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Why pre-set pricing could work.

Problems with pricing killed the Soviet Union. And they are close to killing health care.


The rot at the core of the old Soviet Union was an economy in which there were no real prices, which meant that there were no feedback mechanisms about value. A car manufacturer got no signals from the market, because product lines were chosen, and prices set, by government committees. And the manufacturer could not tell the real costs of the car because the prices for the steel, rubber, glass and labor that went into the car were also set by apparatchiks.

And there were no real competitors anyway. If people wanted something different, too bad; they had no ability to choose. Signals of value were replaced by bureaucratic bafflegab and propaganda.

The redolence of familiarity comes from the fact that health care in the U.S. and many other countries has a Soviet pricing structure. Prices are determined directly and indirectly by the government, and by large bureaucratic organizations that base their prices on the government price structures, with no relation to what the market (the patient) wants, or to the costs of actually producing the product or service.

In most cases the health care provider does not actually know the true costs of providing a particular medical intervention. And in most cases the actual customer does not pay the price; instead, some fraction of the nominal price is paid by the government or third-party payers, and sometimes some smaller fraction by the customer as a co-pay.

The result?

* An uninsured man falls off his motorcycle in San Francisco, cracks two ribs, and is billed $12,000.

* An uninsured friend of mine calls the hospital to ask how much a stress test will cost and is told $4,200.

* I go to the hospital emergency room last year for what turns out to be an interaction between vicodin I am taking for back pain and a Chinese herb. The bill, after three hours? Nearly $5,000. Actually paid? My insurance company: $1,500; me: $50.

When your customers and potential customers read such stories in the press (the first was in the San Francisco Chronicle) or hear them from friends (as they inevitably do, they do not think, "Health care is a tough business," or even "Health care is expensive." They think "People at that hospital are insane. God grant that we never fall prey to them."

Vexing value

The classic economist's answer to the question of what is the true value of anything is simple: Anything is worth what some willing customer will pay for it.

This translates into a belief so common and deeply imbedded in America culture that we don't think of it as a belief, but rather like the law of gravity. This belief is: "You get what you pay for."

Yet the health care system daily, consistently, vividly violates this truism. There is often little discernable relationship between what you pay and what you get. This difficulty in discerning value is core to the burgeoning movement to radically reform U.S. health care finance in a way that, at minimum, guarantees coverage to all Americans.

Organizations that use "lean manufacturing" techniques to improve service, cut costs and increase quality often analyze all the steps that make up a given procedure, then ask which are truly necessary, and which add value.

To ask whether a step "adds value" is to ask whether a customer might be willing to pay for it, as if it were a side order on a menu.

* Would you pay extra for some more pain medication? Yes, please.

* Would you pay extra to fill out another form? No, thank you.

* What would you pay for any particular piece of health care? The canonical answer is itself a question: What will it do for me? Will it fix my problem?

If I told you I paid $22,000 for a new car, would you tell me that's too much? You would be more likely to ask what kind of car it was and what I needed it for.


When people say that health care costs too much--either as a national program or in their individual case--they are saying two things:

1. It costs a lot.

2. They have no way of telling what they are getting for it.

Sometimes health care clearly, unequivocally, saves your life. Much of the time it is not so clear that any particular test or therapy or procedure is helpful or necessary, or helpful enough to be worth the enormous amount of money that you (or a third party) are paying for it.

Even worse, the actual cost to the consumer often seems arbitrary--it varies not with such related factors such as whether they exercise or drive while intoxicated, but with such unrelated factors as the financial condition of their employer.

The bill can also include huge unanticipated costs. When the emergency medical technicians in the ambulance carrying the motorcyclist with the cracked ribs radioed ahead to say that they had a "traffic accident victim," the hospital assembled an entire Level-1 trauma team, instantly and unnecessarily added nearly $5,000 to the patient's bill. When the hospital's technicians messed up on the first MRI it did on the motorcyclist, the clinicians ordered a second one--and he was billed for both.

Even worse, it is increasingly common in the U.S. for people who have run up large medical bills to discover that the insurance company is denying them coverage after the fact, based on any tiny discrepancy in the voluminous forms they must fill out to apply for health insurance. Rather than a service that you pay for with full knowledge of what you are getting, health care more often resembles a colossal financial gamble.

