America has finally reached the point where it’s time to address a completely out of control healthcare system. Think about it, it’s common knowledge that common procedures can have widely different costs across markets and yet there’s really no difference in terms of quality. Whether you get that knee surgery done in this state or that one doesn’t really matter in general, but the costs could be widely different. That’s where the insurers and their deductibles come in and further muck things up. Or as James C. Robinson PH.D put it:
“Because insurance shields patients from the full cost of their care, providers are able to price aggressively without fear of losing business. This phenomenon is especially evident in the market for hospital services and has been reinforced by ongoing consolidation among hospitals, which stymies payers’ efforts to contract selectively on the basis of price as well as quality.”
With that said, in this article we’re going to look at how the system is changing and why so that surgeons and hospital staff make wiser purchasing decisions that don’t diminish care, but do take some of the power aware from bureaucracies.
Promoting the “Shop Around” Mentality
Health care consumers have been in a comfort bubble for a while now, at least those with insurance. But with the Affordable Healthcare Act, over the next 5 or 6 years that pool is going to grow by leaps and bounds. It’s time now that pricing models were changes to promote the same kind of consumer behavior found in clothing retail.
A Simple Change: What if we switched to a reference pricing model? This would increase consumer awareness in terms of pricing and insurers could then set maximum payer contribution. What research has shown is that this gets people to take a closer look, especially when we’re talking about the more costly procedures. They go out and find a better deal (higher-value providers). Then on the flip-side hospitals are compelled to lower the prices on their end in order to keep themselves competitive.
An Example: California used reference pricing to a degree and the numbers have come in. IT drove the costs of knee replacements (incredibly common procedure that adds up to huge annual numbers) by nearly 20% without sacrificing quality.
What it comes down to is how big of a scale can reference pricing be applied to? Or is it just better-suited for a smaller amount of more common procedures? Here’s how it was put in laymen terms over on The Healthcare Blog:
“Reference pricing is most effective in situations where cost variation is significantly greater than quality variation; understanding which procedures fit that description is more difficult than it seems. Time-bound/emergency procedures bring up similar concerns.”
What About Hospital Market Power?
That’s what American healthcare will face next. Putting more power into consumers and taking it away from huge consortiums of hospital networks and bureaucrats that have little to no understanding of where or when reference pricing is applicable. Change will NOT ultimately come from the government. It must be created through free-market practices that find a better balance between insurer decision-making and consumer power to pick and choose. This will drive down costs across the board.
The good news is that it’s already happening. Let’s face it, America is still in the throes of an economic depression. The downward pressure on everything and everyone, not just the healthcare system, is causing people to require reasonable prices. The system simply can’t handle more debt. If consumers have to pay more, it will force the entire infrastructure to make a shift towards cost + quality = service.
Ask the NIHCR
Ever heard of the CalPERS’s Experiment? Using reference pricing models CalPERS put the threshold for hospital payment for both knee and hip replacement surgeries at $30,000. Then, they applied those costs to certain hospitals where enrollees had access to even lower costs. In the end what happened was CalPERS paid out 30% less and saved $2.8 million in 2011.
This is only the beginning. By 2020 the entire landscape of westernized healthcare will have transformed and prices will indeed be lower. Furthermore, thanks to new models like reference pricing insurers and hospitals will take a more competitive approach to the market.