Variation in treatment cost from one provider to another within the same geographic market is responsible for approximately $36 billion in health care waste annually in the U.S., according to a February 2012 white paper by business information provider Thomson Reuters, Save $36 Billion in U.S. Healthcare Spending Through Price Transparency.
The researchers used insurance claims data for Americans with employer-sponsored insurance to analyze variation in prices nationwide for 300 “shoppable” procedures—high-volume procedures that consumers would plan for and schedule in advance, like a mammogram, colonoscopy or MRI. They found that prices in some markets were two to three times higher than the median price for the same procedure.
"Studies show that health care costs for the same procedures in the same market can vary by more than 100 percent," according to the white paper. For example, Thomson Reuters’ research on price variation for an Illinois-based employer revealed a variance of +102 percent/-23 percent for a lower back MRI. Diagnostic colonoscopy and knee arthroscopy procedures showed a similar price variance.
"Providing consumers with clear, comparative information on the cost of services is key to further engaging them in the decision-making process and, ultimately, reducing health care costs," the researchers advised.
Among the key findings reported in the white paper:
• $36 billion in savings. By reducing prices for 300 common procedures to their median price nationwide, total employer medical expenses would be reduced by 3.5 percent or $36 billion annually for the 108 million Americans under 65 who receive insurance through their employer.
• Site of service matters. A major driver of price variation is site of service; prices vary significantly by care setting and the percentage of services done in the hospital vs. an office setting.
• Best practices to reduce price variation waste. The central ingredients to achieving potential cost savings are benefit designs that promote health care consumerism, access to provider-specific price and quality information, estimates that summarize all costs associated with a service (hospital, physician and ancillary fees) and calculating out-of-pocket costs using benefit information to personalize.
Utilizing Cost Thresholds
To confront wide cost variations for standard medical procedures, CalPERS, the largest purchaser of public employee health benefits in California, designed its preferred-provider organization (PPO) plan to pay in-network providers up to a maximum cost threshold for knee and hip replacements, arthroscopies, colonoscopies and cataract surgery. Enrollees pay any amount above the threshold when they don't use designated in-network ambulatory surgery centers for these outpatient procedures. (See the SHRM Online article Applying Effective In-Network Incentives at CalPERS.)
Among the critical problems with consumer decision support tools was a lack of awareness and underuse, the researchers found. To derive savings from price transparency, "organizations need to raise awareness about the value of the tool by creatively promoting it, illustrating the cost-savings potential, and reinforcing this message throughout the year," they noted.
"Our history of deeply insulating consumers from the costs of their health care choices and the pervasive systems that obscure visibility into the cost of services bear at least some of the blame for year-after-year double-digit growth percentages for health care costs," the researchers concluded. "Price transparency tools that encourage more-informed, financially intelligent health care decisions, combined with benefit plans that are designed to require more conscious health care choices by consumers, will help create engaged, informed, educated consumers."
Educating Employees About Price Transparency
The following are among the best practices that can inform health care information gathering to ensure that it is as useful as possible to the patient and to the long-term quest of lowering health care costs, according to Thomson Reuters.
• Structure health benefits to give consumers a vested interest. Whether it be a high-deductible, consumer-directed health plan or a more traditional design, consumers need strong economic incentives to select affordable care options. History shows consumers will not concern themselves with the prices that are charged to their insurance providers.
• Provide information on price and quality variation by provider. Consumer trust is low. Providing information on price without addressing quality can raise concerns about the intent.
• Show total costs and components. Costs can vary significantly depending on where services are performed (physician’s office, hospital or outpatient facility). Illustrate the total costs associated with a particular service or treatment clearly, as well as how they vary based on where a provider practices.
• Highlight what insurance will and won't cover. Patients need to be alerted to the potential for certain procedures not to be covered (cosmetic or elective surgery), statistics on the effectiveness of certain procedures, and whether they will be liable for any expense not covered by insurance.
• Engage consumers to help them manage conditions. Patients need to be made aware of care guidelines for any chronic disease or condition and the likelihood of complications if they do not follow the preventive care regimen.
• Promote, promote, promote. To derive savings from price transparency, organizations need to raise awareness about the value of transparency tools by illustrating their cost-savings potential and reinforcing this message throughout the year.
Cost Transparency as an Emerging Trend in Employer Coverage
A growing number of U.S. employers recognize the need to improve transparency in prices and quality in order to change an opaque health care market, according to findings from the 2012 Towers Watson/National Business Group on Health Employer Survey on Purchasing Value in Health Care. The survey found that 15 percent of large U.S. employers provide health care service unit price information to employees and another 22 percent planned to do so over the next 12-24 months. In addition, more than one-third of companies are requiring plans to provide complete extracts of claims data that identify providers so as to reveal pricing differences that can be communicated to employees.
The survey was completed from December 2011 through January 2012 among respondents at U.S. companies with at least 1,000 employees in all major industry sectors.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Seeking Transparency (Health Care Costs and Quality), HR Magazine, September 2012
More Health Plan Users Investigate Prices for Services, SHRM Online Benefits Discipline, June 2012
HSA Plan Growth Continues; Most Provide Decision-Support Tools, SHRM Online Benefits Discipline, June 2012
Educate Employees to Control Out-of-Pocket Lab Costs, SHRM Online Benefits Discipline, July 2011
Health Care Consumerism Needs Transparent Cost, Quality Data, SHRM Online Benefits Discipline, April 2011
Transparent Health Information
Sandy Lutz, director of the Health Research Institute, PricewaterhouseCoopers, discusses strategies for price and quality transparency in health care, and how employers can spur these initiatives.
SHRM Online Benefits Discipline
SHRM Online Health Care Reform Resource Page