Last week I bought a car. I don’t know how much the car cost yet. I gave the dealership a down payment and they will send me bills for the balance. I’ll get separate bills for the engine, the body, the tires, the radio and the other separate components and send a monthly payment to each supplier until I pay it off. Until I pay all the bills, I won’t know if my new car costs $10,000 or $100,000 or somewhere in between.
If you are thinking, “That’s not how this works! That’s not how any of this works,” then you’re right. Anyone who bought a car under these terms would be an idiot. That’s not how the market for new cars works at all, but this is the way we buy health care without thinking twice.
We go to the doctor and pay our copayment or deductible, but we know that this is not the entire cost of our care. The insurance companies exclude some services from the copayment and even after paying the deductible we are responsible for a percentage of our healthcare expenses until we reach an out-of-pocket maximum. When we leave the doctor’s office or hospital, we have no idea how much money we have just spent.
It isn’t that health care providers are keeping the cost of care a secret. It turns out that they don’t know how much their services cost either. The Wall Street Journal recently cited the example of Gunderson Health System in Lacrosse, Wisc. The hospital administrators had increased the price of knee surgery by about three percent per year for a decade until the list price approached $50,000.
As with most car dealerships, only suckers pay the list price. The sticker price is a starting point for negotiations. As the car lot, the buyer negotiates directly with the seller, but in the case of health care, the haggling is done between the provider and insurance companies and Medicare.
When the insurers complained about the cost of Gunderson’s knee surgeries, the hospital conducted an 18-month review of their pricing. The review included an efficiency expert, cost of materials and a tally of the time that nurses, doctors and physical therapists spent with the patient. In the end, it turned out that Gunderson’s knee surgeries cost $10,550 at most, about one-fifth of the list price.
A big part of the problem with American health care is lack of price transparency. If hospitals don’t know how much a procedure costs, how can patients? When you don’t know what something costs, it is impossible to compare prices and shop around. When you only see the insurance copay before the procedure, there is no incentive to compare prices.
Knee surgery, the most common procedure in the US outside of childbirth, would be a good case for price shopping if the data were available to consumers. High-priced hospitals spent about twice what lower-priced hospitals spent on the procedure, but there was little difference in the quality of the work.
“It’s a standard procedure” that doesn’t vary much between hospitals, said Professor Robert Kaplan of the Harvard Business School. “Carve out the old knee and put in a new joint.”
Gunderson went further than just finding out what its costs were. It took steps to cut them. The hospital took steps to improve efficiency while improving the quality of its care. A generic brand of bone cement was substituted for the higher-cost brand used previously. Now physical therapy is started much more quickly. This reduces pain for the patients and speeds up the recovery time, making hospital stays shorter. These and other changes lowered costs by about 18 percent to $8,700.
The American health care system is one of the best in the world when it comes to quality. The biggest problem with American health care is its high costs. Lack of transparency in pricing means that there is little competition based on price. Inefficiencies at the local level boost costs for some hospitals, but the lack of transparency prevents patients from seeking out lower cost alternatives.
The current pricing system is not working well. Even after the implementation of the Affordable Care Act, health care costs have continued to rise. Reuters reported that health care costs are projected to increase by more than five percent in 2018 while CNBC pointed out that annual health care costs already exceed $10,000 per person. Health care spending is approaching 20 percent of GDP and will go higher as Baby Boomers continue to age.
In the end, it is the consumers who are hurt most by the lack of competition and transparency. When the bills that insurance doesn’t cover start rolling in, the patient may contract a serious case of post-op sticker shock. Even those who don’t have surgery pay for the inefficiencies in the system through constantly rising insurance premiums.
Originally published on The Resurgent