Price Transparency Lowers Healthcare Costs

A study recently published in Health Affairs describes how price transparency drove down the cost of MRIs by almost twenty percent from 2010 to 2012. Compared to patients who did not have the advantage of transparent pricing, patients who knew what their MRI procedure would cost saw a cost reduction of $220 per procedure. Further, price transparency was associated with a significant shift from hospitals to outpatient facilities.

This result is just the beginning. It was not a result of true consumer-driven health policy, but an intervention by an insurer. When a physician referred a patient for an MRI, the insurer required prior authorization before paying for it. When the patient called for prior authorization, the customer-service rep was able to give the patient the choice of a lower-cost provider in the same area. Importantly, the insurer’s rep was able to tell the patient how much he or she would save by using the lower-cost provider.

This is something that healthcare providers resist mightily — for obvious reasons. As a consequence, more expensive providers, especially hospitals, dropped their fees significantly. This resulted in a 30 percent compression of prices.

It is a step in the right direction. The Health Affairs article notes that government dictating price transparency has no effect — as discussed previously at this blog. Nevertheless, there is a lot further to go. For example, one-third of the patients had zero co-pay or deductible, and so were completely insensitive to price. Also, it still requires too much bureaucratic intervention. Why should a patient have to call the insurer to figure out the best price for the service?

For reducing costs, imaging is probably low-hanging fruit. Nevertheless, this experience teaches valuable lessons. Prior authorization alone (when an insurer simply makes a yes or no decision on whether it will pay for a procedure) is a cause of irresolvable conflict between payers and providers. Because the patient remains insensitive to price, if the physician decides to do the paperwork for prior authorization, it does not reduce costs. This was confirmed for Medicare in a Congressional Budget Office estimate in 2013.
However, introducing price sensitivity to prior authorization “softens up” the decision for both patient and insurer: The patient understands that the insurer is trying to get the best bang for the buck, not just prevent access to diagnosis.

What are the next steps?

• Private insurers can make prices of credentialed providers even more transparent, by posting fees on their websites and clearly informing patients about how much money they will save by going to low-cost providers.
• Private insurers can design ways to financially reward patients who have no co-pays or deductibles to make price-conscious decisions also.
• Medicare can also design ways to reward beneficiaries for making cost-saving imaging decisions (likely through Medigap plans, which often cover beneficiaries’ co-pays).

This is still a long way from consumer-driven health care. However, like reference pricing for surgery, this experience should motivate insurers to continue experimenting with letting patients know, understand and respond to the prices of medical care.