Highlights:
The lack of price transparency is a major contributor to skyrocketing healthcare costs in the U.S. Patients are charged fees for services prior to receiving price estimates, unlike any other purchase a person makes in their life. These fees are obscure and can vary among people receiving the same services/ procedures. However, digital solutions are being developed to address these rising costs as well as to transform the payor system within the U.S. healthcare system. Castlight Health, formed in 2009, is one company trying to do this - creating a new area of digital cloud-based services for hospital systems. Castlight has show their model of using reference pricing to enable better price transparency for patients has been successful and is ready for larger scale adoption.
Major Findings
The opportunity to reduce wasteful spending and inefficiency in healthcare is enormous. U.S. employers currently spend over $650 billion on healthcare for their employees. Castlight found that using digital solutions such as their cloud-based price transparency platform, can incentivize hospital systems to offer more value (patient-centered care) while simultaneously cutting costs for patients.
The study found that to do this, patients need to operate as they do in their everyday lives as a consumer. In other words, patients should shop for the lowest priced service offering the best quality of care. As supply shifts, the demand curve will also shift. Applying basic economics to this study, the market will bring down the prices of the highest priced competitors while improving the quality offered by the lowest priced competitors until the market reaches a new lower equilibrium.
For patients to be able to make these decisions, they need to be able to see the prices prior to receiving any form of treatment. However, the pricing schemes that providers and insurance companies agree to are conducted via private and/or closed negotiations. And these organizations are usually not willing to provide this information to companies such as Castlight Health.
In systems where Castlight Health's model of price transparency was implemented, significant costs savings were realized. One such example was a company called HealthSparq, which showed a savings of >$50M over a two years. Extensive research has also shown that this pricing model can offer huge savings for Medicare as well – a program that currently spends over $1.5T annually – and can potentially help make the program sustainable.
Lastly, it was found that the lowest hanging fruit in price transparency implementation would be for optional or “commodity-based procedures.” These would include procedures such as tonsillectomies, knee replacements, hip replacements, etc.
Empirical Basis for Findings
Currently, there is a lack of competition within healthcare. The negotiations between insurance companies, drug companies, and providers are sealed and/or private – many times using legal means to do so, helping these stakeholders gain more leverage in future negotiations. However, this means that consumers (patients) are not able to see the true cost of procedures, with the cost of procedures varying greatly from one hospital system to the next. For example, depending on the provider, the cost for a simple blood test varied from $10 all the way up to $150. Castlight is addressing this by using reference pricing. This works by setting the price of a blood test, for example, at the lowest price offered on the market. If that price is $40, then the health plan would cover the test up to $40. This incentivizes customers to shop for the cheapest option. Eventually, the higher priced alternatives will reach a lower equilibrium and the quality of the lower priced alternatives can increase.
Further, this example links to another major finding in this article. From a monetary perspective, the incentives of most stakeholders within healthcare are misaligned. Since customers have health plans that cover most of the costs after meeting a deductible limit, the customer does not care about the cost of the procedure beyond what they would have to pay out-of-pocket. Since providers know this, they can charge increasing prices knowing that insurance will covering the extra cost of these procedures. This in turn causes insurance companies to raise premiums over time as their margins get squeezed. Combine this with a lack of effort within many hospital systems to truly weed out inefficiency and bloat, and now the hospital systems have a way to justify raising their prices: low profit/ margins. And the cycle continues.
Implications for Practice Management
Firstly, as more hospital systems experiment and implement cloud-based platforms that enable price transparency, market forces will play more of a factor than ever before in setting prices. Health leaders will need to ensure that they are continuously improving the quality of their patient care to attract patients and generate profit.
Second, companies that focus exclusively on providing price transparency platforms, such as Castlight Health, have yet to turn a profit. This is the next big hurdle that needs to be overcome. Is it possible for these independent companies to exist? Or do insurance providers or healthcare systems need to acquire these companies and then offer price transparency as part of their current service offerings?
Third, the difficulty in gaining access to negotiated pricing to be able to set reference pricing in the first place needs to be addressed. The system does not currently work like a free-market system – and health-leaders and senior executives need to work with state and federal legislators to align incentives to be more patient-centric. Price transparency will enable organizations to appropriately set referencing pricing for patients to use while comparing and selecting providers for procedures and other services. Once this is initiated, health leaders need to work on increasing customer engagement with price transparency programs. This system will only work once customers (patients) are aware of and make use of the system. As more patients utilize reference pricing in their decision making, the market for patient care will shift to the most efficient equilibrium point.
Bibliography
Raube, Kristiana. “Castlight Health: Disrupting the Health Care Industry.” California Management Review 57.4 (2015): 104–125.
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