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Facilitate seller collusion. Third, transparent prices might facilitate collusion among sellers and raise prices.7 George Stigler demonstrated that secret discounts can drive down prices paid in many markets.8 In contrast, price transparency can increase prices by making cartels easier to enforce.9

Even consumers who use price comparison tools may select more expensive providers because they think higher health care prices imply higher quality, even if that’s often not the case. Yet only half of price transparency tools offered by health plans include information about quality. One study found that including easy-to-understand quality information alongside prices helped patients select higher-value care.

But transparency is not universally good. When it goes too far, it can actually harm competition and consumers. Some types of information are not particularly useful to consumers, but are of great interest to competitors. We are especially concerned when information disclosures allow competitors to figure out what their rivals are charging, which dampens each competitor’s incentive to offer a low price, or increases the likelihood that they can coordinate on higher prices. Too much transparency can harm competition in any industry, including health care. Typically, health care providers (hospitals, outpatient facilities, physician groups, or solo practitioners) compete against each other to be included on a health plan’s list of preferred providers. When networks are selective, providers are more likely to bid aggressively, offering lower prices to ensure their inclusion in the network. But when providers know who the other bidders are and what they have bid in the past, they may bid less aggressively, leading to higher overall prices.

It Starts with Perception Even though there is no evidence that higher prices translate into higher quality, many consumers still believe this to be true. In a survey published by Health Affairs, a journal of health policy research, most of the people who had compared pricing believed price and quality were associated. Thus, the challenge for healthcare providers is to train consumers to understand pricing and how it relates to quality, and to educate them on how best to compare the medical services being offered. Price transparency was designed to give consumers more control of their spending and, by extension, lower overall healthcare spending. The Harvard Medical School study revealed a need for healthcare providers to find better ways to engage consumers to research medical costs. “We’re trying to change a culture here,” said Barbara Anthony, a senior fellow in healthcare at the Pioneer Institute, a non-profit think tank, in an article by the Boston Globe . “You don’t do that by saying, ‘Here’s a site, go use it.’” According to Anthony, insurers need to “double down their efforts to motivate consumers to choose high-value, low-priced services.”

Advocates for price transparency would have us believe that we, as “consumers,” should consider our health care a product to be shopped for, like a pair of shoes. But mainly we are “patients,” with varied, often time-sensitive health-care needs. There is an important distinction between presenting the information—and choices—to patients and asking consumers to make complicated decisions about their health care based on that information. The health-care system is complex: Less than 15% of Americans can correctly answer questions about basic components of traditional health insurance. Choosing health-care services and providers may be even more complicated, especially for the half of all American adults that have at least one chronic condition. More important, the public seems to not want to shop for health care. In studies, fewer than 5% of respondents used health-care shopping tools when available. This lack of use has persisted over time, even as tools have improved. When it comes to their health care, people generally don't want more choices; rather, they want to know that they are getting good care and to feel confident in their range of choices. Most Americans prefer to choose their providers based on recommendations from their friends or their family, rather than on price. People also lack a sufficient incentive to engage in price shopping. A single, well-informed and motivated consumer who needs an expensive elective procedure may be able to spend time researching and save money by shopping for the lowest price possible, but this scenario is the exception rather than the norm. Available evidence is not cause for optimism about how much money can be saved with more choices and publicly available prices. While large health-care payers may save some money from consumer shopping, the average person will likely see little, if any, savings. And what savings are possible will largely be determined by insurance-benefit design. No consumers could shop their way to a lower copayment, or out of making a deductible payment. Factor in the associated opportunity costs, and the average American won't save money. Finally, many Americans don't live in places with lots of providers and health-care choices. Transparency efforts centered on consumer shopping rest on the assumption that people have multiple options to choose from. Some say people can avoid complexity entirely and take simple steps to save a lot of money—such as asking a doctor for generic drugs and paying cash for procedures, which can carry a lower price. But health-care prices are much more complex than those scenarios make them appear. Prices vary by procedure, provider, facility and negotiated insurance rate. As for asking a doctor how to save on costs, we cannot expect doctors to be experts on everything. No health-care provider could memorize the price of every service or drug, nor do most have access to a tool that provides this information. For most patients, their insurance determines their costs, and providers don't generally have access to all of the necessary information about a patient’s insurance to give the advice people need about costs. Even the seemingly simple switch from a brand prescription to a generic version might be complex. Some drugs don't have generic versions, some generics are as expensive as the brand versions, and some may not be covered—or be well-covered—by a specific insurance plan. The estimated price and quality of a health-care service or provider should be available to anyone who wants it. But we should not expect people to make complex decisions about their health care using those abstract measures. Smart shopping might work for some people. But for the vast majority of consumers, it isn’t even a choice.

