Thursday, January 12, 2012

Why is There No Transparency in the Cost of Medicine?

Let me start this week’s blog entry with a series of questions:

How much does a pack of gum cost?
How much does a large pizza cost?
How much does a six pack of Budweiser cost? How about a high-end microbrew?

Easy, right? These items have fairly consistent prices, and we have a general sense of how much to expect to pay for them. Because we know how much they cost, we know when we’re getting a good price.

How about something more complicated? Try these questions on for size:

How much does an oil change cost?
How much should you pay for monthly Internet service?
What’s the price of a flight from New York to Los Angeles?
How much does a lawyer charge as an hourly rate?

Though these are largely service-based costs, most of us know the answers to these questions as well, or if we don’t, we can easily use the Internet and find out. We can probably even shop around a bit and get a good deal on a service we’ve never even used before.

Finally, try to answer these questions:

How much does an annual physical cost?
How much do routine screening labs cost?
How much does a mammogram cost?
How much does a knee replacement cost?
How much does a stress echo cost?

If you’re like most Americans, I’d guess that you have no idea. Why is this? The age of the Internet has produced very sophisticated consumers – we have access to information that allows us to compare prices, services, and any number of individual aspects of a given product. Yet few of us have any idea of how much medical services cost and can’t compare services between providers. Even comparing health insurance plans is difficult – How much does one cost vs another? What’s covered in one or another? What are my likely out-of-pocket expenses for one or another?

Unlike in the rest of the economy, there is little transparency in the healthcare market.

This lack of transparency is in part a result of a third-party payer system – health insurance. Of course, the role played by insurance is important, and there’s even a study out there that shows that health insurance does, in fact, serve it’s most important function – preventing severe economic consequences to illness. However, having an intermediary in the payment for services creates a unique system that exists nowhere else in our modern economy. Consider how odd we would think it if every time we visited the pizzeria, they billed our pizza insurance company, a company that estimated our monthly pizza consumption and gave us a monthly rate based on that projection. As I said, insurance’s role in preventing severe economic hardship has been shown, but it also creates a blind spot for consumers.

I believe that in the age of information, consumers have become remarkably smart, able, and adept. We have the ability to shop around as never before, to research as never before, and to share information as never before, resulting in an increased ability to seek out quality products and find them at reasonable prices. Unfortunately, these new consumer patterns haven’t reshaped healthcare in the same way that they’ve reshaped things like the retail market, and I believe that economic crisis around healthcare is in large part due to the lack of transparency around healthcare costs. Healthcare costs are, of course, multifactorial in origin, but if consumers cannot seek out a good deal, as they can in other parts of the economy, they can’t do their part to bring down healthcare costs.

Fortunately, there are a couple companies out there that are trying to make a difference and help consumers gain access to knowledge.

The first company, who I blogged about last year, when it was still in development, is Castlight Health. Castlight was brought to my attention by an article in the Wall Street Journal that raved about them. Castlight’s mission is literally to ‘cast light’, to make healthcare costs clear, and help companies make smarter choices when providing for their employees. While the company doesn’t reduce the prices of the healthcare plans themselves, their emphasis on transparency brings important market forces into healthcare, which should hopefully, in the long run, bring prices down across the board and force transparency. I applaud the efforts of Castlight.

Another company, working in the area of dental care rather than medical care, is Brighter. Brighter is a membership-based company that gives its members access to pre-negotiated prices for dental services. These types of companies have existed for some time, but the difference I see with Brighter is transparency of pricing. If you’re a consumer without dental insurance seeking to get dental care, it’s really hard to compare prices, or even get a clear quote. Brighter provides clear pricing and reviews of the dentists who participate in their plan, allowing consumers to choose based on their needs.

The economics of the American healthcare system are in need of a great deal of work, as its current situation is simply unsustainable. Undoubtedly, some of that solution is going to mean governmental regulation to ensure equitable practices by insurers, not only including their treatment of consumers, but of providers as well. However, some of that solution is absolutely going to be driven by market forces. Currently, the healthcare industry isn’t subject to a lot of the same pressures that other industries are, and it’s in large part because consumers don’t understand how the money works in healthcare. To be sure, neither of the two companies I mentioned above are perfect, but both are committed to increasing transparency and arming consumers with the information they need to make smart decisions.

The third factor that’s going to solve the healthcare crisis is experimentation. There are a number of models currently in operation that are all competing to be the next big thing in how healthcare operates in the US. On the one hand, there’s an increasing number of concierge medical practices in the US, which are now starting to make inroads into the middle class. There are companies like Qliance, which are leading the move towards 'medical homes', medium-sized clinic that provides routine and urgent care, relegating insurance to emergencies, and not letting it into the routine practice of medicine. There are companies like OneMedical, which offers a hybrid form system, combining the best of concierge medicine and insurance-based practice. And finally, there’s the ever-present possibility of a Canadian or British-style socialized healthcare system, or at least a public insurance option. One of these systems, or perhaps some other form of healthcare, is likely to emerge as a major force in the next few years, challenging our current healthcare system to adapt and improve. We’ll see what happens. Stay tuned.