Pick a Price, Any Price

In today’s edition of the Journal of the American Medical Association: Internal Medicine is a new research article that spotlights the challenges the average consumer faces in navigating the healthcare system.  Researches  Jaime Rosenthal, Xin Lu and Dr. Peter Cram share the results of their research on, Availability of Consumer Prices From US Hospitals for a Common Surgical Procedure.

They selected 20 of the nation’s top-ranked orthopedic hospitals, according to US News and World Report rankings, and using a secret shopper script (one of the author’s 62-year-old grandmother who did not have insurance but had considerable means to pay privately), requested from each the lowest complete bundled price (i.e., including hospital costs and physician fee) for an elective total hip arthroplasty (THA, or hip replacement).    They also contacted 102 non-top-ranked hospitals to request the same information.  What they found was considerable variability in the hospitals’ ability to respond to the request – and the range of prices quoted where responses were received. Each hospital was contacted up to 5 times.

The tables below (taken directly from the article) show the research results.  Table 1 indicates the number and percentage of hospitals unable to provide a single, bundled cost for a THA (55% of the top-ranked hospitals and 90% of the non-top-ranked hospitals).  Table 3 illustrates the significant in pricing. The range of prices for those top-ranked hospitals able to respond with a payment bundle was between $12,500 and $105,000.

This research is hardly going to come as a surprise to those familiar with the economic realities of the US healthcare delivery system. It would have been more surprising if the results were reversed.  Healthcare cost accounting has for decades now been driven by incentives that seek to allocate costs for the purpose of maximizing third-party reimbursement and not for the purpose of understanding production costs per unit of service/care similar to what you would find in any manufacturing sector.

In September 2011 Robert Kaplan (of the Balanced Scorecard fame) and Michael Porter (Redefining Healthcare) wrote an article for Harvard Business Review, How to Solve the Cost Crisis in Healthcare.  While I challenge both the immediate practicality and scalability of their approach, it was a strong effort to advance the cost allocation discussion from the bottom up, instead of the top down as we are used to doing.

But here’s the key takeaway: Consumer-Driven Healthcare must play a critical role in the future of the US healthcare delivery system.  Debate surrounds what policies best encourage and promote CDH and to what extent consumers can truly be their own advocates in a system where even prices are hard to understand (or believe).

Regardless of policy, however, healthcare providers – and hospitals in particular – are realizing quickly how important it is in an era of hyper-competitiveness, higher costs and shrinking reimbursement to understand costs the way a Lean manufacturing concern understands costs.  We’re heading in the right direction.

Cheers,
  Sparky