Think Tank

Move Toward Openness in Health Care Pricing, Performance

The cost of health care — from the most tangible of products and services to the most arcane high-deductible insurance policies — is relatively opaque in California’s health care system.

Comparing prices for a knee replacement, tonsillectomy or even an aspirin between hospitals is difficult and sometimes impossible because of all the variables that can have a bearing on the bottom line.

Even comparing prices for identical procedures in the same hospital is difficult.

It’s like trying to put a single price on an airplane seat. Although every passenger leaves and arrives at the same time, the cost of the ride depends on many variables — whether the seat is in first class, business class or coach and whether it was purchased directly from the airlines, through a discounter or with frequent flier miles.

The analogy to air travel ends there. When consumers shop for airline tickets, all those options are clearly spelled out. The cost of first class vs. coach is displayed. The cost of getting the ticket through Expedia or Travelocity instead of directly from the airline ticket is clearly stated.

In addition to prices, other airline information is readily available to travelers — on-time statistics, safety records and inspection data.

That’s not the case in health care, but efforts are under way to change that.

Catalyst for Payment Reform, a coalition of large employers and others, such as CalPERS, that purchase care, has just released a brief calling for more transparency in health care pricing. The report outlines steps purchasers can take to support price transparency. A related statement calls on insurers and providers to release price data.

Parts of the Affordable Care Act support transparency, including the creation of Medicare Qualified Entities that can collect and share information with the public.

Some states have created online price transparency tools for purchasers and consumers. In New Hampshire and Maine, insured and uninsured consumers can compare prices of various medical services from multiple providers. A new online tool in Minnesota allows consumers and purchasers to see average negotiated rates for those with insurance.

In California, a new state law takes a first step toward transparency by prohibiting health insurers and providers from including “gag clauses” in contracts that forbid the disclosure of pricing information.

We asked stakeholders and experts if California should be actively pursuing pricing and performance transparency.

A Promising Start, But More Steps Needed

Among health policy researchers, a strong consensus has emerged that high prices commanded by some providers are a major cause of our health care affordability crisis. For example:

  • In San Francisco and Los Angeles, according to a study by Paul Ginsburg of the Center for Studying Health System Change, hospitals in the top quartile charge insurers on average twice as much as hospitals in the bottom quartile. The highest-cost hospital in Los Angeles is 3.5 times more expensive than the median. 
  • The Government Accountability Office found in a 2005 study that after adjusting for regional differences in operating costs, hospital prices in metropolitan areas varied by as much as 259%. Hospitals in the lowest-cost regions had prices approximately one half the national average and those in the highest cost regions were 83% more expensive than the national average.

Researchers for each of these studies, as well as most others on this topic, have concluded that the cost variations are likely a function of differences in hospital market power rather than quality of services. In Ginsburg’s words, “Few would characterize the variation in hospital and physician payment rates found in this study to be consistent with what would be expected in a highly competitive market — at least for markets outside of health care.”

Despite these dramatic cost variations, consumers and the public are almost completely in the dark about them. Unquestionably, that’s a major reason for their persistence. We can’t possibly hope to achieve fair prices for hospital services unless consumers know those prices and the quality of the care they buy.

Over the last two years, Sen. Ed Hernandez (D-West Covina) has led the California Legislature in taking two important steps to promote such transparency. In 2011, he won enactment of SB 751, which he co-authored with Sen. Ted Gaines (R-Roseville), to prohibit gag clauses in contracts between health plans and hospitals that prevent plans from disclosing hospital cost and quality information to their members. This year, Hernandez shepherded into law SB 1196, which bans gag clauses in plan-provider contracts that prohibit plans from sharing claims information with qualified health care reporting entities that would use the data to produce reports comparing providers on cost and quality.

As a result of these moves, Californians will have access to a steadily increasing flow of information about the costs and quality of health care services. Undoubtedly, policymakers will need to do more to ensure well-functioning health care markets, but this commitment to transparency is a promising start.

Importance of Distinguishing Between 'Cost' and 'Price'

When addressing the fundamental issue of cost in health care, we must first disentangle “cost” from “price.” When searching for an airline ticket, the price we see is the cost to the purchaser, not the cost to the airline and service partners that need to deliver the product — a timely, safe and convenient trip from point A to B.

Similarly, when we talk about “price” and price “transparency” in health care, generally we are describing the price of the service to the purchaser; not the cost it takes to deliver that product to the recipient of the service. Therein lies the problem — airlines do one thing — fly people from A to B.