Price Transparency Price transparency promotes the notion that health care purchasers, whether individuals or employers, ought to be able to find and compare the price of a given service between hospitals. Price transparency has broad political and intuitive appeal by attempting to lift the veil of secrecy that shrouds hospital prices.91 So the argument goes, consumers need access to accurate, understandable, and comparable information regarding hospital price and quality for market forces to discipline prices and improve quality.92 Armed with such information, consumers will shop for health care and select the lower cost, higher quality providers and pressure the others to bring their prices and quality levels in line.93 Health care price transparency initiatives are being pursued at both the state and federal levels. A majority of states have passed some form of legislation to improve hospital price transparency.94 According to 2014 data from the Catalyst for Payment Reform, thirty-five states only require that hospitals post or make available their chargemaster data;95 fifteen states require the reporting of the prices hospitals receive from private payers, whether actual claims data or average amounts paid (several of which also require reporting of chargemaster data);96 and two states (New Hampshire and Massachusetts) make available more detailed, plan-specific price information.97 At the federal level, the Department of Health and Human Services initiated its price transparency efforts by releasing hospital charge data on May 8, 2013, updated annually, and making available $87 million in grants to states to create data centers to collect and analyze health care pricing information for consumers.98 For transparency efforts, the type of data matters. Publishing chargemaster prices does little to accomplish price transparency.99 Chargemasters are too long and incomprehensible to be useful and do not reflect the prices that the majority of individuals with insurance would pay.100 Average prices negotiated by payers gives a better sense of the relative price differences between hospitals actually paid by health plans in the aggregate, but it does not give an individual a sense of how much she might pay with her particular health plan or the range in prices negotiated by different health plans. Plan-specific data or estimates of a patient’s expected out-of-pocket costs are more helpful for consumers to get a sense of what their actual costs might be, but still may fall short if not accompanied by robust quality data, which is much more difficult to measure.101 Most consumers do not want cheaper health care if it is of poorer quality, and without good quality data, patients often assume (incorrectly) that price is a proxy for quality.102 It is far from clear whether consumers will use available price and quality data information to make their treatment choices. Generally, the more complex the information, the less consumers utilize it. For example, price information ought to be provided about the whole bundle of services associated with an episode of care rather than a disaggregated list of coded, a la carte items, as hospital services are often priced.103 Earlier efforts at health plan price transparency using easy-to-read symbols ($ vs. $$$) were abandoned due to little consumer use and pressure from low-price providers to increase prices.104 If the patient is shielded from price differences because she has exceeded her deductible, then she has little incentive to choose a hospital based on price information. Price transparency, though politically popular, has a couple of major pitfalls. First, disclosure of prices does not solve the market failures created by noncompetitive hospital markets. Despite having among the most robust price transparency laws in the country, New Hampshire has not seen a measurable reduction in hospital prices or price variation.105 There, price transparency has not been able to overcome the tidal force of a noncompetitive hospital market.106 Where hospitals do not compete on price, transparency does little to constrain prices. Large, “must-have” hospitals can still command high prices without losing patient volume where patients and payers have few alternatives. The second pitfall is that widespread price transparency may lead paradoxically to higher rather than lower hospital prices.107 In particular, revelation of the prices that commercial health plans actually pay hospitalsthe data most helpful for patientscould create a perverse incentive for hospitals to raise their prices.108 To illustrate, imagine Hospital A offers a significant discount to Insurer 1 and a smaller discount to Insurer 2. If forced to reveal its prices, Hospital A might be unwilling to offer the deeper discount to Insurer 1, knowing that Insurer 2 will likely pressure it to offer the same discount.109 This tendency is exacerbated where the hospitals have greater bargaining power than the health plans, which is true in most provider markets.110 In these markets, a lower-priced Hospital B may raise its prices once it sees what Hospital A is charging because the health plans lack the power to keep Hospital B’s prices in check.111 Especially in less competitive markets, price transparency might create a magnetic ceiling, where all hospitals converge on higher prices rather than compete to lower them.112 Hence, prices might become more uniform, but uniformly higher. 2. Consumer-Directed Health Care Consumer-directed health care (“CDHC”) is another market-based approach that builds off of price transparency. The typical mechanism to encourage CDHC is through a high deductible health plan coupled with a tax-advantaged health savings account (“HSA”).113 By giving patients some “skin in the game,” CDHC sensitizes patients to health care costs, which leads the patient to exert market pressure on providers to move toward more uniform prices.114 CDHC attempts to address the moral hazard problem of health insurance by forcing the insured individual to bear the initial cost of her health care expenditure, which will cause her to ration her utilization of services.115 In 2015, a plan is considered a high deductible plan if the deductible is at least $1300 for an individual and $2600 for a family.116 Deductibles vary widely, and over a third of family deductibles exceed $5000. 117 The use of high deductible plans is widespread and steadily increasing. In a 2014 survey of large employers, eighty-one percent reported offering a CHDC plan to employees as an option, and thirty-two percent reported offering a CDHC plan as the only option, up from twenty-five percent the previous year.118 As of 2014, twenty percent of covered employees were enrolled in a CDHC plan, compared with just four percent in 2006. 119 On the health insurance exchanges, high deductible health plans comprise approximately sixty percent to eighty percent of plans.120 In the form of high deductible health plans, CDHC has a limited impact on hospital prices because most hospital services will be so expensive that a patient will “blow through” her deductible, and thus be insensitive to price variations above the deductible.121 Carl Schneider and Mark Hall identified several barriers to the goals of CDHC that prevent patients from engaging in consumer behaviors.122 Patients may lack choices among plans and providers.123 Moreover, despite efforts to promote transparency, patients still lack necessary information about price and quality.124 If they lack quality data, patients are likely to opt for the higher-priced hospitals because of the mistaken perception that price is a proxy for quality.125 Even with price information, patients are often unable to bargain with the hospital, either because they will not or cannot. Patients place themselves in their doctor’s hands, following whatever advice the doctor prescribes, including at which hospital to have a procedure performed.126 Acutely sick patients are in a particularly vulnerable position, unable to negotiate on prices for urgently needed care on the way to the emergency room or at the bedside of a gravely ill family member.127 Empirical research has cast doubt on patients’ financial literacy and ability to process the complex information necessary to make health care choices.128 Studies have demonstrated that higher cost-sharing has a disproportionate, negative impact on the poor and those with chronic illness, highlighting questions of distributive justice.129 Greater costsharing causes people to cut back not just on unnecessary care, but needed care as well.130 Privately insured individuals with incomes below 200 percent of poverty are significantly more likely to have deductibles that exceed five percent of their incomes and are more likely to delay needed care as a result.131 When individuals defer cost-saving preventive and outpatient care, they may later consume more expensive ER and hospital services for poorly controlled illness.132 CDHC may contribute to adverse selection, with healthier (and, evidence shows, wealthier and more educated) individuals selecting a CDHC plan and sicker people opting for plans with lower deductibles.133 Meredith Rosenthal and Norman Daniels explain that among employer-sponsored high-deductible health plans with HSAs, the employer contribution to the HSA tends to redistribute wealth from the unhealthy to the healthy.134 3. Reference Pricing Like high deductibles, reference pricing also puts the individual’s own dollars at stake, but reverses who pays the first dollar of coverage.135 Instead of making the patient pay for the first few thousand dollars of care, health plans agree to pay the price for a given service charged by a low priced provider, and the individual is free to seek care from a range of other providers but is responsible for the difference between that provider’s higher price and the reference price.136 Health economist Austin Frakt illustrates the difference between deductibles and reference pricing by analogizing deductibles to being told that insurance will pay for any Toyota you want if you pay the first $500. 137 You would likely pick the most expensive car, such as an $80,000 Land Cruiser. With reference pricing, you are told that insurance will cover the first $15,000 of any Toyota, but you have to pay the excess price.138 In this example, reference pricing will clearly lead to more value and price-sensitive shopping by the consumer who may opt for a Toyota Yaris instead of a Land Cruiser. Proponents say reference pricing makes patients more sensitive to the differences in price between hospitals than CDHC, where most hospital visits will exceed the patient’s deductible.139 The increased price sensitivity from reference pricing creates market pressure for high-priced providers to lower their prices closer to the reference price or else lose business. One advantage of reference pricing over CDHC is that it relies on the health plan to gather and report the providers’ price information rather than the individual, who may not have sufficient data or wherewithal to evaluate the different options.140 Health insurers favor reference pricing because it caps their financial responsibility for a particular service.141 There is early evidence that reference pricing can nudge patients toward more cost-effective choices and cause high-priced providers to lower prices closer to reference price levels.142 Payers are starting to use reference pricing for hospital or outpatient services, but generally only for certain standardized procedures where there is wide price variation but little variation in quality, such as colonoscopy or hip replacement.143 In addition, the service ought to be “shoppable,” that is, a nonurgent service that allows the patient time to shop around, with readily available information regarding price and quality, and for which there are several choices of provider.144 Reference pricing also has limitations. Most health care spending is for services that are not shoppable and are therefore ill-suited for reference pricing.145 To make up profits that it loses on reference-priced services, hospitals may simply raise prices for non-reference priced services.146 One study suggests reference pricing may have a limited impact on total spending because it tends to affect prices only at the highest end of the price distribution.147 Some of the barriers to CDHC, such as lack of choices, lack of available data, reliance on physician recommendations, and impaired ability to make choices based on information given, could similarly afflict reference pricing initiatives. Reference pricing comes with a thorny technical problem of how to set the reference price. Set too high, and the cost-savings will be lost, with lower-priced providers raising their prices up to the reference price.148 Set too low, and the providers may not be able to cover the cost of providing the service, leading providers to drop the service, to cost-shift to more remunerative services, or to seek market power as a method of resisting reference pricing.149 4. Tiering and Narrow Networks Another market approach relies upon health insurance plans to engage in active purchasing in the form of narrow or tiered networks to pressure hospitals and other providers to restrain prices.150 In a narrow network, payers selectively contract with a limited group of providers who will agree to lower prices in exchange for patient volume.151 Under a tiering strategy, the health plan sorts contracted providers or service lines into tiers based on price and steers patients to the lower priced providers (the preferred tier) using lower cost-sharing incentives.152 In their roles curating the narrow or tiered network, the health plan is the one wielding the consumer power on behalf of the patient. Neither approach is new. Narrow networks and tiering were both strategies widespread during the rise of managed care and HMOs in the 1980s and 1990s.153 Consumers and employers vociferously resisted choice-limiting networks then, and it is unclear whether they will accept similarly narrowed choices today.154 Nevertheless, tiering and narrow networks are gaining renewed attention as solutions to discipline health care prices.155 The ACA has accelerated the revival of narrow networks because of its limits on health plans’ ability to engage in underwriting or to narrow benefits to keep premiums down.156 Thus, one of the remaining strategies for health plans to keep their prices in check is to offer narrow networks of providers.157 Narrow networks and tiering strategies rely upon the existence of sufficient competition among hospitals, which is lacking in many markets.158 Without competition, powerful providers use their market power to require anti-tiering provisions in their contracts with health plans, or else require that the plan always include the high-priced hospital in the most preferred tier.159 To address this issue, Massachusetts passed a law in 2010 prohibiting providers from using anti-tiering provisions in their plan contracts.160 Even with such a law, health plans may have no choice but to include high priced hospitals in their network or in the best tier because they have unique services, such as a Level I trauma facility or a Neonatal Intensive Care Unit (“NICU”), that lower priced hospitals lack.161 In most places, health plans will be unable to exclude “musthave” providers from the highest tier due to their market power.162 5. Market Approaches Measured Against Health Care Market Failures Market solutions to the hospital pricing problem are intuitively pleasingthey attempt to restore market forces to a failed market. Price transparency and reference pricing take aim at correcting information asymmetry and helping patients become informed consumers. It may be technically difficult to implement price transparency or reference pricing, but it is plausible that well-designed programs can prompt effective comparison shopping by patients.163 The cost-sharing imposed on individuals by CDHC, especially in the form of reference pricing, attempts to address moral hazard and sensitizes patients to the prices of their care. The biggest problem with market approaches to discipline hospital prices is that they fundamentally will not work in concentrated markets where there is little choice or competition between providers.164 And as discussed above, concentrated hospital markets are the norm, not the exception.165 Where there is no choice, patients cannot shop around or substitute the lower cost or higher value provider. Where hospital-sellers have disproportionate market power, purchasers (health plans or patients) can exert little discipline on prices through transparency, CDHC, reference pricing, or active purchasing. Moreover, the stressful nature of most hospital encounters makes it unlikely for transparency plus CDHC to overcome patients’ substantial cognitive and behavioral barriers to rational consumer behavior.166 Even when equipped with sufficient price and quality information, when it comes to serious medical decisions, patients generally defer to their physicians.167 Buying health care is thus unlike shopping for a car, unless one imagines buying a car while being chased by a gunman, when there are only a couple unfamiliar models to choose from, relying upon the guidance of a trusted car salesman who tells you which car is best for your situation and also serves as your driver as you try to get away. Although market approaches attempt to address information asymmetry and moral hazard, the principal-agent problems persist. Health plans and/or providers are in the best position to gather, report, and translate price and quality information for patients, and thus market approaches build upon the existing web of principal-agent relationships.168 Finally, market solutions like price transparency or reference pricing are inherently limited because much of health care is not “shoppable.”169 Acute or urgent health care does not lend itself to comparison or price shopping, and patients end up seeking care at the nearest hospital, the one to which the ambulance delivers them, or the one to which they are referred to by their physician. Market solutions are premised on improving informational deficits and sensitizing consumers to their health care costs to bring competitive forces to bear on health care prices. As an overall strategy to discipline health care prices, however, market solutions are fundamentally limited because they fail to address the underlying lack of competition in hospital markets and barriers to patient consumer behavior.17

