Price transparency an important factor in cutting healthcare costs, study finds

Each year, a large portion of healthcare spending is on services for which consumers could price-shop ahead of time, a new study finds, suggesting that price transparency is an important factor in cutting down on healthcare costs.

The analysis by the Health Care Cost Institute revealed that up to 43 percent of the $524.2 billion spent on healthcare by those with employer sponsored insurance in 2011 was spent on "shoppable services."

Overall, the data suggests that the potential gains from the price shopping aspect of transparency efforts are modest, but could be more robust with a few tweaks.

Authors Amanda Frost and David Newman note that not all services are shoppable. "It should not be expected that someone pull out his or her smartphone and research the lowest price (for an) emergency room before dialing 911," they write. In order for a service to be considered "shoppable," it should be a service that can be researched in advance, offered by multiple providers in a given market and have sufficient data available about the prices and quality of service.

Their data also showed that about 15 percent of total spending in that year was spent by consumers out-of-pocket, while $37.7 billion -- or seven percent of total spending -- of out-of-pocket spending was on shoppable services.

[Also: Prescription drug spending rise expected to eclipse pace of overall health spending]

But out-of-pocket spending doesn't tell the full story, they argue. The amount of money consumers spend out of pocket on a given service is highly dependent on the design of their insurance benefits, with coinsurance, deductibles and copayments all playing roles.

For consumers hoping to save money through price shopping, a relatively straightforward method might be to choose lower-priced providers when shopping for services that require coinsurance payments, as those payments they often vary with the price of the service, the authors explained. In their analysis, about 27 percent of out-of-pocket spending for shoppable services was for coinsurance payments. Those dollars represent about 12 percent of all dollars spent out of pocket. The vast majority of the payments were on outpatient and physician services; consumers spent about six times more for coinsurance payments for such services than those for shoppable inpatient services.

Deductible payments may provide a different set of incentives. Consumers may want to choose low-priced providers while in their health plan's deductible; conversely, they may care less about price if they believe they will reach their deductible. In Frost and Newman's study, payments for deductibles accounted for nearly 50 percent of the dollars spent out of pocket on shoppable services. But deductible payments make up a larger portion of out-of-pocket spending on inexpensive outpatient and physician services -- 51 percent -- as compared to spending on expensive services -- 41 percent.

As far as copayments are concerned, they're generally at a fixed price set by the insurance company -- $20 to see an in-network provider, for example -- so price-shopping services may not be the best way to save money, say Frost and Newman. Copayments have their most significant effect on inexpensive shoppable outpatient and physician services, with 30 percent of out-of-pocket spending occurring through copayments. In contrast, copayments on more expensive services represented only two percent of out-of-pocket costs.

Of course, the efficacy of price-shopping is limited by the amount of price variation in a given market, the authors said. Pricing information works only as far as there are options from which to choose; and data shows that there's less price variation in the area of shoppable services than in non-shoppable services.

[Also: Employers, insurers shape healthcare spending more than consumer shopping, study suggests]

Frost and Newman offer a couple of suggestions. Among them: Lowering costs and/or increasing benefits to make price-shopping more feasible, and a modification of the reference price model into a benefits-sharing model.

"Once the reference price is set, if consumers chose providers with prices above the reference price, they would pay the difference, whereas if they chose a provider under the reference price -- holding quality constant -- they would share in the savings," they wrote.

An important note, they said, is that this type of incentive structure would require information about provider quality, so consumers wouldn't have to choose lower-quality care to save money.

Logistically, there are limits to price shopping and transparency. Among them, the study said, are patient limits: Those who may be too sick to shop. An incomplete integrated medical records system is also an impediment, as is the infeasibility or price shopping for prescription drugs, given the risk of drug interactions.

Still, Frost and Newman assert that greater price transparency, and an emphasis on price shopping by consumers, might lower healthcare spending -- for states, insurers, employers and consumers. 

Twitter: @JELagasse