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What is Medical Price Transparency Worth?

Shopping for medical care, like reducing food waste, or the adage that half of advertising is wasted1, is an exercise that first starts with disbelief and ends with reality. Simple observations are cheap. 99th percentiles masquerade as the norm. Some key findings and structural limits can guide us through why price transparency has its limits.

  • Insurance messes with incentives. It does protect us with a limited downside, as insurance should. But your propensity to shop for a car would change dramatically if you only had to pay 15% of the bill (employer-sponsored plans pay on average 80-85%) and even less on average after a typical $1,500 deductible is met.
  • Healthcare is episodic: over half of the people who get healthcare through their employers have cable bills that are higher than their total medical spend, and out-of-pocket costs are even lower based on commercially insured utilization tables. This explains why <10% of people typically shop when given the option. How people actually act is more important than surveys saying how much consumers would wishfully love it if healthcare was more like buying a MacBook or Uber ride, something hard to imagine given that <15% are health literate.
  • Transparency is rightly talked about alongside quality. However, everyone has a different idea of what “quality” means. And though studies show quality and price are divorced (or at least showing no positive relationship), we have a tendency to think the higher cost is better–especially if we’re not paying directly.
  • You can’t shop for care while on the way to the emergency room. According to the Health Care Cost Institute, at most, 43% of healthcare is shoppable. Other estimates peg this at ~60%.
  • Savings from shopping is modest, even when you read all the marketing examples of 5x price differentials for infrequent procedures like knee replacements. One Notre Dame study showed that price transparency tools, for the small percentage who use them, can lead to averageĀ savings of 10-17%. Castlight Health, in a recent presentation, showed a case study on Kraft, including a reduction of 9% in total costs for a self-selected motived group of members. That doesn’t include the non-users, which when added would make the total impact <1% of total costs, not including fees.
  • These programs also cost money to manage.

An example based on $5,000 in average medical claims and assuming users shop for all dollars on the table illustrates this.

Item Value
Total Claims $5,000
Shoppable Portion (43%) $2,150
Variation in Prices (13.5%, midpoint of ND study) $290
Total savings per user per year (assuming 10% utilization) $29

Shop away. A typical person ends up realizing <$3.00 per month in total savings. Another person could clearly save more depending on his/her condition and cost-sharing structure of the health insurance coverage. Just don’t expect that alone to revolutionize all the flaws with healthcare in America.

 

Photo by National Cancer Institute on Unsplash

  1. even more than 50% is probably wasted due to high abandonment rates and manipulation. See Facebook example of not counting ad views of under 3 seconds.
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