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Better Price Information Could Reduce Health Care Spending

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Better Price Information Could Reduce Health Care Spending

March 13, 2017

The health insurance reforms proposed by House Republicans would expand Health Savings Accounts and Flexible Savings accounts, encouraging individuals to pay for some medical services with pre-tax dollars. The GOP “patient-centered” health reform plan is designed to give consumers more choice and more skin in the game.   

One way to reach that goal is to give people better information about prices for similar services and products so that patients could choose the best price from a competitive marketplace. If people were turned into savvy health care shoppers by comparing prices would they choose less expensive services, and in the aggregate, could this slow health care spending growth?

A new paper by University of Notre Dame economics professor Ethan Lieber examines what happens when people have access to health care prices. People who ‘shop’ for better prices paid 10 percent to 17 percent less than others. However, since a mere 12 percent of people insured by their employers searched for prices at least once in the first three months, that smaller pool reduced prices paid by only 1.6 percent. 

With a better understanding of the different options available to them, including prices, the employees may choose to shift to less expensive alternatives for some health care services. 

Significant variation in prices for the same procedure occurs both by the hospital and by the insurer. For example, in Lieber’s sample, the cost for a mammogram at the same hospital ranged from $369 to $882, depending on the insurer.

Patients with better access to price information could shop around for more affordable options without necessarily sacrificing quality of care, as the example above shows. Health care services, such as Lasik or other forms of cosmetic surgery, where people know the underlying prices, have seen significantly slower cost growth over time. 

Here are some caveats to Lieber’s findings. His paper is based on employees at a single firm, so there are concerns that his findings would not scale accurately to a broader population.

Further, Lieber is unable to detect changes to prices resulting from supply side reactions to the introduction of access to new sources of price information and how that changes consumer incentives. Providers are likely to respond to more people shopping around by offering lower prices or developing new, more efficient ways to deliver care. This could lead to additional savings, but this dynamic is not within the scope of this paper.

The low search rate he finds is not unique to this paper. Some previous studies also found low levels of search and shopping. A major reason for this is that health insurance insulates customers from making those kinds of decisions, or even knowing the underlying information. This removes much of the incentive for them to shop for the best price. 

If patients do not see any of the gains from finding less expensive care, many of them will not bother to search. Lieber finds evidence of this moral hazard. In his sample, those who had already met their deductible (and were thus significantly more insulated from paying more out of pocket for additional covered health care services) were 90 percent less likely to search. 

A number of factors limit the magnitude of potential cost savings from higher levels of patient shopping. Many patients are not in charge of their own health care. More than 37 percent of people are in some form of public insurance, according to CDC data. For these people, shopping for more affordable options is not a possibility.

Also, some health care services are inherently not “shoppable.” An injury requiring immediate attention does not allow a patient to research it in advance, so trying to compare prices and find less expensive providers is not really an option.

One useful function of insurance companies is that they negotiate these major costs in advance, which results in a “preferred network” of providers—doctors, hospitals, dentists and laboratories. Employer-provided insurance does the shopping for its employees, so it would be useless to go out of network to find a lower price.  

Similarly, consumers need multiple providers to compare, and sufficient price information to be able to compare them, which is not always the case. One study estimated that 43 percent of spending by people in employer-sponsored insurance could be considered “shoppable,” equivalent to more than $500 billion each year. This is in line with Lieber’s finding that the effect of increased search and use of price information is “concentrated among care that is more amenable to search, e.g., non-primary care, less complex care, and nonemergency care.”

Lieber shows that more price information can reduce health care spending, but this effect is muted because most people do not shop around. Expanded HSAs and FSAs could change this. Health care will continue to be one of the biggest sectors of the economy and in people’s pocketbooks for the foreseeable future, and people will want to lower these costs. 

 

Read original article in the Fiscal Times here.

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes. 

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