Pricing & Healthcare Products

The pricing of healthcare services in the US healthcare system is of great interest to me. Despite attempts to achieve price transparency, creating a simple, accurate pricing system that we see delivered daily in stores and online has been elusive. While the answer for why that is the case is not complex, achieving a system that delivers it is going to take time.

The fundamental reason that healthcare pricing is not readily achievable today is because most of payments in the US healthcare system occur through third-party payors. The government is the major payor followed by the large health insurance companies. In contrast, today, only a tiny percentage of healthcare costs are paid directly from the patient to the provider.

To highlight why this is so important, think about how you consume a meal at a restaurant.  You go in and review a menu of prices for products. Depending on your interests and your budget, you might select an appetizer, an entree and a drink to go with it. You roughly know the total amount that you are going to pay ahead of time and, when the bill comes, you reach into your own pocket and pay from your own wallet.

Contrast this with one’s experience getting a healthcare service in the United States. You walk into a medical office and the first thing you do is present your insurance card. Based on the information on the card, the office has a decent, but highly imperfect, sense of what will be paid for (“covered”) by your insurance company on your visit. The complexity of determining coverage in advance is magnified by the fact that no one knows what services will need to be paid for until you are actually evaluated by your doctor or medical provider (“provider”).

Once in the patient room, you will be evaluated by your provider.  The provider will perform an assessment and, as needed, order from a wide range of lab and imaging studies to make a diagnosis. Theoretically, it is a mixed blessing that the provider typically does not know the prices of the services being ordered. On the one hand, the provider can order everything that is necessary without shortchanging the patient’s care. On the other, when the final bills are tallied, it can result in a massive sticker shock for the patient if the services are not covered.

Continuing the visit, the provider might write a prescription for some medications to help you with your illness. Again, the price of the medications (particularly branded ones) are unknown until you actually go to a pharmacy and pick them up. At that time, you will again present your insurance card and, depending on what benefits have been negotiated previously, pay a price ranging from zero to hundreds of dollars. If you try to look up information on drug costs ahead of time (this is slowly changing), you are stymied by the complexity in the system. As a data point, it is interesting to note how many links one has to click through just to get basic information about drug coverage through Medicare.

Applying this sort of operational logic back at our restaurant can make one’s head spin. Instead of how we dine out now, what if we were to go into the restaurant and present a card that represents our membership at a restaurant-payment company (“RPC”). Rather than looking at the prices of services, we just ate whatever we wanted and, once we were done, the restaurant would send a bill to our RPC.  The restaurant would have a better chance of getting paid if they were a preferred restaurant (“in-network”) to the RPC. Additionally, the restaurant would need to make sure that our meal was coded in the paperwork sent to the RPC correctly and that they could justify what we ate as necessary for our sustenance.

As health insurance premiums go up, our system is slowly shifting from the traditional model to the restaurant model. Generally speaking, we as humans use vastly more healthcare resources as we age (no surprise) and, as the US population ages, health insurance premiums continue to rise in an effort to absorb many of those costs.  As premiums rise, consumers are forced to choose between maintaining comprehensive insurance or shifting to less costly, high-deductible plans. As one would expect, many are choosing the latter option which is why we are seeing growth in these types of plans as a way to get some relief from the higher premiums.

At an individual level, having a high-deductible health insurance plan changes purchasing behavior. Now, the first $1,000 or even $10,000 of medical care is paid directly out of one’s pocket. If one is generally healthy and not planning on hitting their deductible in any given year, the result is that the individual will price shop for any necessary healthcare services before buying. As the population of people shopping for first dollar healthcare services expands, expect to see new cash pay healthcare service operations form to fill this demand.

As anyone who has spent time on the internet knows, one can find many websites that review and discuss healthcare pricing for specific services. While product review websites have existed for some time to help people like doctors navigate the options out there, the number of websites that actually deliver healthcare services at defined prices is quite small (but growing). For example, services like Accesa Labs enable one to research and order lab tests online at cash prices and get tested at major national laboratories. Rather than eating a full buffet at a medical restaurant and dealing with the sticker shock later, services like this one enable people to know what they are paying for ahead of time and making purchasing decisions based on the value of lab tests delivered to them.

Not all medical services can be priced accurately, however. People with medical conditions can be broadly classified along lines such as ethnicity and age but, ultimately, every application of a medical service ends up being custom due to the myriad of differences once one gets into the subtleties of the clinical case. As such, saying that we can price every person who has stomach pain at $150 simply does not work as your routine gastritis will mix in with more complex conditions even when larger attributes such as age and gender match up. As such, the more complicated the clinical condition, the more time, testing, and interventions required and the greater the ultimate cost.

There are some healthcare services that do have good, or increasingly improving, pricing. Drug pricing is one of them. While still dominated by large entities that control pricing behind the scene – related to contracts with health insurance companies and other 3rd-party payers – newer software companies like GoodRx have popped up to help bring more transparency to the industry.

One thing that seems to be more certain is that true price transparency in the US healthcare system has to improve. Other countries have long enabled the private, direct pay market of healthcare and entities exist that enable someone to walk in and get the studies or prescriptions they need with cash or a credit card. In the US, many would complain that this leads to overutilization of services but that argument is potentially less important in a system in which the buyers (i.e. patients) in the market are paying for the services versus payment being delivered by a third-party entity like health insurance or the government.

Going forward, I see a new market infrastructure forming that connects existing and new healthcare vendors with patients and offering their services at defined cash prices. Absent from this discussion is society’s role and obligation in funding healthcare services for its constituents and it is not one that will be touched on in this article. Big picture, as scary as change is to some, new market forces should result in a system that aligns more precisely with delivering quality medical care to patients with real, cost-driven value.

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