As a response to the hidden variability in health care prices, an increasing number of states have passed price transparency legislation. Federal legislators have even introduced several bills into Congress to make health care prices more transparent. Expect more such bills to follow. But will health care price transparency help reduce costs? Seems it would. But health-care can be a strange and unique sect of economics. Could price transparency backfire and cause spending to increase? In the traditional consumer marketplace, price transparency is a powerful force in incentivizing producers to raise the quality and lower the price of their goods. When a consumer decides to purchase a flatscreen television, for example, she will be hesitant to buy an expensive model when a less expensive alternative exists that is just as good. As a consequence of such consumer scrutiny, the average price for a 32 inch LCD TV dropped from $1,566 in 2005 to under $400 today, at the same time as the quality of those products increased dramatically. Expensive pain pills reduce pain better than the same pills listed at a lower price. The same kind of consumer pressure rarely exerts a similar influence on the cost and quality of health-care goods. For starters, most patients have little inclination, or motivation, to shop for health-care bargains. Insurance companies pick up most of the tab for patients' health-care. A patient who pays a $150 co-pay for an MRI (like I do with my insurance) won't care whether the clinic she goes to charges the insurance company $400 or $800 for that MRI. The MRI is still going to cost the patient $150. Even patients responsible for 20 percent of the tab (a phenomenon called co-insurance) face a maximum bill of only $160 in this circumstance. That is not an inconsequential amount of money, but it is still not enough money to prompt most patients to shop around for less expensive alternatives, especially when most consumers don't realize that the price of such for services often varies significantly, with little discernible difference in quality. To make matters worse, patients often don't shop for health care in the kind of rationally defensible way that economic theory expects them to. According to neoclassical economics, when making purchasing decisions consumers independently weigh the costs of services from the quality of those same services. If toaster A is more expensive than toaster B, the consumer won't buy A unless it is better than B in some way -- unless it is more durable or has better features -- and unless these improved features are worth the extra money. Sometimes, however, cost and quality are not perceived by consumers as being independent attributes. Instead, people assume the cost of a good or service tells them something about its quality. For instance, blind taste tests have shown that consumers rate the flavor of a $100 bottle of wine as being superior to that of a $10 bottle of wine, even when researchers have given people the exact same wines to drink. Other studies show that expensive pain pills reduce pain better than the same pills listed at a lower price. Price, then, leads to a placebo effect. Such a placebo effect is no major concern in the context of wine tasting and pain pills (even if it suggests that consumers could save themselves some money if they didn't hold this strange belief that higher cost means higher quality). But suppose your doctor asks you to get a spinal MRI to evaluate the cause of your back pain, and you decide to shop around for prices before getting the test. Would greater price transparency cause you to choose an MRI provider more rationally? Or would you instead mistakenly assume that higher price means higher quality? There is reason to worry that price transparency won't lead consumers to make savvy decisions. It is too difficult for people to know which health-care provider offers the highest quality care. If patients are not going to make savvy use of price information to choose higher quality, lower cost health-care, some health-care providers, like doctors and hospitals, will probably respond to price transparency by raising their prices. Imagine you direct an MRI center in Massachusetts, and the state government requires you and your competitors to post prices for your services. You consequently find out that the MRI center around the corner from you charges $300 more than you do for their spinal MRIs, and that this increased price hasn't hurt their business. Imagine, also, that you are convinced that your competitors don't offer higher quality MRI scans than you do -- your MRI machines are just as new and shiny as theirs; your radiologists and technicians are just as well trained. In that case, if patients are not going to be price-sensitive, you are going to raise your prices to match your competitor's. Otherwise you are just leaving money on the table. Consider what happened in Denmark, according to an article published in the New England Journal of Medicine in 2011: In response to concerns that the highly concentrated suppliers of Ready-Mix Concrete were charging widely varying prices to different buyers, Danish antitrust authorities began publishing information on actual invoice prices on a quarterly basis, beginning in October 1993. The result was an increase in average prices of 15-20 percent within a year, as the lower prices in the market rose and the higher prices edged up. Or consider what happened in New Hampshire after the state began releasing price information on things like MRIs, as part of its health care price transparency efforts. In the twelve months following that bill, prices hadn't budged at all. This probably happened because there was not enough local competition for the price information to change patient behavior. Price transparency may also cause prices to rise by reducing health-care providers' willingness to bargain with insurance companies. Currently, the price any given hospital charges for, say, a hip replacement will vary depending on which insurance company is paying for the service. A given hospital might have negotiated a higher fee from Aetna than from Blue Cross. Now suppose that legislation required hospitals to make all these negotiated rates public. Do you think Aetna is going to stand by and pay more money for a hip replacement than Blue Cross? Of course not. It's going to demand the same deal. If price transparency made such negotiations public, then no hospital in its right mind would offer a discount to one insurance company unless it was willing to offer that discount to everyone. Price transparency could be a huge impediment to price negotiations. I witnessed this phenomenon second-hand in the early 90s, when my wife was the director of managed care at Temple University (her job was to negotiate with managed care companies on Temple's behalf). During that time, two managed care companies in Philadelphia merged, and quickly discovered that they had negotiated different rates from Temple for different services. The merged company came back to Temple and demanded that the new price of care match whichever of the two companies had previously negotiated the lower rate for any given service.

It’s a new year, and you know what that means: Your health insurance deductible just reset. Which for many of us means looking forward to paying a significant amount out of pocket for health care until we’ve spent enough for our insurance payments to kick in. According to the Henry J. Kaiser Family Foundation, in 2016, the average deductible for an American with employer-based insurance was $1,221. People covered through the Affordable Care Act exchange will likely pay more than that. Close to 90 percent of those enrolled will select a plan with an individual deductible of at least $1,300, or $2,600 for a family. Can’t afford it? Feel squeezed? No worries. Your employer or insurer probably offers an online price-comparison information tool for you to find the best deal on everything from blood work to birth control. “Be a smart health care consumer,” reads the landing page for my insurance company’s price-comparison site. “Use our tools and information to help you save money.” But will it? Less than five years ago, online price-transparency tools, with which patients can compare the costs of nonemergency procedures in advance of booking them, were heralded as miracle cures that would finally get health care costs under control. No longer would the cost of medical procedures be a mystery. It made sense. Online, we can compare prices for books and hotel rooms and TV sets. Why not doctors? “Life inside the fortress will increasingly be disrupted,” noted health care economist Uwe Reinhardt said of the concept in a 2013 Journal of the American Medical Association article. The rush was on. A 2015 survey by human resources consultancy Mercer found that more than three-quarters of U.S. employers said they offer employees access to such tools. Numerous states jumped into the fray, passing legislation that mandated some form of transparent pricing.* Yet this past spring, JAMA re-emerged with a less rosy diagnosis. In a study of how employees at two corporations actually made use of the health care cost-measurement tools made available to them, researchers at Harvard Medical School discovered that not only did few use them, their spending actually increased after the tools designed to encourage comparison-shopping were introduced. “There was no evidence that health spending declined in the settings where transparency tools were offered,” a JAMA editorial noted. What went wrong? Comparison tools work by allowing people seeking nonemergency health care like hip and knee replacements, MRIs, physicals, and lab work—and even more mundane services like earwax removal—to compare the cost of the care at different practitioners and determine what their co-payment will likely total based on their insurance and whether they’ve met their deductible. That should be easy enough. But do you really pick your doctors the way you bargain shop for electronics on the web? Of course not. A 2008 survey by the (now-defunct) Center for Studying Health System Change found that about half of us turned to friends and relatives for recommendations when seeking a new primary care doctor. And when it comes to specialists, almost everyone relied on the advice of other medical professionals, with less than 10 percent turning to online information to make a choice. Things haven’t changed much since then. A 2014 poll from the Associated Press and the NORC Center for Public Affairs Research found barely 1 in 4 identifying excellent ratings on sites like Yelp or Healthgrades.com as a decisive factor in deciding on a particular doctor. Moreover, one man’s frivolity is another woman’s necessity. With health care, many of us are willing to pay extra for everything from convenience to communication skills. When the AP–NORC poll asked people what traits made for a high-quality doctor, “affordable” and “accepts my insurance” were the two least important qualities, outranked by more than a dozen other traits including attentiveness, office environment, and bedside manner. Yet another survey, this one by Healthgrades, found many patients prioritizing location over co-pay and quality ratings when they needed a hospital. And when consumers do make cost-conscious decisions, their ability to make good ones is limited. A recent study released by the National Bureau of Economic Research makes the point. The researchers looked at a company that moved all its employees into a high-deductible health insurance plan. Yes, the workers spent about 15 percent less on health care. Unfortunately, they appeared to cut their medical consumption willy-nilly, making little distinction between needed treatments and ones they could forgo. They didn’t actually spend less on the services they sought out. “We show that consumers did not price-shop after the switch—that is, they did not move toward cheaper providers, for example, when they were going to undergo a specific procedure,” wrote Benjamin Handel, one of the authors of the study. As for the JAMA paper on health care comparison tools, the researchers speculated that if consumers did attempt to price services, it’s quite possible they ended up paying more money. That’s actually not that surprising. Behavioral finance studies repeatedly find we use cost as a measure of quality. The more expensive an item, the better we think it is. Yet even if consumers did use comparison tools as they were supposed to, it’s questionable how much they could actually impact prices. The medical system in the United States is a complex beast. The recipients of the services, even if they are the best shoppers around, have little actual control on the overall costs. For example, the Health Care Cost Institute determined the average knee replacements cost more almost $17,000 more in Palm Bay, Florida, than in Miami, which is 180 miles away. But few consumers, even if they do the research, are likely to sign up for a surgery that far from their home. How will they get there? Who will pay transport and house their families? What happens if there’s a complication after they return home? That’s not even the big picture, because these tools aren’t actually taking on the American medical health care system itself. They’re simply offering customers some room to maneuver within their insurer’s fortress, to borrow Reinhardt’s phrase. When many of us use an insurer’s price-comparison tool, we’re receiving the prices the medical providers have agreed to charge people using that company. “A hospital can charge one person $500 for a cholesterol test and $10 for another,” says Steven Weissman, a former health care executive turned industry critic. “The problem with health care transparency tools is they do nothing to make health care providers compete the way other businesses compete.” And how much does it really matter? It’s not, after all, the nonemergency MRIs and lab bills that are breaking the bank. Less than half of all medical services can even be priced in advance, according to the Health Care Cost Institute. Hip and knee replacements, which are an example frequently cited by price-transparency promoters, are a mere fraction of our annual tab. And getting an advance estimate for everything from emergency-room visits to strep tests at the doctor’s office is all but impossible—if an ill patient is even capable of that. In many situations, the power remains with the providers. Pharmaceutical giants set the prices of their drugs. As long as the law permits a hospital that chooses to be in network with a particular insurer to service patients with out-of-network providers, consumers will remain at risk of receiving a surprise medical bill if they need to visit an emergency room. Advertisement Yet cheerleaders remain undeterred. Dr. Adam Bernstein, the chief medical officer of Rally Health, speculated that the problem the 2016 JAMA study revealed is that consumers need a “financial reward” in return for using the online price-comparison site, such as making the insured pay a greater share of the bill if they choose a provider charging more than a pre-determined amount for a particular medical service. Others say that as tools are able to include more information about pricing from providers, more people will use them. “Transparency hasn’t even started,” Dr. Giovanni Collela, a founder of Castlight Health, a publicly traded company that markets yet another online price guide, told the New York Times last year. Supporters say they hope that over time patients can be coached into using the tools more often. Maybe. Maybe not. I’m all for transparent pricing of medical services, but I suspect that even at their most successful, price tools will only make a marginal difference in what we pay the doctor. Once again, we’re seeking an individual solution to an economic and political problem that our politicians not only don’t have the will to solve themselves, but which they might actively make worse by repealing the Affordable Care Act.