Many hospitals do far more than provide a unit of service such as a knee replacement. They provide emergency services to those who cannot pay, conduct groundbreaking research and train the physicians and health care professionals of tomorrow. These are services that have great societal benefits; however, they are costs that consumers do not recognize when making purchasing decisions.

Hospital “prices” are also affected by the uniqueness of the communities they serve. Micro-economies, geographical differences and demographics of all the patients served, the level of discount and charity care provided to the uninsured and underinsured, or their share of patients covered by public programs that have low reimbursement rates, such as Medi-Cal — all factor into the unit “price” of a knee replacement that a hospital can offer. Because many of those costs are not paid for in full by anyone, hospitals must make up the difference by “cost-shifting,” which increases the unit cost of a knee replacement relative to other hospitals.

A singular focus on “price,” therefore, misses the larger picture of the unique differences in the communities served by hospitals. It is this very same issue that plagues the “narrow network” delivery model that is primarily focused on “price.” Institutions may try to increase volume by agreeing to some of these low-priced services, but this just shifts costs to other payers and does nothing to address cost drivers. It places no value on hospitals that restore the health to some of the sickest patients in the state, serve vulnerable populations, support physician education programs, or provide important research functions that result in clinical best practices that may increase quality or decrease costs for the entire system.

If there is going to be a concerted focus on “price,” then it must coincide with a concerted effort from our health and policy leaders to recognize the “costs” of the entire system and find ways to identify appropriate ways to pay for them. Otherwise, we will be confronted with the unintended consequences of well-intentioned policy gone awry.

Plans and Providers Should Provide Data

As health care costs continue to rise, employers and others who purchase health care for consumers are asking them to share more of that cost burden. But as consumers have more “skin in the game,” purchasers realize they need to help educate and empower them so they can choose the right care at the right price. Yet as our recent Catalyst for Payment Reform Statement on Price Transparency articulated, purchasers are thwarted in at least two ways when trying to give consumers access to price and quality data.

First, some providers won’t willingly share price information, and/or they insert “gag” clauses in their contracts with health plans to prevent them from sharing it with plan members. Second, while consumers may have access to a shopping tool through their health plans, in some cases these tools fall short.

Some tools make it hard to look at quality and price together, limiting consumers’ ability to identify choices with the best value. Others lack data on certain procedures or lack features that make data relevant to users, such as the expected cost based on where they are in meeting their deductibles. But should a purchaser seek alternative tools from outside vendors, they might find themselves hitting another brick wall. Some health plans won’t allow purchasers to give their own claims data to anyone else.

Fortunately, there are steps purchasers, providers, the public and our state leaders can take to help break down these walls and empower consumers to shop for higher-value care. First, as outlined in our Statement on Price Transparency, purchasers can (and will!) push providers and their plans to release price data, and to do so by 2014. California consumers can begin to foster a cultural change, asking their providers for price estimates.

Plans should continue to improve the transparency tools they provide their members, including by gathering real-time customer feedback about the utility of their tools. CPR outlines specifications that transparency tools should meet. Health plans also should allow purchasers to use their data with other vendors to develop alternative tools. Finally, state leaders can sponsor legislation, building on SB 751 and SB 1196 passed last session, freeing plans to share provider prices with plan members and designated data collection entities, even when gag clauses exist. As purchasers rally around transparency as a priority, all players need to play their part to help empower consumers to seek the highest-value care.

Transparency, Data Keys to Successful SHOP Exchange

California’s Small Business Health Options (SHOP) exchange, slated to open in 2014, could provide better access to health insurance and help drive down premium costs for countless California small businesses.

For the SHOP exchange to be successful, though, it should implement support tools that enable employers to compare plans and make meaningful choices.

The current health care market is incredibly difficult to navigate, and many employers end up with plans that aren’t ideal for their needs. Bringing transparency to the costs of services and products in the exchange will enhance small business decision-making, pushing insurers and providers to be more upfront with price information and giving small businesses much-needed clarity as to where their health care dollars are going.

The SHOP exchange can become more than just a website where employers and individuals go to purchase health insurance. If California puts the proper standards and systems in place, the SHOP exchange can provide small businesses with the information they need to pick the best plan. A transparent and navigable exchange will save employers on their health care spending, allowing them to easily and quickly gauge what products are affordable and of high quality.

Some argue that it would be impossible for exchanges to institute and administer effective criteria and rules for health plans. They say exchanges lack the ability to generate the necessary tools for their customers. They support an exchange that functions more like an insurance clearinghouse.

However, simply providing a lot of choices won’t make the exchange successful. The SHOP needs to provide small businesses and individuals with specific information so they can make an apples-to-apples comparison between plans.

