Monday, August 1, 2016

Healthcare Price Transparency Isn't Enough to Drive Down Medical Costs

One of my bigger criticisms of Obamacare has been that it drives up healthcare prices by design. Obamacare is a subsidy for demand, and without addressing supply, prices are bound to go up. That is the economic theory That is what has happened with healthcare prices (see here and here), and that is what is expected to happen with prices in the foreseeable future. Here we were supposed to have the so-called "Affordable" Care Act, and healthcare has become less affordable. Something needs to be done to contain price amidst the mess. One idea that has been popular for quite some time with those who are labeled "free-marketers" is that of healthcare price transparency. Even when I first started blogging in 2009, I thought that healthcare price transparency was a good idea. What makes it an easier sell is that there is a demand for such transparency. However, I read this article that the Brookings Institution wrote last week, and I had to start questioning that assumption. What happened?

The idea behind healthcare transparency is the following, and it is something I explained when writing about why price gouging is actually a good thing. Prices are not just arbitrary numbers. In a free or liberalized market, they signal supply and demand. In the case of healthcare, procedures that require highly-trained specialists or rarer and/or more high-quality equipment are going to be more expensive than a pap smear or an office visit with a generalist. If a consumer is able to compare prices across practices in the area, state, or country, a consumer is more savvy and well-informed to make a decision that best suits their financial situation. This transparency leads to doctors better competing for patients, thereby further driving down prices, or so goes the argument. Normally, I would accept the argument because that is how it works in just about any other market. However, the healthcare market is not like any market, which is all the scarier considering that as of 2014, healthcare accounted for 17.5 percent of the U.S.' GDP.

Unlike most markets, prices in the healthcare industry do not reflect supply and demand, largely because of government intervention and third-party payment systems are in place, and do not help contain prices. Medicare and Medicaid have become a strong enough force in the healthcare market that in 2014, they accounted for 36 percent of national healthcare expenditures. The U.S. government has stringent price controls that make it more difficult to a) know the actual price of drugs, and b) lower prescription prices in the long-run. There is employment-sponsored health insurance, which I think is the worst tax break in this country. The employment-sponsored health insurance is compounded by the fact we have a third-party payment system. With the third-party payment system, patients do not see the prices of the non-refundable service until after it is consumed, which creates little incentive for people to look for prices in the first place, thereby leading to more frivolous healthcare spending (e.g., Desai et al. 2016). There is also the importability of health insurance, not only with regards to employment-sponsored health insurance, but also the inability to sell health insurance across state lines. Then there is how Obamacare has affected healthcare prices, and I'm not just talking about price increases. Two measures within Obamacare demolished the price's role as a carrier of information and a signal of market conditions: the mandate to cover pre-existing conditions and the provision to limit age rating, the latter of which means that one can only charge so much for older individuals. If insurance companies cannot assess risk, how can we expect prices to be contained, and how can we expect them to signal what in the world is going on in the healthcare market? All of these policies have created a lack of a feedback loop between the producer and consumer, which makes prices severely malfunctioning at best. If those were not enough impediments, there is also the "wide variety of insurance benefit structures, a lack of standard formatting for reporting prices, and the difficulty of determining prices when changes originate from multiple providers," not to mention legal hurdles, especially contractual obligations.

In addition to government intervention, it is difficult to navigate the healthcare market. It is not as simple as buying groceries or filling up a tank of gas at the gas station. For one, the healthcare system is so convoluted that it is often difficult to find sources for prices, let alone being able to determine what is going on. This leads to my second point. Quality and price are unrelated in the current healthcare system because prices have been so distorted, which is why quality ratings are needed to supplement price transparency. Price is not the only factor in a healthcare decision, and using price as the sole factor potentially masks malpractice and doctors who don't know what they're doing. Quality and safety have to be accounted for, as well, which is why quality ratings help. This is all the more the case when there is not a particularly strong correlation between price and quality. We can also try implementing reference pricing. However, reference pricing would be limited to more standardized services since quality differentials are not a concern. There is also an issue that reference pricing only applies to the 43 percent of healthcare services that are "shoppable."

Something I have advocated for a while, which is to remove employer-sponsored health insurance from the tax code. It would most probably provide the price transparency without the unintended consequences. At the end of the day, keep in mind that I am not arguing against healthcare price transparency. It would be a step in the right direction, as the Robert Wood Johnson Foundation illustrates. However, we cannot delude ourselves in thinking that mere price transparency would solve healthcare cost woes. Without supplementing price transparency with other much-needed reforms to untangle the behemoth that is our healthcare system, healthcare price transparency will only have a very limited effect on healthcare costs.

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