Many current proposals to increase the value of care delivered in the U.S. health care system focus on improved coordination — and with good reason. Badly coordinated care, duplicated efforts, bungled handoffs, and failures to follow up result in too much care for some patients, too little care for others, and the wrong care for many. A host of current reform efforts aim to reduce these inefficiencies in both public and private markets. These efforts range from penalizing hospitals with higher-than-expected readmission rates, to rewarding primary care providers when patients receive higher-value care, to providing incentives for the adoption of electronic health records. Accountable care organizations (ACOs) and bundled payments are designed to create monetary incentives for coordinated care. The hope is that coordination will improve value by ensuring that the right care is provided in the right place at the right time. These laudable efforts, however, may unintentionally be at odds with another strategy for improving value: promoting competition in health care markets. In general, less competition means higher prices; one well-publicized symptom of the lack of competition in U.S. health care is providers' ability to charge different prices for the same service.1 Competition may drive higher quality, particularly when prices are constrained.2 The benefits of competition in private markets may even spill over to higher quality in Medicare, for which the Centers for Medicare and Medicaid Services (CMS) sets prices.2 A number of policy interventions, such as quality-reporting and price-transparency initiatives, are based on the idea that better information can promote competition and lead to greater value, and these initiatives have the potential to be very effective when patients have a choice of providers. Efforts to promote integrated, coordinated care, however, can generate incentives for provider consolidation that may reduce competition — witness, for instance, the antitrust concerns surrounding the implementation of the ACO initiative.3 Consolidation may take the form of vertical integration, such as a hospital's acquisition of physician groups, which has ambiguous consequences for competition, or of horizontal integration, such as the merging of two hospitals, which nearly always reduces competition.2 Consolidation is most likely to raise prices when providers of similar, rather than complementary, services merge — which is why hospital mergers are closely monitored by the Federal Trade Commission (FTC). There are subtler forms of anticompetitive behavior as well. Bundled payments, a darling of procoordination delivery-system reformers, can spark antitrust concerns, as they have done most famously in the case of computer software. The problem arises because bundling offers providers who have market power in one product domain (such as tertiary hospital care) an opportunity to dampen competition in other product domains (such as primary care) by requiring insurers to contract with them for both products in order to receive discounts.4 There is thus often — though not always — a trade-off between coordination and competition. Well-integrated provider networks may promote coordinated care that improves the allocation of health care resources, but they are likely to undermine competitive pressures to keep prices down while maintaining high quality. Coordinated systems may thus deliver the right care to the right patient at the right time, but at the wrong price. Competitive markets may do a better job of keeping prices low, but with the well-documented drawbacks of fragmentation. Some policies, such as the use of electronic health records, can in theory promote both competition and coordination, but only if they are implemented well — an interoperable health information technology (IT) environment, for example, should promote both, but health IT without interoperability may simply lock patients in to their current providers or provider networks by making it difficult or costly to move their records, reducing competition. The opportunities for a win–win are limited. The current suite of policies for addressing the ills of the health care system does not embody a unified approach to the roles of coordination and competition (see table Key Current Policies and Their Potential Effects on Health Care Coordination and the Competitive Environment.). In part, this lack of coherence reflects the fact that our insurance “system” is really several different systems, including moderately competitive private insurance markets for the nonelderly, nondisabled population and a single government payer, Medicare, for the elderly and disabled that largely pays providers set prices on a fee-for-service basis. These two payers currently pursue different approaches to reform. The most recent round of Medicare reform initiatives focuses on coordination, with ACOs as the prime example. In fact, the FTC has signaled that it will weigh the benefits of integration in improving quality against the potential harms of reduced competition.5 For the privately insured sector, the current focus is on enhancing competition through price transparency and “skin in the game” for consumers.

Health care for every citizen is just as essential, and making it a right would make it a public responsibility subject to public accountability, while largely being provided by the private sector, but the country has not yet committed to ensuring that all of its citizens have health care coverage. Nor does it appear that this is on the horizon. Unlike many other goods and services, laws of supply and demand do not function well with health care.7 Many proponents of repeal and replace often view health care as a personal responsibility and/or market commodity rather than as a human service and contend that reform should be based on utilizing the discipline and inherent efficiencies of a market economy approach. Markets can be effective and efficient in allocating resources based on ability to pay but are not intended to be equitable or fair. Markets are inherently unfair. That is what they are designed to do and do accomplish, with health care being a perfect example. Markets very efficiently determine who drives a Porsche, Toyota, or the cheapest car, the Nissan Vespa; who takes the bus; who rides a bike or walks but function less well in meeting basic human needs. With respect to heath care, markets also efficiently and effectively decide who does or does not get health care, who suffers illness or disability, who goes bankrupt, and, in many cases, ultimately who lives or dies. Despite recent reform efforts, U.S. health care continues to be primarily allocated by an ability to pay and not by need, with a “wallet biopsy” being the most common procedure, where the first question asked of us in seeking care is “what is your insurance?” What have been the results? Results of reform market-based initiatives have been less than impressive. Despite decades of attempts, costs continue to rise while consumer choice and access to provider networks decline. When compared with other industrial nations, in terms of access, cost, and health statistics, the United States is an outlier, and not in a favorable direction. We have the least access and by far the highest costs in the world, although we do not receive more physician services or hospital days annually.8,9 Nor are our health statistics anything to be proud of. Our health statistics, such as infant mortality or longevity, which were among the best a half century ago, are now among the lowest of industrialized countries.10 If the United States were in the Health Olympics we would be eliminated in the early heats—we would not get to the finals in any event much less get to medal podium.11 Said another way, in terms of health statistics, over the past several decades we have been “lapped” by many other countries.

Yet one of the greatest advantages of a single-payer system — its relatively low administrative costs — has been thrown into sharp relief by problems registering with the new health exchanges. Andwhile Republicans despise the Affordable Care Act despite its conformity with many of their earlier proposals, their proposed changes (other than simple rollback) look complicated, kludgy and costly to administer. The malfunctioning website has magnified problems inherent in coordinating enrollment across many different companies in many different exchanges in cooperation with many different government agencies. The harmonization challenges are orders of magnitude greater than those faced by a single company or a single state, making streamlining difficult. Improved software can do only so much. In theory, competition and choice should increase efficiency. In practice, health insurance companies are able to take advantage of the complexity and uncertainty surrounding health care choices to make comparison shopping very difficult. Lack of clear information about the prices of medical procedures, combined with a proliferation of insurance options whose potential benefits will be strongly affected by unpredictable events (such as being involved in an automobile accident or developing cancer), put consumers in a weak position. The process of negotiating relationships with new health care providers because old ones are “out of network” is physically and emotionally exhausting. Insurance companies benefit from promoting policies that are difficult to understand and make consumers fearful of any change in their coverage. That fear and aversion has spilled over into the transactions required for many people to benefit from the Affordable Care Act.

