Getting your appendix out can cost between $2,000 and $180,000. Hip replacements run from $10,000 to more than $100,000. Hospitals, we have also learned, frequently mark up the price of cotton swabs and routine X-rays by 300 or 400 percent, with most patients oblivious to the reason their healthcare bills are so large.
As a response to the hidden variability in healthcare prices, an increasing number of states have passed price transparency legislation. Federal legislators have even introduced several bills into Congress to make healthcare prices more transparent. Expect more such bills to follow.
But will healthcare price transparency help reduce costs? Seems it would. But healthcare can be a strange and unique sect of economics. Could price transparency backfire and cause spending to increase?
In the traditional consumer marketplace, price transparency is a powerful force in incentivizing producers to raise the quality and lower the price of their goods. When a consumer decides to purchase a flatscreen television, for example, she will be hesitant to buy an expensive model when a less expensive alternative exists that is just as good. As a consequence of such consumer scrutiny, the average price for a 32 inch LCD TV dropped from $1,566 in 2005 to under $400 today, at the same time as the quality of those products increased dramatically.
The same kind of consumer pressure rarely exerts a similar influence on the cost and quality of healthcare goods. For starters, most patients have little inclination, or motivation, to shop for health-care bargains. Insurance companies pick up most of the tab for patients’ healthcare. A patient who pays a $150 co-pay for an MRI (like I do with my insurance) won’t care whether the clinic she goes to charges the insurance company $400 or $800 for that MRI. The MRI is still going to cost the patient $150. Even patients responsible for 20 percent of the tab (a phenomenon called co-insurance) face a maximum bill of only $160 in this circumstance. That is not an inconsequential amount of money, but it is still not enough money to prompt most patients to shop around for less expensive alternatives, especially when most consumers don’t realize that the price of such for services often varies significantly, with little discernible difference in quality.