price Shopping Improve Health Care? Do Pigs Fly?

Posted Apr 12 2010 9:56am
In a recent Time magazine article Could Price Shopping Could Costs and Improve Health Care, the author suggests as many others have done in the past that forcing patients to more like customers and comparison shop will drive healthcare costs down.

Nothing could be further from the truth.

The theory of consumer driven healthcare goes that if there was more information about the costs of doctors, hospitals, imaging tests, and procedures that people would hunt around to find the best deal, stimulate competition, and drive pricing downward.

Proponents always point to the example of how LASIK eye surgeries have gotten less expensive because of price transparency and increased competition as more eye doctors enter the market in what used to be a very expensive procedure.

But that is always the only example that they give.

They fail to demonstrate how price transparency alone results in decreased costs. Look at elective plastic surgery, which like the LASIK example, has doctors providing a service which isn't medically necessary. Shop around. Get pricing. Has plastic surgery gotten less expensive like LASIK surgery? Of course not. Why?

In the past, LASIK eye surgery required the very skilled hands of an ophthalmologist. Over many years, however, understanding precisely who made a good candidate and the optimal surgical technique to be used become more clear. Consequently the procedure became standardized. As a result, these days LASIK surgery is typically performed by an machine that is essentially automated under the supervision of an ophthalmologist. Because of this standardization and precision, LASIK surgeries are done more reliably and quickly for those who are good candidates. For those of us who have conditions that don't fit into this neat workflow, we will still need to rely on the human doctor's expertise and experience. In those situations, the pricing won't be inexpensive.

It isn't price transparency alone that will drive costs down, but the standardization of treatments for a particular ailment. Specific treatments for bladder infections (urinary tract infections), sore throat, like strep throat or mono, pink eye (conjunctivitis) are fairly clear cut and straight forward. This is why walk-in clinics like Minute Clinic can drive costs downward using less expensive physician assistants and nurse practitioners, rather than doctors. For sore throat, the workflow is pretty obvious (and available at www.familydoctors.org ).

Note how they avoid back pain and chest pain. It may be for liability issues, but also because the amount of precision needed isn't quite there. Once medical science can determine which tests or interventions can reliably differentiate a symptom or problem into a specific treatment will costs come down. This is probably why plastic surgery won't quite ever become a commodity like LASIK surgery. How would you like to have a standardized nose job or face lift?

Proponents of consumer driven healthcare also believe that having patients pay more of their healthcare expensive or "having more skin in the game", will also drive costs down over the long-term. The thinking goes that if people understood the high costs of having a chronic illness like diabetes or heart disease that they would choose healthy behaviors. They should appreciate that preventive interventions like cancer screenings were less expensive than dealing with a cancer diagnoses and subsequent treatment. Getting a simple vaccination to prevent influenza or pneumonia would be far better in preventing emergency room visits or hospitalizations. People would begin to make rational choices and opt for less costly therapies today to put off very expensive theoretical losses in the future.

Odds this will occur? Highly unlikely.

Simply look at how the American consumer fared when given financial responsibility to make decisions presumably for their best interest, retirement planning, to determine how successful the public might be in embarking on consumer driven healthcare.

Starting in the 1970s, employers started to shift employees from pension plans (defined benefit plans) to 401(k) plans (defined contribution plans), where employees would have more financial responsibility and have "more skin in the game" in determining how much to save and how to invest for retirement. The thinking was that employees, looking out for their best interest, would do research and demonstrate the rational behavior needed to ensure that they retired with a nest egg that suited their needs. After all, who would have more motivation to save for retirement than the individual himself?

Did it work out as planned?

A recent article from CNN Money found that 43 percent of Americans have less than $10,000 saved for retirement . More importantly "the gap between what Americans have saved and what they'd need for retirement is forcing workers to prolong their working years."

In other words, the American consumer isn't doing well to save for retirement even though it is in his best interest. At least in retirement planning, consumers have the option of delaying retirement and working longer.

Consumers as patients, however, won't have that luxury of putting off medical care if they suddenly become ill. It is very likely a large number of Americans instead of losing weight and controlling blood pressure will have a devastating heart attack that requires open heart surgery. Colon cancers will be detected at later incurable stages requiring very expensive chemotherapy for months rather than having been removed years earlier with less costly colonoscopies. It is very likely in consumer driven healthcare, much like defined contribution retirement plans, that the consumer or patient hasn't saved enough to pay for these very expensive future therapies or treatments.

As a graduate of the Wharton School of Business, however, I wouldn't do my education justice if I completely dismissed the concept of efficient markets, consumerism, and competition. If consumer driven healthcare is to work, it will require a few elements, which unfortunately the American healthcare system at this time is ill equipped to deliver on.

I will discuss these crucial elements in a future post.
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