Cost to Treat Cancer Drops 34 Percent When Physicians Package Price
An experiment by UnitedHealth Group tested bundled payments for cancer care. Another name for bundled payments that you might recognize is package pricing — where a vendor offers to group all costs together and lower the total price in an attempt to win a consumer’s patronage. Although common in every other industry where consumers buy services, package prices are quite rare in health care (except cosmetic surgery). Ordinarily, oncology doctors are given a fixed percentage markup on the cancer drugs they administer in their offices. For instance, a doctor administering an expensive drug would earn a proportionately larger fee than a doctor using a cheaper generic. UnitedHealth Group wondered if this perverse incentive translated into doctors using higher-priced medications rather than a cheaper drug that might be more effective.
The study found that over a 3-year period doctors who received bundled payments spent about one-third less treating cancer patients than if they had been paid a percentage of every oncology drug they used. Authors noted that while actual drug spending rose, total treatment costs were lower than expected. In other words, doctors weren’t skimping on drugs; they were choosing the most effective drug regardless of their commission.
This result should not be unexpected. What would be considered common sense or conventional wisdom in any other industry is considered novel in health care. The bottom line: incentives matter!
UnitedHealth found package pricing resulted in lower spending than if it paid for each item separately.
This is similar to the WellPoint / CalPERS experiment using reference pricing, where enrollees were encouraged to patronize lower-cost hospitals, while the hospitals were encouraged to compete for enrollees on the basis of price. We wrote about WEllPoint and reference pricing here. Reference pricing is sort of like when you were in high school and your mother gave you $20 to buy a pair of Levi jeans at the mall. If you spent $30 on a pair made by Calvin Klein, you paid the difference. The price of the jeans you ultimately purchased was probably lower than if your mother let you use her credit card on whatever you wanted.
In a nutshell, CalPERS and WellPoint noticed that some hospitals would perform joint replacement (i.e. hip replacement; knee replacement) at a lower cost than many other hospitals. There didn’t seem to be any reason for the price difference. Quality was not better at the higher priced hospitals, nor were outcomes not poorer at low-cost facilities.
Both these experiments are intuitive; we would anticipate the positive results in every other market where we shop.
Interesting result in this experiment. I once heard Mr. Obama say that doctors were so greedy that they would amputate a patient’s foot just to make more money. I guess these doctors didn’t hear how greedy they were supposed to be.
Exactly! Doctors tend to be good people, who go into the profession to help people; not to cheat people out of their money. Nonetheless, this administration has bullied doctors because they have the faulty belief that physicians “profit” off of other people’s sickness. No, they do not, they provide a service that people want and need.
Most doctors tend to not make it out of Med school or residency if they were only financially motivated to pursue that career.
Nothing instills confidence in doctors like the president saying they are willing to chop off more limbs for an extra buck or two.
Very interesting. I’m surprised that packaging was not thought of long before. You are right, incentives can be a powerful tool.
This is a great example of how healthcare costs can be lowered, and it’s all without government intervention. In fact, it’s a free market principle that, combined with the proper incentives, will lead to lower prices and/or better quality. How come we don’t allow this more often?
“How come we don’t allow this more often?”
Possibly because of a misunderstanding of incentives. The people in control of health care policy tend to not think in terms of economics, unfortunately. They think more regulation=lower costs. And they couldn’t be more wrong.
“Cost to Treat Cancer Drops 34 Percent When Physicians Package Price”
This is what doctors are supposed to do. Find ways to treat the patient in a cost effective way. I feel too many times physicians are motivated financially rather than in the best interests of the patient.