Conservatives have long held that U. S. health care should be based on the “free market,” that the role of government should be minimal, and that a deregulated marketplace can resolve issues of access, costs, affordability, and quality of care. (1) We have been told this so often that these unproven claims have become a meme: a self-replicating myth or slogan that by constant repetition becomes part of everyday language, without regard to its merit. Recent decades have shown this claim to be completely false as the magic of the “free market” continues to create worsening access, higher costs, less affordability, and variable quality of care. But this time-worn meme is still pervasive and distorts this election year’s contentious debate over the future of our health care system. A Rebuttal to the Free Market Meme The fact that markets in health care don’t work the same way as those for other products was recognized as early as 1963 by Kenneth Arrow, a leading economist at Columbia University. He saw uncertainty as the root cause of market failure in health care—uncertainty among patients not knowing what they will need, uncertainty among physicians about diagnosis, treatment and prognosis, and uncertainty among insurers about risk of enrollees. (2) These are some of the ways that under-regulated markets fail patients and the public interest: A nine-year tracking study of 12 major health care markets found four barriers to efficiency of markets: (1) providers’ market power; (2) absence of potentially efficient provider systems; (3) employers’ inability to push the system toward efficiency and quality; and (4) insufficient competition among health plans. (3) Joseph Stiglitz, Nobel Laureate in Economics and former chief economist at the World Bank, reminds us that: Markets do not lead to efficient outcomes, let alone outcome that comport with social justice. As a result, there is often good reason for government intervention to improve the efficiency of the market. Just as the Great Depression should have made it evident that the market often does not work as well as its advocates claim, our recent Roaring Nineties should have made it self-evident that the pursuit of self-interest does not necessarily lead to overall economic efficiency. (4) Recent years have seen increasing corporatization and consolidation throughout the medical-industrial complex, including among insurers, the drug industry, hospital systems, nursing homes, and dialysis centers. As their market shares grow, they have more latitude to set prices to what the traffic will bear. Corporate stakeholders pursue the business “ethic” seeking maximal revenue well beyond the service tradition. The private sector is much less efficient than public programs. Compared to traditional Medicare, privatized Medicare is more expensive, less efficient, less reliable, more restrictive in choice of physician and hospital, and has much higher administrative costs (e.g. 15 percent overhead compared to about 2 percent for Medicare). (5) Privatized Medicaid follows the same pattern, as illustrated by Tennessee Medicaid plans, operated by Blue Cross BlueShield of Tennessee, UnitedHealthcare, and Anthem, with their inadequate physician networks, long waits for care, and denials of many treatments, even as these insurers take away new profits. (6) With our present multi-payer financing system, there is little opportunity to achieve sizable discounts through bulk purchasing. Bulk purchasing of drugs was specifically prohibited by the Medicare Prescription Drug, Improvement and Modernization Act of 2003, while the 2010 Affordable Care Act continued to ban the government from negotiating drug prices. Implications for Today’s Debate over Health Policy In their 2014 book, Social Insurance: America’s Neglected Heritage and Contested Future, Theodore Marmor, Jerry Mashaw and John Pakutka drew this important conclusion about the effects of “free market” policies in our health care and the need for more government involvement: In health care, the “invisible hand” [of the free market] fails to drive down costs, improve quality, or ensure distributional outcomes that are regarded as fair. We can tinker with the rules, regulations and payment schemes that govern medical care, but the forces that increase the demands for and supply of more care are relentless. Only powerful countervailing institutions can keep them under control. Only governments have the necessary authority, assuming they have the political will to use it. (7)

A free market for health care is not only undesirable: it is, as economists have noted for decades, a fantasy. Fundamentally, the degree of information asymmetry between the buyer (the patient) and the seller (the provider) prevents health care from conforming to the theoretical tenets of free-market economics. Kenneth Arrow famously contended that the uncertainty intrinsic to health care makes it unique from other goods and services.5 The health economist Bob Evans has argued that not only has there never been a pure free market in health care but that “inherent characteristics of health and health care make it impossible that there ever could be.” 6 On the contrary, he argues, attempts to inject market mechanisms into health care are fundamentally about redistribution. As health-care costs are shifted from public to out-of-pocket sources, those with higher incomes invariably benefit. The US divergence from other high-income nations is a disaster. We contend with uninsurance and underinsurance, a lack of coverage for critical benefits, worse outcomes, and higher overall costs. As others have noted, the savings made possible through a single-payer system7 would allow extension of health care as a social right to the entire nation. In contradistinction with a fantastical health-care free market, such a program is both attainable and desirable.

While few financial decisions are as consequential as those related to the choice of health insurance, such decisions can be complicated, and even overwhelming, for consumers. When consumers choose among plans offered by their employer, the Affordable Care Act (ACA), or Medicare, they must evaluate options that differ not only in cost-sharing but also in non-financial dimensions, such as which doctors or hospitals are included “in-network” and the insurer’s reputation for reliably processing claims. Furthermore, communication of critical plan details is frequently inconsistent across health plans, making it difficult for consumers to easily compare options. Recent public and private expansions of plan choice have increasingly tasked consumers with difficult plan comparisons, even as evidence suggests that many people may not understand the fundamental building blocks of insurance. One representative survey of insured U.S. adults found that only 14% provided correct responses to four simple multiple-choice questions testing their definitional understanding of standard plan features — copayments, coinsurance, maximum out-of-pocket spending, and deductibles — that affect how health costs are split between a consumer and the insurer. The same survey found that few respondents were able to estimate the cost of basic medical services after reading a simple description of a hypothetical insurance policy. It is not surprising that, without a clear understanding of health insurance basics, many people report being confused and ill-prepared when asked to make an enrollment decision. This widespread confusion presents a strong rationale for encouraging simplicity and standardization of health plans. A Gut-Wrenching Choice Health plan enrollment can be a stressful experience for consumers not only because of the complexity of plan choices but also because making an informed decision requires consumers to think about financially and emotionally unpleasant contingencies. Because the most important differences between plans involve financial cost-sharing, consumers should largely base their plan choice on how much health care they anticipate needing over the next year (as well as their appetite for risk and degree of liquidity). When a consumer makes a plan choice, she is effectively placing a financial bet on her own, or her family’s, future health. For those who make the wrong guess, the decision can be fateful.” Consumers who expect to be healthy in a particular year, for example, will likely save money with a cheaper, high-deductible, plan. When a consumer makes a plan choice, therefore, she is effectively placing a financial bet on her own, or her family’s, future health. For those who make the wrong guess, the decision can be fateful, particularly for the estimated 1 in 3 households that do not have the financial means to cover the high deductibles commonly associated with employer-sponsored care. The unpleasantness of choosing a health plan may be one reason why so few consumers revisit their plan choices in subsequent years. This widely documented “inertia” in health plan choices means not only that most consumers fail to improve upon the quality of their original insurance decisions but also that they fail to modify their decisions to keep up with changes in plan prices or their own health. A Litmus Test for Sensible Plan Choice In our research, we investigated consumers’ ability to make sensible plan choices by examining the decisions of employees at a Fortune 50 firm. Employees at this firm were asked to “build” their own policy by indicating their preferred choice from a menu of four deductibles, two coinsurance rates, two copayments, and three out-of-pocket maximums (Table 1). Table 1: Health Plan Menu for Employees at a Fortune 50 Firm. *The menu reflects the available set of plan options for benefit-eligible employees shopping for single coverage. Copayments refer to costs for primary care physician (PCP) visits. Click To Enlarge. This 48-plan menu provided a rare litmus test for evaluating choice quality because, outside of differences in the four cost-sharing features, the available plan options were otherwise identical: the plans were administered by the same insurer, and they featured the same networks and the same set of covered services. Employees choosing the most generous coverage (i.e., a plan with a $350 deductible) spent an average of $590 in excess of what they might have otherwise spent, with 25% of these employees foregoing savings of $843 or more.” What made the setting especially interesting was that for nearly every one of the plans with low deductibles ($350, $500, or $750), the otherwise equivalent plan with a high deductible ($1,000) would end up costing the employee less, regardless of the individual’s health care utilization. When a plan with a certain deductible is guaranteed to result in higher total spending than an otherwise equivalent plan, economists call it a financially “dominated” plan. Table 2 depicts plan costs, rounded to the nearest $50, for the four plans available to employees for a fixed copayment, a fixed coinsurance rate, and an out-of-pocket maximum of $1,500. The table shows that the plan with the $1,000 deductible results in lower total health care spending regardless of whether the individual incurred no health care expenses, $1,000 in expenses, or expenses that exceeded the out-of-pocket maximum (the same is true for all other levels of health care expenses). Table 2: Simplified Plan Menu Facing Employees. *The table depicts rounded plan prices and costs for plans by deductible, assuming a copayment of $25, a coinsurance rate of 80%, and an out-of-pocket maximum of $1,500 under different health spending scenarios. Plan costs were calculated by the authors, assuming that once the deductible has been met, no additional copayment or coinsurance costs apply. Click To Enlarge. So, how did employees do? We found that 61% of employees chose dominated plans and that these employees spent an average of $353 more over the year than if they had chosen the corresponding high-deductible plan. This difference was equivalent to about 24% of the cost of employees’ original plan premium and 50% of the premium associated with the superior plan alternative. The consequences of these choices were largely driven by the chosen deductible: employees choosing the most generous coverage (i.e., a plan with a $350 deductible) spent an average of $590 in excess of what they might have otherwise spent, with 25% of these employees foregoing savings of $843 or more. Lower earners were more likely to choose dominated plans, and most employees did not switch into more advantageous plans in the subsequent year. One representative survey of insured U.S. adults found that only 14% provided correct responses to four simple multiple-choice questions testing their definitional understanding of standard plan features.” It is possible that employees knowingly chose financially dominated low-deductible plans because they wanted to avoid the inconvenience of variable medical costs or large unexpected health bills and they valued the predictability of future health expenses. However, the financial cost of such a preference is not insignificant. For example, employees who chose plans with a $750 deductible paid an average of $528 in additional premiums over the year compared with those who selected a plan with a $1000 deductible, even though the largest amount that they could have saved with the lower-deductible plan was only $250. We investigated the factors driving consumers to choose dominated plans in follow-up studies designed to clarify how employees handled their insurance plan decision. In these studies, we asked subjects to make hypothetical insurance plan choices from simple menus that varied in size (with regard to both the number of plans and the number of plan attributes) and transparency. While reducing the number of options did not substantially improve choice quality, we found that transparency had a significant effect: when provided with a menu that carefully communicated how individual plan features translated into total health spending under different scenarios (similar to the presentation in Table 2), subjects were substantially less likely to choose a financially dominated plan. We also measured knowledge of health insurance using three distinct assessments. For each, we found that people who scored as more knowledgeable were less likely to choose dominated options. Together, these results suggest that employees’ choice of dominated plans was not a purposeful decision but instead arose from confusion and a lack of health insurance literacy. The Long Shadow of Insurance Complexity The repercussions of insurance complexity likely extend beyond inefficient plan choice. Even after enrollment, plan features such as copayments and deductible levels (theoretically intended to contain costs) can precipitate complicated, emotionally laden decisions. For example, suppose your child is running a high fever over the weekend, when your family doctor’s office is closed. Should you incur the expense of a trip to the emergency room or urgent care, or should you risk waiting to see the family doctor? For low-income households, cost-sharing may manifest as a draconian trade-off between a needed car repair and precautionary action to avoid risking the health of a child. Given that many people struggle to estimate the costs associated with a trip to the emergency room and are certainly not trained to accurately assess health risks, we can begin to understand how the psychological burden of health care decisions is compounded by consumers’ incomprehension of their health insurance policies.

