Price Transparency Fallacy

Price Transparency Fallacy

Be careful what you wish for. The calls for price transparency will not have the desired effect you seek. They will not lead to patient empowerment or more cost effective care. Instead, we will see higher costs of care in medicine. This is the price transparency fallacy.

A fallacy is a mistaken belief, one founded on an unsound argument. The thought that price transparency will empower patients to make cost-effective decisions is naïve at best and disingenuous at worst. Studies that have evaluated patient behavior relative to varying degrees of price transparency have found few changes in patient decisions. For most patients, cost is not a factor.

But the massive push for price transparency will factor into two major trends. The first will be a series of adjustments in financial practices among health systems. The second will be a counterintuitive move toward more costly care.

Price transparency mandates will lead to clever financial engineering tactics, where hospital administrators will transform fixed costs into variable costs. In doing so, hospitals can present artificially low prices because fixed costs – as the name implies – are fixed, upfront costs, the ones that have to be disclosed. Variable costs, on the other hand, vary based on the care provided. They are the costs incurred in caring for patients and are difficult to anticipate ahead of time.

Now, nearly everything will be a variable cost, contingent on the care provided. Instead of a $40,000 appendectomy, the cost will be broken down into hopelessly miniscule line items: the cost of the operating room technician, the cost of the type of anesthesia, the cost of maintaining the surgical equipment. And by dissecting prices in such granular detail, hospitals can artificially portray the pretense of lower prices for clinical services and procedures by listing only the basic cost itself, while conveniently separating all the ancillary costs of care that are required to properly manage patients.

And once it begins, it will not stop. Soon health systems will break down costs like car parts at a dealership. We will see line after line of individual costs, but we will not know how the costs relate, or which costs are needed for which service.

In our ignorance, we will look at the listed costs differently. Unsure of what is necessary, or what costs correlate, patients will opt for the maximum number of services and the highest possible costs. If the listed prices for two types of anesthesia are offered, why would patients not choose the more costly of the two? As the saying goes, you cannot put a price on health.

We naturally equate price with value. And we presume the higher the cost, the better the value. It is not our fault. It is a natural reaction to uncertainty.

Herein lies the second trend to emerge out of price transparency: the counterintuitive increase in costs of care. When costs are spelled out and listed item by item, consumers have little actual understanding of what to make of them. It is akin to consumer overload, which appears when people have more options to choose from than what they can deal with. In such situations, people have a harder time deciding, are less satisfied with their decisions, and are more likely to experience regret.

In healthcare, this will lead to decisions by patients where they will select more costly services and ask to bundle services that may not be necessary.

This is the ultimate outcome in our push for price transparency. Hospitals and health systems will dissect costs until they become a hodgepodge of indecipherable line item numbers detailing prices for procedures and services that most patients can make little to no sense out of.

And in the face of uncertainty, patients will opt for additional services and procedures at higher costs than what they would have received if they never knew what the prices were in the first place.

This is the price transparency fallacy.

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