Getting Prices Back into Healthcare

& Why They Are Missing Now

In virtually every other part of our lives, we consider price when making a purchase decision.  This is why it is very unlikely that you are driving a Ferrari.

Except in healthcare, where bills are high enough to look like you are buying a Ferrari.  Why is that?

The healthcare industry sector has been so distorted by its artificial market conditions, government’s heavy thumb on the scale and only a few insurers, that effectively pricing is not a factor.  That has stranded its consumers, not the insurance companies or government, actual patients, in a cost fog.  This led to what could be described as an ultra-slow motion multidecade car accident that is healthcare today.

Briefly we should examine what led to this fog.

Firstly, the U.S. government “pays” for over half, and some would estimate two-thirds, of all American healthcare via the Medicare and Medicaid programs.  The word “pays” is in quotation marks as the reimbursement level is below the cost of care and is a price fixing program as the rates are set by the federal bureaucrats and are non-negotiable.  For hospitals these programs pay roughly 89 cents on the cost dollar while for doctors’ offices it is closer to 60 cents.

When a single buyer purchases so much of a service within a market that it can set its own price, regardless of the cost of the service, it is called a “monopsony”.  Since 1986, when the federal government realized that it could not afford to continue paying market rates for healthcare, it has progressively decreased reimbursement to the levels today, with occasional tiny decorative upticks that did nothing. 

While the Centers for Medicare and Medicaid Services (CMS) claims that there is a defined process for setting reimbursement prices, over 99% of providers consider it a black box.  Sometimes at midnight (no really, midnight) CMS changes reimbursement downward by as much as 50%.  It’s hard to plan your business revenue for the next year when someone else sets your prices and can change them that dramatically without much notice.

The ability of a single large buyer to set its own prices is also called monopsony power.  The vendors who sell their services can’t really do anything about it, other than stop selling to that buyer.  In healthcare this is doctors and hospitals who stop seeing Medicare and Medicaid patients.

Paying less than the cost of care led hospitals and doctors to raise their prices to offset the losses which is called cost-shifting.  So back in the 1990’s, after the government reimbursement reductions, everyone in healthcare raised their prices.

Surprise! Insurance companies sort of noticed this.  This led to the logical response to negotiate lower prices so they could sell insurance policies with affordable premiums.  So, the private sector reined in some prices for covered services.  As usual, the government couldn’t help itself and passed the Un-Affordable Care Act so then premiums weren’t as affordable.

One common mechanism for healthcare insurance companies to negotiate better prices is the use of networks, where doctors and hospitals sign up to be “in-network” with the promise of faster payment by agreeing to lower payment.

One attribute of healthcare insurance network contracts is that both the consumer (the patient) and the vendor (doctor or hospital) agree that they must pay or charge the “network rate”, even within the deductible.  In contrast to the government’s low price-fixing program, networks set a network price that is non-negotiable and potentially higher for the seller or the buyer, especially if they wanted to haggle. 

A patient can’t look for a better price with various providers within their insurance network as the price is fixed across all of them.  Doctors and hospitals trying to gain more customers via a price advantage are similarly stuck with the required network set prices.

Even in an age of price transparency that many states have enacted, government and private prices are fixed.  Vendors of healthcare are not open to price haggling due to the need to offset losses from government programs, nor are they enthusiastic about offering a cash paying customer a discount for fear that an insurance company might find they sold the same service to someone else for a lower price.

Combine both the historical and current facts and you have a market logjam on pricing.  Over-simplified, price signaling reflects the availability and the demand for something within a market.  Without it healthcare customers face a baffling choice on how to decide if what they need is worth the cost.

To write about this I feel obligated to bring you a solution.  In my military career if you told your commander about a problem, you better bring a solution with it.

If insurance network prices were not fixed within the deductible, healthcare consumers could negotiate with hospitals, doctors, imaging centers, labs, and clinics for a better price.  State laws could prohibit network price fixing at no cost to the state.  I call this “the deductible free trade zone”. 

Insurance companies would love having a decrease in the number and cost of times when the deductible threshold was reached as their covered lives (customers who paid an insurance premium) would all become empowered agents haggling for the best price.  Patients would have the newfound power to find a better value.

The only unhappy stakeholders would be those of us who sell healthcare and, well, tough.  Just about everyone else in business must compete in part on price.  It’s time for us to do so as well.  One could argue that healthcare insurance companies might want care to be so uber-expensive, so you are scared into buying insurance.  If we don’t break up the pricing logjam, the same sellers of healthcare will be even more unhappy when the government takes over the entire healthcare market with fixed and very low, unsustainable prices.  So doing nothing and hoping for the best is not a good idea.

Restoring price signaling to healthcare is an important first step in achieving affordable care and access for more people who need it. 

And it costs government and taxpayers nothing.