Well, it seems as if Congressional Republicans are going to propose a complete refashioning of the Medicare program. Specifically, they are going to recommend scrapping Medicare as a provider of health insurance to seniors, and instead replace it with a system that will provide subsidies to individuals who will then buy health insurance from private insurance companies. In other words, they want to get the federal government completely out of the health insurance business for senior citizens. House Republicans plan to propose Tuesday historic changes to Medicare, Medicaid and other popular programs that pour federal money into Americans’ lives, arguing that a sacrifice now will keep those programs solvent for the future. ...On Medicare, Ryan will propose altering the plan so that the federal government no longer acts as a health insurer for seniors. Instead, he would create what’s called a “premium support plan.” Seniors would pick from a list of private insurance plans, and Medicare would subsidize their coverage. The idea, again, is to use market competition to create a system with lower costs. Ryan’s plan would not apply to Americans age 55 and older, for whom Medicare would remain under the current system. The notion that Medicare costs have been rising because it is a government-run health insurance program, or because it is not a "competitive" health insurance program, is odd, to say the least... Theoretically, economists can list a number of very specific ways in which the markets for health care and health insurance are characterized by market failures. And for those of you who have forgotten your Econ 101 lessons, please recall that economic theory clearly predicts that when there are market failures there is no reason to necessarily expect that competition (i.e. the free market solution) will provide a good outcome. Providing yet another example when economic theory actually matches what we see in the real world quite well, we find that there is absolutely no evidence that competition among private health insurance companies leads to lower costs. The Kaiser Family Foundation conducts a survey of employer-sponsered health insurance programs every year to estimate private health insurance premiums. Health insurance premiums for workers in large companies -- those employing 200 people or more, which encompasses about 65% of all workers covered by private, competitive, employer-sponsered health insurance plans -- rose by 135% over the ten year period 1999 to 2009. Meanwhile, Medicare spending per person rose by about 103% over the same period. (Note that to get this figure I simply divided total Medicare costs from the CBO (pdf) by the number of Medicare enrollees as provided by Census (pdf).) Given this, I'm really baffled by this repetition of the assertion that more competition in the market for health insurance is the answer. There's no theoretical justification for it, and no empirical evidence for it. The fact is that people in the US consume more health care services every year. So every year we pay more.

