Earlier this week I was on a panel at a major healthcare conference in Washington, DC and, while it covered a variety of healthcare system maladies, the main topic was healthcare pricing transparency. There were a few moments during the panel that raised my eyebrows and compelled me to set the record straight, both on the stage and in this blog post.
The first moment was when the moderator asked me to answer this question, “Given that everyone in the healthcare industry wants to see transparency, why is it so hard to achieve?” I’m pretty sure she was surprised when I objected to her premise instead of answering the specific question.
Clearly everyone in healthcare does not want price transparency. Patients do…mostly. To be honest, patients/consumers/humans don’t always care about pricing information because it is apparent that patients don’t always price-shop when they need treatment. There are lots of reasons for this. Sometimes they are so sick that they don’t have the ability to do it – this can definitely be the case with cancer patients or those in the midst of a heart attack – it’s all they can do to get to care, much less shop for it. Sometimes they are wed to their health system/provider network/physician for any number of reasons, including loyalty, habit, convenience or economic drivers, such as it’s cheaper for them to use their benefit, regardless of the cost of the service. Sometimes people don’t know where to look for price comparisons, and that is often because the system doesn’t make it easy for patients to do this. Sometimes people have access to services that offer some pricing information, but it is not always so simple when the websites are hard to find, or the service need is too complex for a price list. Sometimes there is a virtual monopoly on the product or service they need so price shopping is not even possible. But fundamentally, OK, I’ll stipulate that consumers would rather have price information than not. Self-insured employers also want price transparency, as they are trying to minimize the cost of benefits whenever possible.
That is pretty much the end of the list of who wants real price transparency. Everyone else who has a big stake in healthcare, not so much. There are lots of reasons for this, but in the end, they basically boil down to protecting profit margins and/or maintaining some other competitive advantage that is enhanced through opacity and harmed by transparency, or at least that’s their fear. And that, my friends, is why broad scale transparency is a tough sell. I suspect it is achievable in our current healthcare system only through regulation, of which few are big fans. There are certainly some organizations that are quite open about their pricing practices – you can walk into any retail pharmacy clinic and get a price list for services, for instance. But even then, you don’t really know what the margin is, just the price. Profit information is fiercely protected by purveyors of pretty much everything one can buy in America. So when we talk about transparency, we have to be clear about whether we mean the actual price or the actual mark-up, or both.
To that point, the other comment on the panel that surprised me was from one of the other panelists, a physician who said that healthcare is the only industry where the cost of delivering the product/service deviates so massively from the price charged. Now it’s certainly true that healthcare is one of the chief offenders on this front. But the ONLY industry? Absolutely not. It costs about $1.50 to make 1000 gallons of purified water and Americans spend upwards of $20 billion/year on in the U.S. for plastic bottles of what is, for all intents and purposes, glorified tap water with a great origin story. The cost of one bottle of Evian at the airport today? $6.00 – enough to make 4000 gallons of what went into the bottle (the cost of goods of a bottled water is about fifteen cents all in). It was a damn bargain, though, because the same bottle cost $8 at the hotel I slept at last night. Now that is a mark-up.
Here’s a list of things that frequently have a mark-up of at least 500%: movie popcorn, phone chargers, jeans, text messages, beer, and gourmet pizza. Guess what? People pay those markups and are happy to do it. I bet you bought or at least used one of those things this very day. I admit to three of them.
So, it’s not really that healthcare is special for its extreme gross and net margins. What’s special about it is that we view healthcare through an entirely different lens than the one we use to view discretionary consumer goods (fyi, speaking of lenses, glasses are also in the 500x markup category). Most people, though apparently not all of our government officials, view healthcare as an essential thing that we cannot live without (sometimes literally) when we are sick. Most people also believe that we have some sort of right to get healthcare when needed. That is the most basic difference between healthcare and consumer products that bear similar mark-ups in price. Most people do not think we have a right to pizza and beer. Of course, those people are wrong, but it is what most people would say if pushed to be honest (but not happy). Consumer goods are entirely discretionary. We can choose not to get the pizza (a sad decision, but a legitimate one), but we cannot readily choose not to get the chemotherapy when it is clearly needed.
Additionally, healthcare has a 3rd party payment model, meaning the purchase is often made by one party (payer/provider/employer) and used by another party (patient). This disconnect from the purchase decision has a big impact on how things are priced and charged. Now some would argue that pizza and beer also are, at least when you’re in college, also subject to a 3rd party payment model where the purchaser (parents) pay while the consumer (college kid) charges it to the parents without regard to cost. But even so, it’s a different animal and we go right back to direct payment almost immediately upon graduation, if not sooner. I suspect there are few of us that think phone chargers are discretionary and most probably believe that all mobile phone owners have a right to use electricity at any public place. I have seen fights to near death over outlets in conference rooms. It isn’t pretty. But it is still different.
Another critical difference, at least when it comes to pharmaceutical products and medical devices, is that the cost of inventing the product and bringing it to market is far more than is typical of pizza, beer, or jeans. It would be a pretty phenomenal pizza that cost $1 billion or even $500 million to bring to market. I can’t even imagine the awesomeness of the jeans that had that kind of R&D price tag – they would make me look skinny and tall.
And of course, another big difference in healthcare is that it’s much harder to shop around. I can find the cost of 8 different phone chargers, at least 3 different kinds of pizza and a myriad of different beers at any random airport. It’s not that the markups are unusual, it’s that the shopping experience is, back to the earlier topic of this blog.
But to say that healthcare is the ONLY place where manufacturers and service providers charge prices that have little to do with the cost is just incorrect. We encounter products and prices like this all day every day and we choose to live with or without. I think it’s really important to be precise in our arguments about healthcare costs because fallacious arguments lead to bad policy. Yes, bad policy can be created on its own, but why help by being inaccurate? Given that I was in Washington, DC for this panel, I was acutely aware that there were likely policy-makers in the audience and that fake news is all around us. Since not all of those making healthcare policy are steeped in healthcare experience, it is important that we help them with facts and clarity of thought if we are going to move the ball forward.
Sorry for the rant. I obviously need pizza and a beer.