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Life Health > Health Insurance > Health Insurance

Price vs. value

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In “Lady Windermere’s Fan,” (Oscar Wilde, 1893) Lord Darlington is asked to define “cynic.” He replies, “A man who knows the price of everything and the value of nothing.” I thought of that quote while listening to the nonstop “repeal and replace” tattoo with its seemingly singular focus on the demand side of the U.S. health care equation.

Related: Seeing it coming

Have we learned nothing in the six years since the ACA was passed? Are we, as Einstein remarked, about to do the same thing but expecting different results? Despite all of the gazillions of words written about the subject, two salient facts are generally omitted — facts without which there cannot be a real discussion or a significant solution to the problems we face.

First, we do not have a free market in health care. That died in 1965 with the passage of Medicare. When a single player responsible for more than half of the health care spend in the U.S. can set arbitrary prices while the remainder of the market cannot, “free” is no longer an applicable adjective. Additionally, pricing is nearly impossible for competitors or (heaven forbid!) consumers to find. If you can’t shop, you don’t have a free market.

Second, until or unless we are willing to touch the third rail — the fact that health insurance is expensive because health care is expensive — we stand as much chance of solving the real problem in the system as this year’s Cleveland Browns have of winning the Super Bowl.

Underscoring the problem is the fact that you have to strain your Google Maximus muscle to find much about this in print. A recent study published in the September 2016 issue of ‘Health Affairs,” offers a peek behind the curtain. “U.S. Hospitals are Still Using Chargemaster Markups to Maximize Revenues,” by lead author Ge Bai of the Johns Hopkins Carey Business School and Gerard Anderson of the Johns Hopkins Bloomberg School of Public Health, is instructive.

While, according to the study, some hospital executives think chargemaster prices are irrelevant, the reality is quite different. According to Bai, “Hospitals apparently mark up higher in the departments with more complex services because it is difficult for patients to compare prices in these departments.” For example, a hospital whose costs for a CT scan are $100 will charge a patient with health insurance and an out-of-network privately insured patient $2,850.

The study of financial data in 2013 from all Medicare-certified hospitals with more than 50 beds also found (unsurprisingly) that hospitals that dominate regions or markets were more likely to set high markups. Hospital consolidation has doubled in the last 10 years. This is also not a sign of a healthy free market.

The cost/price ratio varied by type of hospitals. From a low of 3.47 per dollar in government hospitals to a high of 6.31 in private hospitals, the study validated the researcher’s assumption that hospitals that can mark up prices will do so. How much does this actually matter to the facility’s revenue? A one-unit increase, such as from 3.0 to 4.0 results in a $64 higher revenue per adjusted discharge.

Some believe that plans, and thus consumers, can gain control over this phenomenon only by employing reference or metric-based pricing, where plans fix a top price based on some value-based reference point such as a multiplier of what Medicare allows or other such mechanisms. Others have hope that Health and Human Services Secretary-designate Dr. Tom Price, who has seen both sides of this issue, will facilitate a literal Price vs. value discussion.

We will have to see if the study and other nascent reportage of the supply-side problems will awaken the sleeping consumerism giant. Are there other solutions that will bring some form of rationality to healthcare? Perhaps. As we take that journey we would do well to remember another Wilde quote: “The truth is never pure and rarely simple.”


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