THE BLOG
10/28/2014 05:46 pm ET Updated Dec 28, 2014

Price Transparency Won't Work

The latest fad in solutions for ailing healthcare is price transparency. Presumably, this is being done to restore economic power back to consumers, so that free market forces can control the upward spiral of spending on healthcare. Unfortunately, it won't work.

To reinstall free market forces into healthcare, consumers need three pieces of information (price is not one of them); one restoration of power; and unfettered competition among sellers. Price transparency is not a "good start."

Necessary datum #1: Cost-to-you
"Price transparency" drags out into the open a number, price or charge, that has no real meaning in healthcare. In other activities, the price is what the consumer pays to the seller. When you purchase a sweater with a tag reading $20, twenty dollars-the cost-to-you-is what you pay out of pocket to the seller. Not so in the third party payer system of U.S. healthcare.

In healthcare, no one gets paid price or charge. Providers and hospitals get paid whatever the federal government decides. For Medicare and Medicaid, the government is in direct control of payments. My typical charges for a cardiac catheterization in a baby were $4000-$7000. Medicaid paid me $387. Take it or leave it. Most insurance companies follow federal payment schedules. Thus, a doctor's or a hospital's prices or charges mean nothing. Payments are what Washington says they are.

Suppose the consumer only knows out-of-pocket cost. He or she will surely buy the cheapest. That is usually not the cheapest over time, and is rarely the best value. People who purchased the cheapest ACA insurance-Bronze Plan-eventually find to their dismay that they will have to pay 40% of any large hospital bill. The cheapest turns out to be the most expensive and totally unaffordable.

Necessary datum #2: Comparable Outcomes
In healthcare, payments are made for performance, not for outcomes. No other market works that way. In every other market, consumers and sellers are connected by exchange of money for goods and services ... but not really. Customers do not buy goods or services. Consumers buy solutions. They buy outcomes or results.

When you buy a hamburger, you purchase a solution for hunger. You know the outcome because burger-and-fries has always satisfied in the past. When you buy a car, you get your solution to weariness from walking fifteen miles to work every day. When you buy insurance, you are buying security from bankruptcy in the event of fire, flood, burglary, or cancer.

You spend your money buying the outcome you want...except in healthcare. There you buy "performance," not result. If you purchase a hip replacement, you don't just want the doctor to perform (operate.) You want to regain pain-free mobility. But the price quoted buys you the procedure, not the outcome. You may or may not get what you want.

To be a wise consumer, you need outcome data from various sellers. If you require a hip replacement, you want to see (a) cost-to-you, and (b) positive outcomes such as percent recovery of mobility comparing various hospitals and surgeons. It is just like shopping online for a car. You line up various makes and models across your computer screen. You choose and you spend.

Necessary datum #3: The "ME" factor
Health care is fundamentally different from all other commercial activities in one way. Each consumer/patient will experience his or her own, unique outcome from the services rendered or goods received. That is why medical outcomes are expressed as probabilities, not guarantees. As a consumer, you need to know YOUR probability, not some average.

If you are a 40-year old marathon runner and need a hip replacement, you do not care about surgeon's X's results with hip replacement in 75-year old diabetics who have arthritis and emphysema, and neither do they care about your likely outcome. You want to compare surgeon X's results with surgeon Y's in people just like you. That is what I call the "ME" factor: the risk and benefit probabilities that most closely relate to what you will experience.

Free market: You spend - Sellers compete
It is only through unrestricted interactions of buyers and sellers that a free market can: (a) balance supply with demand, thus precluding an "unsustainable [healthcare] spending curve;" and (b) offer the most and best at the lowest price to consumers.

The consumer can have all the information in the world, but without control of his/her own money, and without sellers competing for those dollars, the market will not work. One cannot have the advantages of free market forces if the market is not free.

At present, healthcare in the U.S. is not a free market. Consumers do not spend their own money and thus have no reason to economize. Healthcare providers do not compete, either on price or by results. The government, as the main payer of medical bills and the setter of payment schedules for all, has a strong incentive to spend more, not less. After all, it is paying itself, through expansion of its administrative machinery. For proof, look at how much the ACA expands the federal bureaucracy.

Anyone who thinks that market forces can rein in the out-of-control U.S. healthcare spending spiral, you are right, but beware! Consumers must have all the information noted above. Sellers must be allowed to compete. Consumers must control their own dollars. Then and only then will the U.S. healthcare market work for We The Patients, instead of aiding and abetting The Cancer In Healthcare.