A robust exchange would increase California small businesses’ ability to offer health insurance to employees. Scientific polling data released by Small Business Majority and Kaiser Permanente in June 2012 found that just 32% of California small businesses offer health insurance to their employees. However, when they learn an exchange will open in 2014, the proportion of those who said they are likely to offer health coverage to their employees jumps to 44%.

Small businesses should not have to be health care experts to purchase the right insurance for themselves and their employees. To make the process as smooth as possible when our employers use the SHOP to purchase coverage, California needs to make sure the right systems are in place to make the experience a good one.

Consumers Deserve To Know Cost, Quality of Care

While the Affordable Care Act will do much to expand the number of people with health coverage, more must be done to slow the growth of health care costs if we want health reform to be successful and sustainable in the long term.

There is no silver bullet to curb health care costs. We must look at many strategies, which will have a cumulative impact.

One approach that is getting significant attention is letting consumers get a look under the hood at the underlying costs and quality of care within our health care system.

Consumers deserve to know the quality and cost of their health care. Health care transparency provides consumers with the information and the incentive to choose health care providers based on value.

Not only would this yield a more informed health care purchaser, it would allow physicians, hospitals and health plans to analyze quality of care and efficacy. Transparency offers a treasure trove of data that can be used to assess the best care to provide at the right time to help improve health outcomes. In fact, the Institute of Medicine has said that transparency is a key to improving clinical quality and achieving better value in our health care system.

Any transparency proposals must be carefully constructed to provide consumers with simple, easy-to-understand information that is relevant to their health care decisions. Health care is complicated. If information is confusing or inconsistent, it may ultimately provide no value to the end-user.

We must protect proprietary information that could have the adverse effect of undermining competition and driving prices higher. For instance, releasing information on pricing or payment terms may give competitors information that increases prices during contract negotiations.

Health plans, government programs like Medicare, and providers are all developing and implementing new programs that offer greater transparency and help consumers assess price and value of care. Some programs are focused on rewarding health care providers for quality performance through health plan payment systems. Others allow consumers to compare cost and quality information for a range of providers within their networks.

Health plans, too, have increased transparency for consumers and the public. Through submission of rates to state regulators, plans have disclosed detailed information about the costs that make up the sum of premiums. All this information is easily accessible through the Internet to all interested parties.

California should continue to investigate new transparency programs, either through the private sector or through state initiatives that ultimately meet the dual goal of offering consumers useful, understandable cost and quality information while also preventing the release of information that undermines competition.

Consumers Have Right to Information

No one will dispute that health insurance premiums are rising at an unsustainable rate. In response, corporations are increasingly turning to high-deductible or consumer-directed health plans and transferring additional costs to employees. These plans require workers to satisfy a deductible of a couple of thousand dollars out of pocket before insurance kicks in. In 2012, 42% of firms with more than 1,000 employees reported that they offer a high-deductible plan to their employees.

While the concept of high-deductible plans encourages consumers to accept greater responsibility and accountability over their care, currently these consumers have no real access to the information they need to understand and manage their health care costs. In fact, even the most educated consumers are left in the dark regarding pricing and often don’t realize that there is massive price variation for most procedures — even in the same city, and within the same health plan. For instance, a recent CALPIRG study noted that a knee replacement surgery in two nearby cities in Northern California ranged from $59,800 at one hospital to $164,400 at the other.

In many consumer markets, such as travel and retail, consumers can go online and easily research prices and quality ratings from users. It would be unfathomable today for someone to go out and buy a car without doing this research. Should something as important as your health care be any different? Consumers have a right to access information that will enable them to make better medical decisions for themselves and their families.

As one of the most progressive and populous states, California is in a unique position to set an example by empowering its citizens with the information they need to take control of their spending and improve quality outcomes.

We are already seeing innovative companies offer health care transparency tools to their employees to help them gain the information they need to make more informed decisions. But this information needs to become more readily available to all. Medical procedures and services can be complex and take unique turns, but hospitals and providers should be required to at least provide a baseline for costs. In tandem, consumers should be able to draw up regular quality reports on facilities. And any health care organization receiving state money should be incentivized to deliver care at a certain quality level, and penalized for not reaching a certain standard — similar to the programs we are currently seeing from Medicare.

Only when consumers have the information they need to make informed, educated decisions can they become true health care consumers. And only when consumerism becomes a reality in the health care market can we begin to drive down costs and improve quality. Today, medical providers are not competing for consumers’ business — so where’s the incentive to change their ways?