HSA Patients Need More than Better Price Information: The Rule of Zeros

Dr Alper is a practicing internist in Burlingame, Calif, and a Robert Wesson Fellow in Scientific Philosophy and Public Policy, Hoover Institution, Stanford University, Palo Alto, Calif.

President Bush’s promotion of health savings accounts (HSAs) has spotlighted the need for more and better information if HSAs are to succeed. Price information should enable consumers to comparison shop. Packaging the details in a form that is convenient will make it possible for consumers who are spending their own money to do so more wisely.

Doctors and hospitals have long resisted the publication of price data. However, this policy has become more and more anachronistic ever since third-party price controls have distorted the pricing of health services across the board. Whatever deficiencies there were in a system in which doctors and hospitals self-determined “usual, customary, and reasonable” fees have been replaced by other deficiencies resulting from the decoupling of charges to payments by Mediplans and by Managed Care.

Consequently, the benefits of greater transparency in the health system will not be limited to participants in HSAs. Illumination of irrational practices, such as huge discrepancies between list and accepted prices and the immoral consequences that are the legacy of the crazy-quilt patterns of charging and collecting for health care, will come to light and generate their own demand for change.

Already the common hospital practice of billing the poor and uninsured up to 5 times more than is accepted from people who are insured has elicited a furious public reaction. Exposure by the press has led to policy changes by hospital organizations that had previously turned a blind eye to such practices. Both price adjustments and a decline in the most aggressive collection practices by individual hospitals are being implemented. Yet for the most part, hospital prices still remain closely guarded secrets, despite the occasional publication of impenetrable institutional charge masters.

Overall, consumers need to know doctor and hospital prices for specific services, how these prices interact with relevant insurance coverage, and a little about the realities of medical practice. (Of course there are also important quality concerns, personality fit, convenience, and other considerations that are nonfinancial.)

Prices in health care are generally subject to what I think of as the “rule of zeros.” Pick any single-digit number and add, at most, 1 or 2 zeros to get the range of charges for primary care physicians (bills can be under $10 and only rarely will they be over $1000). In the case of specialists, add 2 or 3 zeros (expect charges of hundreds to several thousand dollars and only occasionally more than $10,000). For inpatient hospital stays, expect billed hospital charges to start at $10,000 and reach into the hundreds of thousands of dollars (in other words, any single-digit number followed by 4 or 5 zeros).

Healthy people can expect primary care bills that, while relatively small, are more frequent than bigger-ticket specialist or hospital bills, where insurance becomes critically important. Thus, “My insurance company is more important than my doctor” is a comment I overheard that, while distasteful, does make perfect financial sense.

Price lists detailing dozens to hundreds of physician services and hospital lists of thousands are of limited value. In fact, research in behavioral psychology shows that large amounts of information, far from informing decision-making, may paradoxically decrease the ability to choose well. This results from an all-too-human tendency to focus on some aspect of the data that is more easily understood rather than on what may be most important. This is a danger of “transparency” that is not obvious but is well known to salespeople who barrage customers with information.

An answer to this problem would be to bundle individual prices into market baskets of common services; for example, average hospital charges for common major illnesses and surgeries, such as pneumonia, myocardial infarction, coronary bypass surgery, or cholecystectomy, together with what Medicare reimburses for them. (For competitive reasons, hospitals will not want to provide contract rates with individual insurers.) For doctors, it would mean the most common office visit, procedural, x-ray, and operative fees, perhaps with average frequency data for common conditions.

Data that are easily grasped and can be used to compare the charges of doctors and hospitals do not yet exist but will inevitably appear in response to consumer demand. Yet even this targeted information may be too much for some people. For them, market baskets of typical services can be rated and used to compare the overall charges of physicians, hospitals, and other providers of care. Defining the components and coordinating ongoing reviews would be an ideal opportunity for a public–private partnership between the insurance industry and Medicare. Private companies have vast experience with patients under age 65 years, and Medicare has such experience with those who are older.

In the 1970s and 1980s, the classic Rand Corporation insurance experiment showed that people spent less on health care when their own money was involved. This should come as no surprise to anyone. I was keenly aware of it in the mid-1960s, when I faced one of the toughest decisions in my own career in internal medicine—whether to increase the office visit fee from $6 to $7.50. Even though the amount now seems trivial, it represented a 25% increase at a time when most people paid out of pocket. Fast-forward to today’s era of insurer-determined pay rates, and I’m barely aware of my own fees, because they are essentially pie-in-the-sky numbers subject to arbitrary reduction by insurers for the vast majority of patients.

Hospital charges tell a related story. I happened to be present at the birth of the preferred provider organization (PPO) movement. Economic distortions were introduced at the outset. It did not matter that my own hospital’s charges were 15% lower than those in surrounding institutions. The PPO sales forces still demanded the same 15% discount for the privilege of participating in the network. (Their commissions were based on winning a 15% discount—no exceptions.) The hospital’s solution was to raise charges by 15% to cover the nonmarket discount plus more to cover contingencies. From then on, it didn’t pay to be frugal. Charges soared and, not long ago, the CEO of the same hospital told me that only 3% of care is now provided outside contracted prices. “And those bills are rarely paid,” he said.

More price visibility alone will do little to discourage list-price inflation as long as bills are perceived as being paid with other people’s money. HSAs add a more serious perspective that we are sure to see in primary care. But a $1000 or $2000 deduc-tible policy may not be enough to focus attention on the highest cost items like operating room and intensive care charges, because, after the large deductibles, there is usually full coverage for the rest.

In fact, HSAs, as currently constituted, may create an entirely new set of distortions. Primary care will mainly be paid for before deductibles are met—and therefore out of pocket. Worse, although payment will be declined after insurance processing, fees will still be subject to contractual price reductions. Delayed billing of patients, who in the past were used to having some insurance coverage, will further decrease collections, while continuing an inefficient billing process for primary physicians.

Specialist and hospital care, following the rule of zeros, will be paid more promptly and, because of more frequent insurance coverage, more certainly. That alone will favor more expensive care. And, once past the deductible, there is little incentive for the consumer to restrain further costs.

HSA proponents are loath to confront these realities, as I’ve found in my own conversations with national leaders. I like the idea of patients having “skin in the game.” But the rules need a lot more work before HSAs can achieve their potential.

e-mail: philipa@itsa.ucsf.edu