Introduction Many believe that health care is, or should be treated as, a "typical" economic good. 1 As such, its delivery and distribution should be governed by "standard economic theory," 2 in the context of a "free" 3 or [*704] "competitive" 4 market. While each of these terms means something different, all of the terms share one characteristic: the primacy of consumers having "complete" or "perfect" knowledge of the good being sold. 5 This knowledge is related to the "value" of the good - its price and quality - so that consumers can make informed choices. 6 Even a cursory review of the attributes of the health care market, however, raises serious questions as to whether consumers have, or can ever have, the knowledge necessary for a competitive market to work in health care. 7 Medical care is complicated, and insurance policies are dense documents. And because we habitually minimize risks that we cannot, or would rather not, contemplate, 8 in a moment of need and [*705] vulnerability, the last thing one wants to do is negotiate prices pursuant to those dense and complicated documents. Of course, this is not to imply that the current health care market is working - at best, the market is characterized as a strange mixture of competition and "command and control" that is lacking in transparency. 9 Prices continue to rise; 10 consumers still find the individual insurance market challenging to navigate; 11 many individuals still lack high-quality, accessible health care services; 12 and many common measures of public health in the United States rival those of third world countries. 13 Still, there is a worry that the current movement toward more fully embracing competition as the means to allocate health care services is fraught with peril. Wrong choices made by patients acting as consumers [*706] lead to delays in accessing services. Even further, some companies may capitalize on the fact that these patients-consumers make wrong choices and might not thoroughly consider all options by incentivizing avenues of care that may be suboptimal with enormous consequences. This Essay advocates that health care should not be treated like any other good and that the vagaries of a competitive free market should not be the approach to achieve health care's so-called "Triple Aim": high-quality, low-cost, accessible health care. 14 This Essay's concerns about the role of competition are further heightened given the current movement toward "consumer directed" 15 or "defined contribution" 16 health care - the idea being that consumers should be empowered to make cost/benefit choices on their desired (if any) type of insurance coverage and then fully bear the implications of those choices. This is very much a competitive market approach, as it assumes that the industry must empower consumers to make self-interested choices to improve quality and reduce the cost of health care. In this defined contribution world, employers will no longer provide health care insurance to workers, 17 but rather will provide a fixed amount [*707] of money that an employee can deposit into a health savings account - along with the employee's own money - to pay health care expenses. 18 Coupled with a high-deductible health plan, whereby the employee is required to pay a minimum deductible of $ 1,300 (individual) and $ 2,600 (family) for catastrophic health care coverage, 19 this "skin in the game" is designed to interject a degree of value consciousness into health care purchasing to parallel any other consumer good. 20 In considering the impact of this expansion of consumer-directed health care and its increased cost-sharing obligations, one must realize that insurance is not just a payment mechanism, but rather the key to entering the health care marketplace. Health care services are expensive, and few can afford a long course of treatment without insurance coverage. 21 While private hospitals have a legal obligation to provide care, this only arises in the context of an emergency or a possible urgent [*708] condition. 22 Private physicians, pharmaceutical companies, and many other health care providers have no legal obligation to provide services or products for free or reduced costs. Therefore, one must present an insurance card within five minutes of visiting a physician. By design, pulling back the scope and level of coverage will cause patients-consumers to consider their need for care. While to some extent, benefit levels and cost sharing have always impacted health care access, the higher level of cost sharing brings affordability of health care to a point where patients-consumers cannot access essential services because patients-consumers are considering the costs of their health care before the service is rendered. Not only has defined contribution thinking taken sway amongst private employers, 23 but it appears to be gaining headway in possible Medicare and Medicaid program reforms. While the views of President Trump's administration continue to be unclear, 24 House Speaker Paul Ryan calls for the implementation of Medicare vouchers, which would enable beneficiaries to shop the private insurance market for the type of coverage they would prefer. 25 And some state Medicaid programs, such as [*709] Arkansas, 26 implemented a version of Medicaid vouchers in addition to the Centers for Medicare and Medicaid Services ("CMS") approving similar programs in Iowa, Indiana, Michigan, and Pennsylvania. 27 Given the significant cost savings associated with a defined contribution approach, the idea is likely to gain even further sway. 28 This Essay argues that overall reliance on competition and free market thinking (particularly value-incentivized consumers) to achieve an appropriate, fair allocation of health care services will cause significant harm to many people. In arguing this proposition, this Essay focuses specifically on the lack of transparency in health care; this lack of transparency means that the sine qua non of a free market - educated, self-interested consumers - is lacking. This Essay also contends that the free market approach will not work because it ignores the reality that invariably society will intercede to "rescue" individuals who made poor choices regarding their scope of insurance coverage, ultimately increasing the cost of every other patient-consumer's health care services. 29 Finally, reliance on this approach [*710] serves to further erode the social compact where everyone should be entitled to the basic building blocks of life to make their way in the world. 30 I. Health Care Lacks Transparency The health care industry is not transparent with respect to price or quality, 31 and its primary beneficiary - the patient - often lacks the capability and capacity to make informed choices. 32 Because an informed consumer able to make value judgments is lacking, the very foundation necessary for a competitive market to work is absent, causing the market to fail. The lack of transparency regarding the quality and price of health care [*711] services has been long known and lamented. 33 And there is a legitimate concern that this lack of transparency will create severely detrimental consequences in the new world of limited health insurance. 34 The nature of health insurance is changing: health plans are minimizing coverage and consumers can expect to bear more of the cost of care and to comparison shop cost and quality to a degree never expected. Invariably, these burdens will result in choices to delay care or seek less competitive, lower-quality options, causing harm. 35 The lack of transparency in large part results from health insurance historically shielding beneficiaries from the full cost of care. 36 Thus, unlike other types of common insurance where coverage is purchased for catastrophic events and rarely used, health insurance has traditionally been designed for the patient-consumer to pay for low-risk, often-encountered occurrences. While society may not agree that everyone has a right to health care, 37 insured individuals seem to agree that this right [*712] exists, because once coverage is secured, they often immediately seek health care services. 38 Indeed, while an important part of the difficulty in pricing insurance products on the exchanges is the lack of younger, healthier individuals opting into the market, 39 another significant factor is the higher-than-expected utilization of services as newly covered individuals seek (presumably delayed) medical care. 40 Government and private insurers have largely focused their efforts on cost containment, giving much shorter shrift to quality. 41 The Institute [*713] of Medicine's 2000 report, To Err Is Human, 42 sounded a clarion call on the poor quality of health care services - likening the number of deaths caused by provider error to a daily crashing of a Boeing 747. 43 Sixteen years later, however, it is fair to say that quality initiatives are still at a fairly basic level of development and implementation. 44 Consumers are traditionally shielded from cost and have focused little on quality. Because of this shielding, there is little consumer demand for tools to assist consumers' assessment of quality providers. 45 [*714] Widespread disparities relating to price and quality, seemingly unhinged from outcomes, are rampant. 46 For many years, the Dartmouth Atlas highlighted significant treatment differences in a wide variety of health care procedures, including tonsillectomies, coronary, stents, and hip fractures - all with no discernable link to quality. 47 Researchers long ago concluded that physician training and practice patterns were responsible for care variation, and that if the nation adopted best practices, then savings associated with standardized approaches would be [*715] immense. 48 Serious efforts at the federal, state, and private levels are underway to provide consumers with quality and price information to enable intelligent choices. For example, on a federal level, CMS' Quality Initiative provides consumers with quality-of-care information and provides the Hospital Compare 49 online platform for consumers to research hospital quality, patient satisfaction, and pricing. 50 In addition, the Patient Protection and Affordable Care Act ("ACA") allotted $ 250 million in state funds for the improvement of price transparency and requires CMS to make standardized extracts of Medicare claims available for provider evaluation. 51 States (e.g., Massachusetts and New Hampshire) 52 have also led the charge to provide information to consumers. 53 Massachusetts pioneered with its October 2013 legislation, which required insurers, physicians, and hospitals to provide health care consumers with the costs of health care procedures ranging from office visits at a primary care provider's office to surgical procedures. 54 In [*716] 2005, New Hampshire passed legislation that created the New Hampshire Comprehensive Health Care Information System, and mandated the creation of an all-payor claims data base ("APCD") and a consumer-friendly public website. 55 This information system collects provider data from a broad array of providers and services, and the New Hampshire APCD lists total and out-of-pocket costs for consumers. 56 Private insurers have also moved to empower consumers. For example, Blue Cross Blue Shield of Illinois provides detailed information on comparisons of in-network versus out-of-network provider services, ranging from CT scans to preferred brand drugs for certain medical conditions. 57 All of these initiatives are supported by incentivizing consumers to focus more deeply on the quality and cost of their care through increases in their out-of-pocket health care expenditures. Even if a consumer wishes to secure price and quality information, however, their ability to appropriately interpret this data may be rudimentary at best. 58 And, in many cases involving elderly, vulnerable, or frail individuals, the expectation of seeking and interpreting data may be completely unreasonable. [*717] To date, for example, leading quality indicators used by the federal government to determine value-based Medicare payments include percutaneous coronary intervention ("PCI") received within 120 minutes of hospital arrival, thrombolytic agent received within thirty minutes of hospital arrival, and ACE Inhibitor or Angiotensin Receptor Blocker for Left Ventricular Systolic Dysfunction and Beta Blocker prescribed at discharge for a heart attack. 59 These particular measurements, however, have very little resonance with consumers desiring to learn the quality reputation of potential providers whose care they may solicit. 60 "Star" ratings, on a one-to-five scale, are more meaningful as they distill a multiplicity of factors in a consumer-friendly manner. 61 But even these ratings may capture areas of little or no concern to a particular consumer, or oversimplify issues causing the rating to be misleading. And, ratings may fail to equalize across patient characteristics, thus incorrectly identifying providers as substandard, for example, because [*718] their patient population is sicker and consequently more prone to poorer outcomes. In sum, meaningful measures of value are lacking in the health care arena. Serious questions also arise regarding consumers' abilities to correctly interpret the available data so as to make reasonable choices impacting their access to quality care. II. There is no Available Proxy having an Interest Unified with Consumers to Evaluate Quality and Cost Data If we grant the notion that consumers may not be able to possess the knowledge necessary for a free market in health care to function, we might next look to see if there is an available agent, or proxy, able to fill this role on consumers' behalves. Logical agents include the government (in the case of Medicare and Medicaid beneficiaries), private insurers, or employers. And yet, the same tangle of relationships responsible for the regulatory burden and confusing incentives rife within health care come to the fore here. 62 The government certainly has mixed incentives that may not give patient interest its deserved primacy. While there are many regulations focused on care quality, at their root, Medicare and Medicaid are insurance programs that have a goal of cost containment. 63 While higher [*719] expenses, of course, do not necessarily equate with higher quality, neither are the two concepts divorced. Thus, the potential competing motivators of cost control and quality enhancement may cause these programs to not always align with patient interests. 64 Private insurers have the exact same issue. The tension between cost and quality in insurer goals is readily apparent in numerous lawsuits over many years. These lawsuits challenged the propriety of payment incentives on physician behavior, where insurers were accused of corrupting physician judgment by compensation formulas incentivizing less, and lower-quality, medical care. 65 The ACA further highlighted this tension by limiting the "medical loss ratio" - the portion of the insurance premium spent on insurer administrative expenses - to 20 percent. 66 In addition, given the high degree of turnover within an insured population, [*720] insurance companies take a decidedly short-term perspective on patient outcomes, often in conflict with a patient's long-term perspective on their health. 67 And, of course, insurance companies function by carefully defining, and thereby limiting, the financial risk they assume, so transferring risk to consumers by definition benefits the insurer. Finally, for many of the reasons articulated above regarding the government and insurers, employers too seem conflicted in their allegiance to access and health care quality. 68 Thus, the industry lacks a proxy with a unified interest with consumers. There is no unbiased, credible party able to make value judgments on behalf of patients-consumers. III. Relying on the Market to Allocate Health Care Is Wrong As the industry continues to move toward a defined contribution era where each patient-consumer is expected to conduct one's own research, balance cost and quality, and shop around, one must remember that not all consumers are equipped to manage these new responsibilities. The ability to access this type of information, process, and make an intelligent decision requires a level of sophistication that many people simply do not possess. 69 Further, unique aspects of an individual's medical condition may render it difficult for patients to properly evaluate competing criteria in a manner that facilitates free market choice. 70 [*721] Because of the highly personalized nature of health care services, the influence of procompetitive forces may actually cause harm to a patient. A patient may gravitate toward an option based on inappropriately weighing the cost of the service, without sufficiently considering the likely outcomes from a quality of life perspective. 71 Finally, even if one wants to assume that an educated consumer can make informed choices in a competitive market, the attendant costs associated with this assumption may be hard to swallow. Externalities abound in health care, as one's health status can have a significant impact on others. Individuals unable to pay for their care may be able to hold off on certain types of medical care for some time, but this often leads to very serious, more expensive consequences. 72 From both an ethical and legal perspective, the industry is not going to deny care to individuals presenting in an emergent situation, even if there is no payor and the cost is high. 73 In the end, however, the nation does not want individuals inflicting the social cost of their care - public health issues, accidents, and the like - on society merely because they were unable to make informed health care choices. 74 Even if we adopt a view of "buyer beware" - leading to high incidences of medical debt - this, too, has significant costs on society. In the end, delayed care is likely to be provided, but at a cost to society higher than might have been borne if it had been provided when first [*722] needed. It is simply unimaginable that there will be an ethos amongst our caregivers, health care institutions, and the public that will accept otherwise. There certainly is a place in health care for a consumer focus on cost and quality. An educated consumer is a good thing. We need to be mindful, however, that we do not attribute to the market a sophistication that it lacks when it comes to allocating as essential a service as health care.

