Can Health Care Transparency Make a Difference?

There's been a lot of discussion of transparency in health care recently, e.g., a USA Today op-ed and a counterpoint by Paul Ginsburg. The appeal of transparency is obvious. As movingly documented by Steven Brill in Time, prices are high and often differ quite substantially, even across close by providers. However, we don't know the prices for the health care that we consume, and it's extremely difficult to find out what these things cost (e.g., this recent study in JAMA).

While the appeal of transparency is obvious, it's important to realize that buying health care is not like buying milk at the grocery store. A key factor is health insurance. Health insurance is very important -- people need to be insured against the catastrophic expenses that can occur with serious illness. Thus people with high health care expenses won't be exposed to most of those expenses (and shouldn't) and therefore will have no reason to respond to information about health care prices.

Further, the distribution of health care expenses among the population is very uneven. Fortunately severe illness is relatively rare. What that means is that most of us will have quite low health care expenses in a given year, while a very small number of people will unfortunately be very sick and have very high health care expenses.  The figure below illustrates this. It shows the distribution of health care spending in the US population for 2009 (source: data brief by the National Institute of Health Care Management). While this is a few years old, the distribution has remained essentially unchanged over a long period of time. The first thing to notice is that the vast majority of spending is accounted for by a small fraction of the population. The top 5 percent of spenders account for about half of all health care spending, and the top 50 percent account for almost 97 percent of spending. 

What this means is that most of the spending on health care in the US is accounted for by people with very high expenses. Further, many (but not all) of these people have expenses so high that they are well beyond the cost sharing features of any health insurance plan, even a high deductible plan that features extensive consumer cost sharing.

Using the query tool for the Medical Expenditure Panel Survey, I found the expenditure levels associated with various percentiles of the 2010 spending distribution. Individuals in the 90th percentile of the spending distribution, who account for almost two-thirds of all health spending, have spending levels of $9,512.76 and higher. These people are almost certainly going to be beyond the cost sharing limits of their health insurance plans. As a consequence, two-thirds of health care spending is unlikely to be responsive to transparency efforts.

Since these people are beyond the cost sharing features of their plans, they have no incentive to pay attention to the costs of care, either in total or cost differences across providers. In addition, people who are spending this much money on health care are unfortunately likely to be quite sick. The demand for care of people who are very ill tends not to be very responsive to prices.

Does this mean that there's no point to transparency efforts? No. Forty nine (.999...) percent of the spending is accounted for by people who spend (just under) $814.86 or less. For these people, cost sharing can make a difference -- large, but conventional, deductibles (e.g., $1,000, $500) would be relevant to many of these people. However, for transparency efforts to work, price information has to be presented to people in a way they can understand and use -- the total cost to them of obtaining care, as opposed to the individual components. Further, there have to be alternative providers. Many health care markets have become extremely consolidated. If there are no good alternatives, then transparency efforts will be of little practical use.

In addition, transparency with regard to the quality of care is both important and valuable to all, regardless of spending level. Providing accurate and informative measures of the quality of care is challenging, but a lot of progress has been made and there are ongoing efforts in this area.

Last, there's some concern that by making prices public transparency efforts will facilitate collusion by providers. If so, this could unintentionally make things worse by reducing rather than increasing competition and leading to higher, rather than lower, prices. There's evidence that this has happened in other industries (e.g., cement), however I don't think it's terribly likely in health care (although not impossible). Even with transparency efforts, health insurers will play a major role as buyers of health care. Insurers' ability to direct large numbers of patients means that providers have large incentives to make deals to obtain those patients. Creating and maintaining collusion becomes difficult under these circumstances.

In sum, trying to achieve greater transparency in health care is a worthwhile effort, but it has to involve usable measures of both price and quality. Further, it's unrealistic to expect consumer shopping alone, and hence transparency efforts, to drive the health care market. Transparency is but one ingredient --- much more is required.