Why Patients Aren’t Cost-Conscious Consumers of Health Care

When I was the head of retirement research at Hewitt Associates in the early 2000s, the concept of consumer-driven health care was just beginning to gain traction. My initial take was: We’ve come to realize in the retirement space that it’s asking too much of people to make sophisticated savings and investment decisions. That’s why we’ve gone in the opposite direction by implementing auto features in 401(k) plans (automatic enrollment, target-date funds, etc.). How are health care decisions easier?

My view hasn’t changed: When people need health care, they think like patients, not consumers. And I recently experienced that myself when I broke my leg in Iceland. Sitting at the admissions desk in the emergency room, I was told that my insurance wouldn’t be accepted. I could hand over my credit card or leave. My leg was broken in three places, I was 5 ½ hours from Reykjavik, and I was in excruciating pain. I didn’t even ask how much it would cost. I gave them the credit card. Later, I was asked if I wanted surgery to repair my leg or to be released to somehow make my way home to get surgery in the United States. Again, all I could think about is how much worse my injury would be if I tried to move (my broken bone was a fraction of an inch from piercing my skin). I didn’t ask how much surgery would cost. I told them to go ahead.

In his research in pricing differential by site of treatment, Paul Fronstin, EBRI’s Director of the Health Research and Education Program, fortunately shows that not every health care cost management solution must rely on the patient/consumer. In his Location, Location, Location series, Paul employs the IBM® Marketscan® Commercial Claims and Encounters Database to examine how site of treatment impacts price for health care services. Specifically, he finds that when it comes to cost differences between obtaining certain treatments as hospital outpatient departments vs. obtaining the exact same treatment at physician offices, hospitals charge:

  • 81 percent more for oncology medications than physician offices, controlling for drug mix and treatment intensity.[1]
  • A median of 91 percent more for certain lab, imaging, and selected specialty medications than physician offices.[2]
  • An average of 200 percent more per unit price for physician-administered outpatient drugs.[3]

In his newest Fast Fact, Paul offers three possible ways that employers can help overcome these price differentials:

  • Engage patients through increased price transparency.
  • Remove hospital outpatient departments from their network.
  • Exert pressure on hospitals to shift their pricing. 

Regarding the first option, Paul notes that even recent public policy efforts to address pricing transparency have fallen short: Since the Hospital Price Transparency Final Rule went into effect this year, a third of hospitals have still not posted usable pricing data and another 12 percent posted data that fell well short of the requirements.

Another drawback is the challenge that patients/consumers may face in making decisions based on pricing. Again, this is well-trodden ground in the retirement space. In 2009, Beschears, Choi, Laibson, and Madrian explored whether the SEC’s Summary Prospectus simplifying mutual fund disclosure helped investors avoid costly sales loads. The researchers found that even with a one-month investment horizon, subjects did not avoid loads because they were confused, overlooked them, or believed their chosen portfolio was superior to a load-minimizing alternative.

An example of this latter type of misperception — let’s call it premium price bias, or the conviction that you get what you pay for — in the site of treatment space is that a cancer patient might mistakenly assume that it is worth paying more for treatment at a hospital facility. For example, they might believe that the hospital facility may have better access to emergency treatment in the event of an adverse reaction. They likely wouldn’t know that, in reality, it probably makes no difference; many hospital facilities are physician offices that were acquired by hospitals.

Paul notes that the second two solutions aren’t perfect, either. Regarding exerting pressure on hospitals, increasing consolidation of health care providers makes it difficult. As for removing the hospitals from their network, this may not work well in areas with limited provider choices or in areas where powerful hospital systems limit payers’ ability to exclude certain high-cost provider locations from their network.

Still, neither of these solutions rely on the patient to be cost-conscious when it comes to health care. And in my experience, that’s a good thing.

[1] https://www.ebri.org/health/publications/fast-facts/content/how-site-of-treatment-markups-for-infused-oncology-medications-drive-cost-differences-over-time

[2] https://www.ebri.org/health/content/cost-differences-for-oncology-medicines-based-on-site-of-treatment

[3] https://www.ebri.org/publications/research-publications/issue-briefs/content/location-location-location-spending-differences-for-physician-administered-outpatient-medications-by-site-of-treatment

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President and CEO, EBRI

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