Price Transparency In Health Care

A blog about business and economics.
Jan. 25 2012 9:43 AM

Price Transparency in Health Care

I sometimes get a little confused where on the ideal-realistic end of the spectrum different people's policy ideas are supposed to lie, and Peter Orszag's Bloomberg column touting more "price transparency" in terms of per unit prices of health care is one such time. His idea seem to be that if we had more price transparency, then prices would be lower:

When prices are revealed, typically after the fact, they often vary widely—depending on both the provider and the patient’s insurance plan. In 2009, for instance, the median charge for coronary-artery bypass surgery in Los Angeles County ranged from about $130,000 at Long Beach Memorial Medical Center to about $250,000 at Cedars-Sinai Medical Center and more than $300,000 at Garfield Medical Center, according to a California government website.
It’s worth noting that most studies have found little, if any, connection between price and quality.
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The rest of the column delves into some ins and outs over whether or not what extent different kinds of price transparency might succeed in reducing per unit costs. The fact of the matter, however, is that the rest of the world has already hit upon a quick and easy way of reducing unit prices in the health care sector—they write laws mandating lower prices. The United States, like all countries I'm aware of, subsidizes the purchase of health care services. But almost uniquely among countries, we don't impose any price controls on those services. Consequently, our prices are high. There is some policy justification for failing to impose price controls—the high prices drive investment in the health care sector, and curtailing prices might curtail the quantity of health care services available or the pace of new health care innovation. But any policy intervention that succeeded in reducing prices would have that same effect. So if lower prices is what you actually want, then why not simply—and transparently!—push the prices down? Maybe this is just a matter of political judgment about what's feasible.

On the workability, one concern I have about the transparency approach is that a wide range of health care services are plausibly Giffen goods for demand will increase with price. Bragging to your friends about what a great deal you got on a new toaster is one thing, bragging to your friends about how you got a discount heart surgery for your husband makes you sound like a jerk. People facing binding financial constrains will, of course, shop for the most affordable treatment option. But most people have some flexibility in their budget and are not going to self-consciously settle for anything less than the best. Washingtonian, like other regional magazines I'm familiar with, does an annual "best restaurants" issue which is different from their "cheap eats" issue. They also have a "best doctors" issue, but there's no equivalent of the "cheap eats" concept for health care. My best guess is that this reflects the authentic structure of consumer demand. People sometimes want a great big fancy dinner and sometimes want a great deal on a bowl of pho, but on health care what they want to know is who's the best.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.