“I Felt Like a Hostage”: Toward a Solution for Medical Price Transparency

I recently wrote an article critical of a business group’s approach to improving transparency of prices for medical and hospital procedures. However, as noted in the article, expressing such criticism is not to deny that we have a serious problem when it comes to figuring out how much we owe for treatment.

In Saturday’s New York Times, the estimable Elisabeth Rosenthal has written another excellent report (gated, for subscribers only) about a failure in American health care: Even insured patients cannot get prices from their healthcare providers.

Rosenthal writes about a woman who went to a dermatologist’s office, where a physician’s assistant cautioned her that a white spot might be cancerous. A biopsy confirmed it. Rosenthal then unfolds a “daylong medical odyssey several weeks later, through different private offices on the manicured campus at the Baptist Health Medical Center that involved a dermatologist, an anesthesiologist and an ophthalmologist who practices plastic surgery. It generated bills of more than $25,000.”

The patient’s share was $4,590, which she whittled down to $3,000 after much effort. A highly educated patient, at no point was she told how much her bills would be or given an adequate response to her requests for simpler and less expensive treatment. “I felt like a hostage,” she laments.

The system is so screwed up, most patients don’t bother asking. According to a recent report published by the Altarum Institute, less than one third of patients asked about the price of a treatment before receiving it, and few believe that they can “shop around” for different providers.

Many solutions to this problem have been tried, but none have worked. I recently wrote about Rosenthal’s previous report of sky-high hospital prices in San Francisco, noting that California has required hospitals to publish their charges on a state government website for years. Other states have similar laws.

Some believe that compulsory adoption of information technology will solve the problem. For example, a bill introduced in the Kansas legislature would require health plans to use electronic Explanation of Benefits (EOB) when a physician submits a pre-determination request. The bill demands a “real-time response to a real-time request.”

I cannot imagine what a regulator or court would define as “real-time,” but even if it were instantaneous, the response would be meaningless. The bill requires the plan to “provide to the patient and the physician information on the amounts of expected benefits coverage . . . that is accurate at the time of the health plan’s response” (emphasis mine). If the procedure is scheduled for two weeks later, the health plan can easily say the “expected” coverage has changed.

It is hard to think of a regulatory solution to this challenge. I tentatively propose a different approach, rooted in the law of contract, which would change the incentives of both insurers and providers.

Suppose you went to a car dealer, and a salesman showed you a car you liked. You decided to buy it and asked how much it cost. The salesmen said, “I don’t know. Just drive it away and we will send a claim to State Farm, and in a few weeks you will get an EOB from them and a bill from us that tells you how much you owe.” Suppose you offered to pay $30,000 on the spot and the salesman said, “I can’t do that. We have to do it the way I just described.” You receive the EOB and a bill a few weeks later that claimed you owed $100,000. You refuse to pay or (more likely) you reiterate your offer to pay $30,000.

I used the metaphor of a car dealer, because I’m pretty sure that if that dispute went to a judge and jury, they would find in favor of the buyer and award the dealer $30,000 — not $100,000 — for the car.

Perhaps a solution in the healthcare arena would be to institute binding arbitration in cases where providers refuse to agree on prices before providing service. And perhaps the binding arbitration could be based on the fee the patient offered to pay upfront, but which the provider declined in favor of bureaucratic claims processing. For example, if a patient had offered (in good faith) to pay $5,000 for the surgery, but the EOB and claim came in at $50,000, the arbitrator would award one or the other. Common sense tells us that the arbitrator will almost always award the patient’s upfront offer.

This might cause providers enough pain to make them change their behavior. However, I am not a lawyer and I have probably not identified the unintended consequences. I welcome any feedback improving the proposal. The regulatory approach has not worked, and patients are at the end of their tethers.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

John R. Graham is a former Senior Fellow at the Independent Institute.
Beacon Posts by John R. Graham | Full Biography and Publications
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