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The American Spark
Better Price Transparency May Help Lower Health Care Costs
By Cliff Montgomery - Sept. 29th, 2007
Below we offer quotes from a very interesting July Congressional Research Service report, which proposes
greater price transparency for health care prices as a means of lowering cost:
"Price transparency helps consumers obtain price information easily, which allows them to make useful
comparisons of costs of alternative choices.
"In health care markets consumers often have difficulty finding useful price information. In particular, few
consumers have a clear idea of what hospital stays or hospital-based procedures will cost, or understand how
hospital charges are determined. Prices charged by hospitals vary significantly across hospitals and vary within
hospitals across categories of patients.
Special Characteristics of the Health Care Markets
"Health care markets differ from markets for standardized commodities described in economics textbooks in
several important ways.
Health Care Is Complicated
"By its nature, health care cannot be easily standardized, making price dispersion difficult to monitor. Different
diseases affect different people in different ways, and treatments that work for one patient may fail to help
"Hospitals are sometimes described as 'job shops' to emphasize their dissimilarity to assembly lines.
Thousands of different types of procedures may be performed in an average general hospital, and even
specialized hospitals must be equipped to face a wide range of conditions and complications.
"Because hospitals produce many different outputs with many of the same inputs, allocating costs to particular
outputs or to specific patients can be somewhat arbitrary. There is no unambiguous way to allocate the costs
of employing nurses, pathologists, accountants, and billing clerks to specific procedures or patients.
"Hospital management strategies that seek to assign such costs to specific 'profit centers' appear to rely more
on rules of thumb than on precise economic calculations.
Physicians as Agents
"In most cases, physicians will make a preliminary diagnosis, recommend which specialists will be seen, and
determine whether a patient is admitted to a hospital or not.
"It is true that ethical and professional guidelines stress that physicians must act in the best interests of the
"Still, physicians may be swayed directly or indirectly by insurers, pharmaceutical companies, hospitals, and
peers in ways that might not benefit patients.
"While the vast majority of physicians feel a strong professional compunction to provide the best care possible,
they also face pressure to reduce costs to patients or insurance companies. The problem of agents
considering their own interests, along with those on whose behalf they act, exists in this market as well as
many other markets.
Patients Pick Physicians and Hospitals Pick Physicians
"Because patients rely upon physicians as their agents, patients often do not choose which hospital they
enter. Rather, patients choose a physician, and the physician’s admitting privileges determine where the
"Hospital credentials committees decide which physicians get admissions privileges based on a physician’s
training, residency program, malpractice record, and other relevant information.
"Although some physicians have admitting privileges at more that one hospital, the available evidence
suggests that most physicians admit the bulk of their patients to one hospital.
"A patient needing an operation may have some choice of hospital if her physician provides referral to more
than one surgeon. While this provides the patient with some choice, the patient rarely has detailed information
about cost and quality, and is rarely in a position to make an informed choice.
"[...] Patients are usually in a poor position to choose a hospital which best suits their needs because they lack
the right information and because they are shielded from information about cost differences among hospitals.
Patients Have Poor Information About Hospital Quality and Costs
"Patients may also be in a poor position to choose their own hospital because they have little access to
information about hospital prices and quality or are not familiar with the information that is available (such as
"As with any other good or service, a good decision about hospital selection must be supported with adequate
information on costs and quality. Hospitals in most states are not required to make public individual prices for
items, and other resources for comparative pricing information are limited. Aetna, for example, has provided
price information for physician services in selected areas, but this information is available only to its subscribers.
"The impenetrability of hospital bills is legendary. Hospital bills for privately insured patients routinely run for
pages and contain hundreds of individual items.
"Hospital billing and coding have become arcane arts, practiced by highly specialized clerks and consultants.
Insurers and government analysts have access to files that can be used to generate meaningful average
costs, but this information is not available to patients.
"Compounding the problems patients face, they generally have access to little useful information about health
care quality. In part this is due to the inherent complexity of medical care and the difficulty of defining and
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