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Health Alert | Knowing the Price of Everything and the Value of Nothing

One of the stated goals of health reform is to make medical prices more transparent. In fact, one provision will force insurers to reveal what they pay doctors. No matter how ill-advised that policy, there is a conceptual problem that plagues advocates of consumer-directed health care. Consider this circularity:

 

A. Having patients pay out of pocket will not work unless prices are transparent.
B. Real prices will never be transparent unless patients are paying out of pocket.

Here are five principles to help us get out of the trap:

Principle No. 1: Whenever patients pay with their own money, prices are always transparent. Cosmetic surgery, LASIK surgery, walk-in clinics in shopping malls - they all post prices. And in the medical tourism market, package prices are usually transparent for almost every kind of surgery. A system which produces menus without prices is possible only when insurance pays most of the bills.

Principle No. 2: When patients are not paying the full cost out-of-pocket, the prices aren't real prices anyway. If patients do not pay for care with money, they are probably paying with time. And when doctors' services are not rationed by price, the fees they receive are not market-clearing prices. Instead, they are artifacts of a bureaucratic reimbursement system. In the hospital sector, fees are even more divorced from reality because, historically, hospitals have had incentives to manipulate their charges in order to maximize against reimbursement systems. Not only are hospital charges not real prices, no one actually ever pays them except poor, uninsured patients who occasionally get caught up in the system. 

 

and although my eyes were open
they might have just as well've been closed

Principle No. 3: Transparency doesn't matter unless providers are competing on the basis of price. As was made clear in a Congressional Budget Office (CBO) report, forced transparency is unlikely to change anyone's behavior in a system dominated by third-party insurance. (If I gave you a Yellow Pages-size book of phony medical fees for your area, would it change your behavior?) If providers compete on the basis of price, fees will be transparent and they will be real. If providers don't compete on price, fees will not be real whether or not they are transparent.

Principle No. 4: Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) by themselves will not produce transparency. Long before you reach the physician's office with HSA card in hand, your insurer and the doctor have already agreed on what will be paid for, what will not be paid for, and how much. And the insurer has already agreed with you on how the transaction will count toward your deductible. Consequently, your doctor is not competing for your patronage based on price. Consequently, the fees are not market-clearing prices.

Principle No. 5: Real transparency will never arise in an insurance-dominated system unless providers are free to repackage and reprice their services to individual patients. Suppose we abolish third-party payment for primary care and give every patient a primary care HSA - no deductible, no copayments, just an account used to buy care. Transparency for all primary care services would blossom overnight. All prices would be real prices. Rebundling and repricing would soon follow. Telephone and e-mail services would emerge. Electronic medical records would sprout. Maybe even house calls.

Happiness and well-being would flourish. All would be right with the world.

John_GoodmanJohn C. Goodman is president and CEO of the National Center for Policy Analysis. The Wall Street Journal and the National Journal, among other publications, have called him the "Father of Health Savings Accounts," and the Media Research Center credits him, along with former Sen. Phil Gramm and columnist Bill Kristol with playing the pivotal role in the defeat of the Clinton Administration's plan to overhaul the U.S.health care system. He is also the Kellye Wright Fellow in health care. The mission of the Wright Fellowship is to promote a more patient-centered, consumer-driven health care system.

Dr. Goodman's health policy blog is the only right-of-center health care blog on the Internet. It is the only place where pro-free enterprise, private sector solutions to health care problems are routinely examined and debated by top health policy experts throughout the country-conservative, moderate and liberal.

 

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