August 20, 2009

Transparency in health care pricing

The (lack of) transparency in health care pricing has received little attention in the health care debate.

As explained in Forbes, our current health care pricing system lacks many of the features that increase efficiency and lower prices in other private exchanges:

Free-market economics is predicated on the idea that people make informed choices about what they consume through prices, which signal the value of goods and services. Unlike the markets for books, cars, groceries and other goods, pricing for health care procedures is done behind the scenes by insurance companies, medical providers and the government.

What do we have instead? A bizarre, ad-hoc and esoteric system in which doctors and hospitals set "list" prices for procedures and insurers set rates that determine how much each party pays.

This has led to a system in which "doctors don't have to compete to provide good care cheaply, and both insurance companies and the government are able to exercise considerable market power in negotiating prices."

So, what should be done? Give people more knowledge about the cost of their procedures. This would help lower prices and increase efficiency as we would use our power as discriminating consumers to seek out the best and most efficient deals.

One way to become more knowledgeable about price is to stop relying on health insurance to pay for routine medical expenses and instead use it only for emergencies like we use other forms of insurance.

A fantastic piece in The Atlantic explains that using health insurance for routine, predicable medical expenses has perverted the price system beyond recognition:

We’ve become so used to health insurance that we don’t realize how absurd that is. We can’t imagine paying for gas with our auto-insurance policy, or for our electric bills with our homeowners insurance, but we all assume that our regular checkups and dental cleanings will be covered at least partially by insurance. Most pregnancies are planned, and deliveries are predictable many months in advance, yet they’re financed the same way we finance fixing a car after a wreck—through an insurance claim.

Health care reform is a complex beast and there are many moving parts in it besides health care pricing transparency. However, transparency is a key to understanding and containing costs.