Perplexing prices

The reasons that hospital pricing is difficult are manifest. Human bodies are absurdly more complex and variable than cars or computers or vacations in Aruba. Clinicians are equally variable, using different amounts of time and resources for the same procedure.

At the same time, none of the procedure's constituent prices is any more real than your own. The prices for stents, hip implants, and perfusion pumps are based on reimbursements and a sense of what the market will bear, not the cost of manufacture.

Compare, for instance, the cost of a stent to the cost of a computer chip. Stents are complex devices, yes, but they are not that complex. They are highly specialized and carefully designed--but they are little tubes made of wire mesh. A bare-wire stent costs around $1,000. A drug-eluting stent costs about three times that much.

Computer chips, on the other hand, are unbelievably complex devices built in three dimensions on scales that need an electron microscope to examine, under conditions far cleaner than any operating room, in "chip fabs" that cost $2 to $4 billion each. Yet the price of consumer-level computer chips top out well under $1,000.

Also both individual cases and clinician's work flows vary wildly, the constituent services and supplies are priced on thin air--and none of your competitors have real, published prices either, so you have no solid comparables.

High fixed costs form an enormous percentage of any price, as do the undercompensated costs of Medicare, Medicaid, and discounted health plans--and the amount of these costs to allocate or re-allocate to a given procedure is arbitrary.

Should a teaching hospital allocate a portion of its costs for teaching and research as a fixed cost? Or should teaching and research be treated as a separate business, with its own sources of funding? How do you cost-shift when the vast majority of your charges end up being discounted in one way or another?

Finally, when consumers look at prices, they look for an entire product--a package tour to Fiji, a fixed fender, a painted house. If the painting contractor orders the wrong type of paint and has to re-order, the contractor pays for the mistake. If the estimate missed how much patching and sanding was needed, the contractor, not the consumer, has to deal with the variation.

A real price in health care would not be a schedule of prices for particular procedures, tests or devices (since the consumer has no idea what is considered necessary), but for the entire solution to the medical condition--an uncomplicated birth, a diabetes control program, a hip replacement.

Yet the very idea of pricing entire products like this argues for a re-organization of health care. Any organization that would put a price on an entire medical response would have to be financially responsible for, and in fact control, every aspect of it.

And the idea also presumes that the provider carries the risk for any variations that it causes--that extra test, the additional procedure. Assuming risk is something no provider is likely to volunteer for.

All of these obstacles are both real and nearly insoluble under the present reimbursement system. Yet not only in the United States, but in other national systems, we are increasingly going to be faced with the demand that we set real prices for responses to whole medical conditions.

Individual states have already begun to make it illegal to charge the uninsured (paying the nominal price) two, three, even 10 times as much as the deeply-discounted charge to health plans. In these states, if you walk in off the street with no insurance, you pay the deep-discount price. Increasingly, states are demanding that providers post their average prices for common procedures, such as an uncomplicated birth, a cholycystectomy, or a cardiac revascularization

Within the United States, we can expect at least that these demands will spread from state to state, and possibly to the federal level, as well as to business consortia and health plans. We can expect, as well, that the demand will migrate from average prices to actual price tags--if it remains uncomplicated, Mrs. Murphy, this is what giving birth here will cost.

With some time lag, we can expect similar developments in many other national systems, as more systems find ways to involve the end consumer in value decisions around health care. China did it recently by adopting a consumer-directed health financing system, and Canada is being forced to do it by diversifying its system.

In all of these situations, there is no need for true pricing to sweep health care for it to have a profound effect. To price even some of its products truly, a health care provider will be forced to reorganize. As some providers give a baseline of true prices, others will be forced to do so as well, in order to attract and retain patients. Medical tourism will bleed patients from systems without real prices or with high prices to other systems that combine lower prices and high quality.

In other words, real prices in any part of the system will begin to provide a powerful feedback loop about real value in the system, what works and what doesn't. This feedback will encourage, and sometimes force, other parts of the system to begin providing the same feedback. What seems nearly impossible to accomplish is, in fact, a golden key to a future that works.

Joe Flower is a nationally known health care futurist and CEO of Imagine What If, Inc., which is building the new online world for health care executives, the Healthcare Futures Exchange. He can be reached at
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Title Annotation:Next!
Author:Flower, Joe
Publication:Physician Executive
Date:Jul 1, 2007
Previous Article:How to make innovation happen--Part 3.
Next Article:Time for 'coopetition' is now.

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