First posted 9/28/11 on the HHCF Blog
Let’s say you’ve invented a new product. Before you can sell it, you need to figure out its price such that you maximize revenue without pricing it higher than your customers will pay. If it costs more than similar products, you’ll need to figure out how to convince people to pay more for your product than they might elsewhere. This is how healthy, rational consumer markets work, promoting innovation that balances cost and quality. To contrast, now imagine you’ve invented a new product in healthcare. Guess what? You get to set the price without worrying what cost consumers will tolerate because they won’t be paying for it directly, and it doesn’t need to reflect how well the product works!
Because consumers don’t realize that the price of healthcare products and services is set very differently than prices in other markets, it leads to perceptions and behaviors that can be expensive and even dangerous. Here is a personal example:
An older relative of mine, Gladys, came to visit last year. While here, she became ill and I took her to my family physician. Among other outcomes of the appointment was a prescription refill, which she took to the pharmacy. Upon returning to my house, Gladys was clearly upset: “Why did your doctor give me a cheap medicine?” “I’m sorry, Gladys, what do you mean?” “My doctor gives me the good medicine, the $60 one.” “Gladys, I think she gave you the generic; it’s the same medicine, it just costs less.” “If it was as good as my medicine it wouldn’t be so cheap,” she grumbled.
Gladys kept the medicine during her visit, but told me a few weeks later that the ‘cheap’ medicine didn’t work so she went back to her own doctor to get the “good medicine.”
Gladys is a strong believer in the axiom: ‘you get what you pay for.’ And in most other industries, Gladys would be right. In a consumer market, price reflects what purchasers are willing to pay, and tends to be higher for something people believe is higher-quality (nicer, faster, sturdier). When older models drop in popularity, price usually drops too. We’re used to seeing end-of-season close-out sales where sellers dump their inventory to make room for newer, higher-priced products. Rather than seeing this as an opportunity to save a little of her fixed-income, in Gladys’ mind, my doctor had reached into the 75%-off-everything-must-go bin and handed her last-year’s pills.
Misconceptions abound in healthcare, mostly because some people THINK price reflects effectiveness and they THINK medical practice has a much stronger scientific foundation and oversight than is actually the case. Most of us grew up thinking that advanced medicine, which translates into technical, expensive procedures, is better than basic tried-and-true treatments and that doctors have a very high degree of accuracy in both their diagnoses as well as determination of appropriate treatments. Consumers don’t realize that medicine is a 50-50 proposition: fewer than half of treatment choices are scientifically proven, and physicians will disagree about appropriate choices of treatment half the time (1). Yet society’s general beliefs about medical rigor have produced a population of predominantly non-questioning, procedure-favoring patients.
If I were to imagine a primer for healthcare users, with key points that might help them choose optimal care, the following would be at the top of the list:
1. Newer medical treatments and medicines are not always more effective or safer, but will likely be more expensive than those that are already available. While many consumers believe that the FDA only approves drugs that are “extremely effective” and have few serious side-effects, the reality is that the bar is much lower; a new treatment must only be shown to do more good than harm (2). Newer treatments do not have to be significantly better or more effective than existing options. Remember, newer treatments have a shorter track record, so potential problems haven’t yet been documented. Despite these facts, over 75% of newly-approved treatments are priced higher than existing ones (3).
2. Prices for medical services do not reflect effectiveness or likelihood to improve health. In many cases, it may be the reverse. Many types of back pain, for example, improve just as much from physical therapy and mild exercise as they do from complex surgery. Some end-stage cancer treatments cost tens to hundreds of thousands of dollars, but only extend life by a few days or weeks on average. Why is the price so disconnected from the health outcome? Because healthcare prices are based on the technical sophistication of the procedure, the training of the professional, and the malpractice risk involved—not whether or not the procedure works. This is what happens when an industry sets it own prices, rather than having consumers pay for what they value. This is why Gladys was misled by her interpretation of price.
3. Which type of doctor you see will influence what treatment recommendation you get. If you go to an orthopedic surgeon about your back pain, he or she will likely have a different suggestion than if you go to a family doctor or a physical therapist. Not surprisingly, surgeons tend to recommend surgery. Doctors will more often choose the tools and methods they were trained to provide, and more often recommend procedures involving equipment that they own, like MRI machines. The more specialized their training, the more expensive their advice will be. Plus, when it comes to medicines, pharmaceutical representatives encourage doctors to prescribe newer medications by leaving free samples to give to patients to try.
4. Life expectancy has improved mostly to low-tech discoveries, not because we have access to amazing, new medical technologies. We can credit the vast majority of our increased length of life in the past 50 years to sanitation, nutrition, vaccinations, antibiotics and a few other public health efforts (4). Even in heart disease, survival has increased due to use of such things as aspirin and other medications, much more than bypass surgery or angioplasty (5). If you have a choice of treatments, go for lifestyle first, then (proven) medicine, then—as a last resort—invasive surgery.
5. Don’t underestimate the risks in healthcare. Just because it is possible to take a pill instead of eating right, or because a health plan will pay for a procedure, doesn’t mean it is the best option. Every treatment has potential risks or side-effects. Consumers underestimate the risk of being harmed in the hospital (one in three patients) (6), or from a treatment or medicine. For many ills, we have a great capacity to heal ourselves without medical intervention. When we do need medicine, we can improve its effectiveness by taking it appropriately and understanding our role in recovery.
6. List but not least: healthcare is a business. It may include millions of caring providers, but this $2.4 trillion (7) industry is no less interested in making a profit than any other. It earns revenue by filling hospital beds, performing surgeries, prescribing medicines and seeing patients. Your misfortune translates into earnings for someone in the supply chain. When you receive unnecessary care, it not only costs you, it also affects everyone in future higher premiums, higher taxes, and lower wages.
Why this matters: As healthcare spending approaches 20% of GDP (8), the consumer’s role in managing utilization and protecting themselves from unnecessary risk and harm has never been more critical. If we want higher quality at a lower price, knowing how the system works is a good place to start.
1. Kumar, S. and Nash, D. B. Health Care Myth Busters: Is There a High Degree of Scientific Certainty in Modern Medicine? Scientific American, Mar 25, 2011; Health Care Myth Busters: Is There a High Degree of Scientific Certainty in Modern Medicine? (accessed Sep 26, 2011).
2. Pittman, G. Misunderstanding of drug approval common: study. Reuters Health, Sep 12, 2011; (accessed Sep 26, 2011).
3. Nelson AL, Cohen JT, Greenberg D, Kent DM: Much cheaper, almost as good: decrementally cost-effective medical innovation. Ann Intern Med 2009;151:662-7.(accessed September 26, 2011).
4. Centers for Disease Control and Prevention (CDC): Control of infectious diseases. MMWR Morb Mortal Wkly Rep1999;48:621-9.(accessed September 26, 2011).
5. Baicker, K. and Chandra, A. Aspirin, angioplasty, and proton beam therapy: the economics of smarter health care spending. Prepared for Jackson Hole Economic Policy Symposium, Sep 9, 2011; (accessed Sep 26, 2011).
6. Ricciardelli, M. Last Year’s Health Care Bill Equaled $2.4 Trillion. Health Reform Watch: A Web Log of the Seton Hall University School of Law, Health Law & Policy Program, Aug 13, 2009; (accessed Sep 26, 2011).
7. Reuters. Hospital errors 10 times higher than thought. msnbc.com, Apr 7, 2011; (accessed Sep 26, 2011).
8. U.S. Health Spending Will Continue to Rise, Reaching 20% of GDP by 2015, Report Says. Medical News Today, Feb 24, 2006; (accessed Sep 26, 2011).