The Hodgepodge Of Market-Improving Regulation Health care markets are subject to market imperfections and regulations that facilitate the exercise of market power. Accordingly, several studies have proposed a menu of regulatory interventions that can enhance competition and improve consumer welfare. In its comprehensive survey of regulatory tools, the National Academy of Social Insurance analyzed eleven nonexclusive categories of interventions that promote market competition.45 Martin Gaynor, Farzad Mostashari, and Paul Ginsburg offered a thoughtful analysis of similar “actionable proposals” at the federal and state levels designed to enhance the competitiveness of health markets.1 Awareness of the need to invigorate market competition has also garnered some attention at the state level. Recently, a Massachusetts commission has closely analyzed—without recommending—various interventions to controlling price variation among providers.46 While certainly warranted, these changes— individually or collectively—seem unlikely to have a major impact on the problem of provider monopoly. Some measures act on the demand side by improving the conditions necessary for informed consumer choice, such as laws requiring transparency on price and quality; encouraging consumers’ adoption of health savings accounts; imposing enhanced consumer protections; and facilitating the placement of providers in tiers by health plans. Others seek to enhance buyer bargaining power—for example, by authorizing health insurance exchanges to engage in active purchasing (which empowers state exchanges to selectively contract with carriers, set tougher participation criteria than the federal standards, or negotiate price discounts in order to effectively serve consumers)47 or banning contractual provisions such as anti-tiering (clauses that prevent plans from offering lowercost products or require the plans to include all entities within a health delivery system in the top tier so providers get maximum reimbursement) and anti-steering and “most favored nation” clauses (whereby health plans require hospitals to give the insurer the best price and, in some cases, to charge plan competitors much higher prices), all of which have the effect of disabling health plan bargaining.1,20,48 However, there are reasons to question consumers’ capacity and willingness to use enhanced tools enabled by changes on the demand side to make health care choices in the face of behavioral factors, uncertainty, and fear.49 Moreover, the effectiveness of such measures is questionable, given that a large proportion of health care costs is borne by people who exceed annual out-of-pocket maximums. 17 Even more problematic is the stark logic of the “dominant provider” problem: Empowering consumer choice is of little benefit where choice is lacking.1

We welcome this important debate, which is unfolding at a critical political juncture. Dr Berdine’s 1 counterpoint has usefully broadened our discussion beyond the issue of single payer to the larger question of the role of the free market in health care. Dr Berdine 1 argues that in an unhindered competitive health-care marketplace, the market will clear at a price and quantity of goods/services that, as if by definition, leaves all parties maximally satisfied. This argument is little more than a tautology that would, if possible, result in a health-care dystopia that society would not accept. Low income individuals might “choose” to spend their money on food instead of asthma inhalers. By Dr Berdine’s logic, this scenario is as it should be, and any intervention by government would only make things worse. Those dying of status asthmaticus might beg to differ, if they were able, as might patients with hypertension who suffer strokes because they elected to cover their rent instead of paying for physician visits. He argues that government involvement in the health care realm has “priced health care beyond the reach of the average person.” 1 It is a rather curious point, because the United States already has a relatively privatized and unregulated health-care system (compared with other high-income nations) while also having the highest costs.2 Furthermore, $375 billion of our expenditures can be attributed to wasteful administrative costs associated with our multipayer insurance market.3 Dr Berdine1 does make a good point when he notes that government-granted patent monopolies can result in high drug prices. To address this issue, a single-payer national health program would directly negotiate with pharmaceutical companies over drug prices. Indeed, the Veterans Health Administration pays 40% less for prescription drugs compared with Medicare, indicating that substantial cost-savings could be achieved by facilitating such negotiations.4

The United States faces an unenviable paradox: the healthcare sector is an important source of job growth and economic output, but healthcare costs—now comprising nearly one fifth of economic output—are dramatically higher than those in other developed nations, and continue to rise. Warren Buffet summed up this dilemma vividly, saying that healthcare is the “… tapeworm of the American economy… I think the healthcare problem is the No. 1 problem of America and of American business.” Adding proverbial insult to injury, the United States—for all it spends on healthcare—gets far less for its money. The Commonwealth Fund’s report on international health system efficiency ranks the United States last of 11 developed nations on measures such as quality of care, access to care, efficiency of care, and equity of care. The work of the Commonwealth Fund contributes to a body of evidence suggesting that what we’re doing to provide, administer, and finance healthcare is just not working. The Lown Institute is one of a number of organizations working to understand the drivers of inefficiency, waste, and harm in U.S. healthcare, and I recently had the opportunity to attend their annual conference. While there, I presented my research exploring the relationship between a country’s administrative expenditures and health system efficiency. I’ll spare you the details [you can read the abstract here, and see one graph here], but the bottom line is that as countries spend a larger percentage of their healthcare dollars on administration (as opposed to public health, or providing patient care, for example), things get worse for patients and healthcare providers. High administrative expenditures seem to be associated with negative experiences of providing and receiving healthcare. While other countries devote a large share of their resources towards the prevention and treatment of disease, the United States spends a huge portion of our healthcare dollars on feeding the system itself. These huge administrative expenditures “crowd out” other important areas of health investment like public health (US public health expenditures are the lowest among all OECD nations). Not long after presenting my research on administrative costs, I had a curious experience. Listening to a medical school lecture on healthcare payment reform, I heard a number of second-year medical students arguing vigorously that the only way to reduce healthcare expenditures was to pay doctors less. I was amazed. As a percentage of total national healthcare costs, U.S. physician wages are small – approximately 9% – a number among the lowest in the developed world. Not only were these students arguing in opposition to their own self-interest, they were arguing against the facts. As a 2014 New York Times headline put it: Medicine’s Top Earners Are Not the M.D.s. The U.S. devotes a larger percentage of it healthcare economy to administration (doing things like moving a claim through the system, answering patient phone calls, and yes, paying the innumerable and sometimes incomprehensibly large salaries of administrators at insurers, hospitals, and healthcare systems) than any other country. I know few physicians at any level of training or practice who believe that administrators are the primary determinant in their ability to deliver safe, effective, and humane care. How then, have we ended up with a top-heavy system, one in which decisions about how care will (or often won’t) be provided are made by those far removed from the experience of caring for patients?

How much compensation? Well, in mid–2009, the total market capitalization of four out of the five top health insurers (the fifth is a nonprofit) amounted to about $60 billion. By then, the stock market had already rebounded nicely from the lows of the crisis, and the uncertainty over Obamacare had largely dissipated, so these were not particularly depressed valuations. Extrapolating this valuation to the rest of the health insurers would have a put a price tag of about $120 billion on the whole racket. This means that buying out the entire health insurance industry at an enormously generous premium of, say, 100 percent, would have cost the Treasury $240 billion — about 2 percent of 2009 gross domestic product. And this figure is highly inflated — premiums for buying out well-established companies rarely exceed 50 percent and are usually closer to 20 percent. Also, I am valuing the dubious claims of non-profit policyholders on par with the more vigorously-enforced property rights of for-profit shareholders. Other than the big smiles on the faces of health insurer shareholders across the country, what would have been the US Treasury’s payoff for writing a $240 billion check? Once again, the numbers are simple, and startling. US private insurance, whether for-profit or otherwise, may well be the most wasteful bureaucracy in human history, making the old Gosplan office look like a scrappy startup by comparison. Estimates of pure administrative waste range anywhere from 0.75 percent to 2.6 percent of total US economic output. Extrapolating again from the biggest four for-profit insurers, in 2008, the industry as a whole claimed to spend 18.5 percent of the premiums it collected on things other than payments to providers. (The other 81.5 percent that is spent paying for actual care is known as “medical loss ratio”. Keeping this ratio down is a health insurer CEO’s top priority.) Medicare, by contrast, spends just 2 percent. The difference amounts to $130 billion, to which we must add the compliance costs the private insurers impose on health care providers — $28 billion, according to Health Affairs. The costs incurred by consumers are difficult to measure, although very real to anyone who’s spent an afternoon on the phone with a health insurance rep. So, to recap, nationalization of the health insurance industry in 2009 would have cost no more (and almost certainly a lot less) than $240 billion. The savings in waste resulting from replacing the health insurance racket with an extension of Medicare would have resulted in no less than $158 billion a year. That’s an annualized return on investment of 66 percent. The entire operation would have paid for itself in less than eighteen months, and after that, an eternity of administrative efficiency for free. And, of course, happy shareholders.