Last December just before Christmas I took my car to a Body Shop for repairs. I received an estimate, which gave me an idea of how much I would be charged. My insurance company also gave me a clear quotation on how much they would cover. Once the repairs were completed, I received an itemized receipt showing exactly what I paid for parts and labor. The process was expensive, but it was not difficult to understand.
Healthcare, however, is an entirely different matter. Once we learn we need a procedure or a test, we often have very little idea what we will actually end up paying for it. This is true whether it is a diagnostic or preventative procedure like a colonoscopy or an MRI or a treatment, like chemotherapy or surgery.
Although we receive an explanation of the charges afterwards, it is often impossible to know what our insurance will or will not cover – until doctors are done negotiating with the provider. This situation makes it virtually impossible for healthcare consumers to comparison shop. In almost any other industry, the ability of consumers to compare prices leads to competition, and competition drives prices down. But for most of us, the prices of medical procedures remain a mystery.
Clearly, greater transparency in health care charges will benefit patients, but achieving this transparency is easier said than done. Eleven states so far have tried to make health care prices public. They have done this mostly by collecting receipts from private insurance companies, as well as Medicare and Medicaid and trying to publish the prices paid in a format that consumers can easily understand. But the task has proven complex and (ironically) very expensive.
In the quest to make such information public, doctors have been criticized for not simply disclosing procedure prices to patients ahead of time. Unfortunately, it isn’t always that simple. As cardiologist Dr. Lisa Rosenbaum pointed out in the New Yorker, “The first problem with financial disclosure from doctor to patient is a practical one. Doctors rarely know how much their patients actually pay. Patients are covered by a variety of insurers, all of whom offer several plans, for which any individual patient has a different copayment and deductible, which he may or may not have met.”
It is also important to remember that the money problem in healthcare isn’t only the prices providers are charging. Unfortunately, in our quest to lower the amount that patients actually pay for healthcare, we have become confused about the difference between cost and price. As North Carolina State University economics professor Mike Walden explains, “Cost is simply what it takes, in terms of dollars or resources, to produce a particular product or service.” Walden goes on to enumerate the resources it takes to produce a restaurant meal: the food, the labor, as well as a portion of the cost of the building, the utilities and the kitchen equipment.
Price, on the other hand, is what the restaurant actually charges for the meal. If I give you a coupon for $15 to make your lunch free, I have reduced what you pay for your meal, but I haven’t reduced the cost of what it takes to produce the meal. If it takes $15 worth of food, labor and overhead to produce a particular meal, the restaurant cannot sell it for less without losing money and eventually going out of business.
Where do medical costs come from? They begin with what it costs to train a doctor properly. In 2012, according to the Association for American Medical Colleges, the median amount of education debt for a new doctor was $160,000 for those attending public institutions and $190,000 for those graduating from private medical schools. Then doctors in private practice must pay all the overhead costs associated with running their offices and paying their employees. Then there is malpractice insurance, new equipment, continual training, and administrative costs for filing claims with insurance companies and negotiating payments.
Other medical costs are associated with the tremendous resources it takes to run hospitals as well as research and test new treatments and drugs. For example, according to the National Institutes of Health, the average cost for a pharmaceutical company to bring a new drug to market is between 1.3 and 1.7 billion dollars. A Gallup study found that more than $650 billion dollars is spent each year on “defensive medicine”—procedures and tests ordered by doctors out of fear of lawsuits.
Transparency in healthcare prices will help consumers get the best deal on the tests and treatments they need. However, the more pressing need is to identify ways to reduce the actual costs of healthcare. In addition, comprehensive tort reform to protect doctors from frivolous or opportunistic lawsuits will help lower costs, as will reducing the regulatory burden on newer treatments. These simple steps seem like a very good place to start.