The power of choice.

Let People Shop for Health Care

Peter R. Orszag is a Bloomberg View columnist. He is a vice chairman of investment banking at Lazard. He was President Barack Obama’s director of the Office of Management and Budget from 2009 to 2010 and the director of the Congressional Budget Office from 2007 to 2008.
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If people knew the prices of medical treatments, and if they paid partly from their own pockets, they might shop around and save money. This stands to reason, and a new study in the Journal of the American Medical Association shows it's true. This comes as very encouraging news for the wider effort to keep going the profound deceleration in health costs we've seen over the past several years.

A team of researchers led by Christopher Whaley of the University of California at Berkeley and Castlight Health examined what happens when hundreds of thousands of people are given access to a website that provides prices for various medical procedures.

Historically, consumers have had difficulty finding out the price they will be charged for a specific procedure or visit. But it's reasonable to expect that if prices were provided, and if the patients had “skin in the game” in the form of cost-sharing, they would seek out lower-priced options.

That is exactly what the researchers found. Use of the price-transparency tool was associated with a 14 percent decline in payments for laboratory tests, a 13 percent decline in payments for advanced imaging tests, and a 1 percent decline in payments for clinician office visits. Giving more information to consumers about the prices of their care, in other words, led them to choose less expensive options.

These encouraging findings come with four important caveats. The first is that although price transparency is a good start, our health-care system needs to provide better value, not just lower prices. Little or no evidence links price to quality in health care, so my strong guess is that consumers who choose somewhat lower prices can help to shift the system toward somewhat higher value. But consumers shouldn’t have to make such guesses. Expanded information about quality is becoming available, and it's important to keep pressing for more.

The second caveat is that price transparency in concentrated markets may facilitate collusion among providers, which I have noted before and which is also underscored in an editorial by Professor Uwe Reinhardt of Princeton University that accompanies the new study. Local hospital markets are growing more concentrated, making this concern a valid one in many areas of the country. On the other hand, the concern is most salient when prices are publicly posted; when access to the prices is restricted to a tool accessible by individual beneficiaries through a personal, secure website, the downside is attenuated (assuming the competing health providers do not have direct access to the system).

The third caveat is that the savings involved in the study were very small. The average lab test payment reduction, for example, amounted to $3.45, and for the clinician office visit, it was $1.18. The advanced imaging result was larger, at $125, but still not huge.

This may help explain why so few people consulted the price website: Only 6 percent of lab tests were preceded by a price search, for example. It also underscores the limited gains we should expect from price transparency: Health-care costs are concentrated among the highest-cost patients (the top 25 percent of Medicare beneficiaries ranked by costs accounts for 85 percent of Medicare spending). And patients will and should have deep insurance against high costs (which is the whole point of insurance), constraining the ability of price transparency to have enormous effects on total spending. That is why, while we expand price transparency for consumers, our primary focus should still be on changing incentives for providers.

The final caveat is that, especially with such small participation rates, one always wonders whether the people using the price website were fundamentally different from nonusers in some way. The researchers deploy a wide variety of tests to minimize this risk, but none of them provides the assurance that you'd get by randomly assigning people access. (A future column will discuss the relative paucity of randomized controlled trials in health-care delivery studies -- which is odd given the emphasis attached to them in other parts of health-care research.)

Despite these cautionary notes, the transparency study is very welcome news in the ongoing effort to produce better value in health care. The next five years will be a crucial period in the transformation of our health system, and we should be aggressively expanding efforts like the transparency tools that have helped consumers choose lower-priced options.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Peter R Orszag at porszag3@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net