Sunday, November 17, 2013

Economic Commentary: Healthcare

  I attended a healthcare conference on Friday and learned a few things, but I'll start with a personal anecdote. I recently had my annual physical and received the itemized bill. The standard battery of blood tests cost $1300 as part of the Northwestern university medical system. My physician asked me to retake two of the tests because of lab errors. I'm on a high deductible plan and so I was curious if I could get the same tests done less expensively elsewhere. The exact same tests were offered at numerous labs around Chicago for $130. Why would any individual or any insurance company agree to pay 10x more than necessary for routine blood tests? How can such an enormous pricing disparity persist?

The Current State
   US healthcare spending is about double that of comparable countries with similar outcomes. A little bit of this difference comes from superfluous procedures and tests, higher medical liability insurance premiums, and hospital emergency room procedures. But the vast bulk of the disparity comes from higher prices on the same medications and procedures.

  The trillion dollar question is why do the same procedures and medication cost 2x-5x as much in the US as in other developed countries? 

Prices are higher here primarily for two reasons:
   1. Prices are not transparent.  This is, I believe, by far the biggest issue. A hospital in the US often charges literally 30 different prices for the same procedure to different constituents, and these prices are not public. Every insurance company receives a separate price, as do medicaid and medicare patients and the uninsured. This lack of transparency means there's no price competition. Consumers usually have no idea in advance what they will be charged for a procedure and so they can't comparison shop. This means that not only is there no competition between providers on price, but there isn't even any substitution. With price transparency, consumers would go to hospital A for the services it provides most efficiently and hospital B for the services in which it specializes, which would yield a lower effective cost of service, even if the prices themselves didn't change at all. In most comparable countries, there's some government entity that can see all prices and is able to purchase the healthcare from the most efficient providers in each category. This is also true with pharmaceutical drugs. In the US, two pharmacies within a 10 mile radius will offer the same drug at a 400% price disparity. The disparity persists because consumers don't know, and don't care. Which brings us to #2.

 2. No one pays directly. No one is simultaneously both incentivized and capable of being an intelligent purchaser of healthcare in the US. Consumers are mostly on low deductible plans or medicaid and medicare, and so most don't care about the prices they're being charged. Insurance companies are somewhat incentivized to negotiate for lower prices, but in many cases they can pass their costs on to consumers, and they're stymied in their ability to negotiate by consumers' preference for broad coverage networks. Insurance companies can't limit their coverage to just the most efficient providers, because consumers will buy other insurance plans that give them access to a broader network.

The Future
   The key trend in healthcare is towards choice. It's not clear if and when pricing information will become more transparent, but many other aspects of healthcare are becoming shoppable. There are now both public and private systems for rating doctors and hospitals and much more performance data is being collected by the government. This has created opportunity for startups that help hospitals improve their performance figures (like a company that is installing RFID sensors into soap dispensers to insure that all physicians wash their hands), as well as by 3rd party medical providers that now have the data to convince consumers they're better. The CEO of One Medical Group spoke at the conference; their tag line is, "The doctor's office reinvented." They provide more convenient care (e.g. offering consultations by skype to patients that would rather not trek into the office) that also provide cost savings (e.g. by encouraging earlier patient-physician contact, they catch problems earlier when they're cheaper to fix.) The battery of new data allows One Medical Group to provide a strong pitch to patients that the quality of care they provide is better than that of traditional, much larger institutions.

 The presenters at the conference all believed that sudden, radical change was unlikely. Rather they expected increasingly large cracks in the traditional healthcare model, cracks that will be filled by startups that treat healthcare like consumer electronics.

Cheers,
Ari

http://jama.jamanetwork.com/article.aspx?articleID=1769890 http://dpeaflcio.org/the-u-s-health-care-system-an-international-perspective/ http://www.commonwealthfund.org/~/media/Files/Publications/Issue%20Brief/2012/May/1595_Squires_explaining_high_hlt_care_spending_intl_brief.pdf http://www.pbs.org/newshour/rundown/2012/10/health-costs-how-the-us-compares-with-other-countries.html http://www.huffingtonpost.com/2013/10/03/health-care-costs-_n_3998425.html

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