Knowing the Price of Everything and the Value of Nothing

One of the stated goals of health reform is to make medical prices more transparent. In fact, one provision will force insurers to reveal what they pay doctors. No matter how ill-advised that policy, there is a conceptual problem that plagues advocates of consumer-directed health care. Consider this circularity:

  A. Having patients pay out of pocket will not work unless prices are transparent.
  B. Real prices will never be transparent unless patients are paying out of pocket.

Here are five principles to help us get out of the trap:

Principle No. 1: Whenever patients pay with their own money, prices are always transparent. Cosmetic surgery, LASIK surgery, walk-in clinics in shopping malls — they all post prices. And in the medical tourism market, package prices are usually transparent for almost every kind of surgery. A system which produces menus without prices is possible only when insurance pays most of the bills.

Principle No. 2: When patients are not paying the full cost out-of-pocket, the prices aren’t real prices anyway. If patients do not pay for care with money, they are probably paying with time. And when doctors’ services are not rationed by price, the fees they receive are not market-clearing prices. Instead, they are artifacts of a bureaucratic reimbursement system. In the hospital sector, fees are even more divorced from reality because, historically, hospitals have had incentives to manipulate their charges in order to maximize against reimbursement systems. Not only are hospital charges not real prices, no one actually ever pays them except poor, uninsured patients who occasionally get caught up in the system.

and although my eyes were open
they might have just as well’ve been closed


Principle No. 3: Transparency doesn’t matter unless providers are competing on the basis of price. As was made clear in a Congressional Budget Office (CBO) report, forced transparency is unlikely to change anyone’s behavior in a system dominated by third-party insurance. (If I gave you a Yellow Pages-size book of phony medical fees for your area, would it change your behavior?) If providers compete on the basis of price, fees will be transparent and they will be real. If providers don’t compete on price, fees will not be real whether or not they are transparent.

Principle No. 4: Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) by themselves will not produce transparency. Long before you reach the physician’s office with HSA card in hand, your insurer and the doctor have already agreed on what will be paid for, what will not be paid for, and how much. And the insurer has already agreed with you on how the transaction will count toward your deductible. Consequently, your doctor is not competing for your patronage based on price. Consequently, the fees are not market-clearing prices.

Principle No. 5: Real transparency will never arise in an insurance-dominated system unless providers are free to repackage and reprice their services to individual patients. Suppose we abolish third-party payment for primary care and give every patient a primary care HSA — no deductible, no copayments, just an account used to buy care.  Transparency for all primary care services would blossom overnight. All prices would be real prices. Rebundling and repricing would soon follow. Telephone and e-mail services would emerge. Electronic medical records would sprout. Maybe even house calls.

Happiness and well-being would flourish. All would be right with the world.

Comments (26)

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  1. Bruce Hopper Jr MD says:

    Most excellent post.
    What are Americans supposed to do? Wait for the government, insurance companies, medical device makers, pharmaceutical companies, durable medical goods companies, etc., to drive down price? I think not. It will NEVER happen.
    We advanced primary care doctors have a huge opportunity here to disruptively innovate how most health CARE is delivered in this country.
    How, you might ask?
    Our real VALUE is inexpensive because our real overhead is low.
    Stop accepting third-party reimbursement (unless it is fair: price AND administrative burden). Start using technology to communicate with patients and to manage chronic disease.
    Follow me on my journey starting my own solo practice in Philadelphia. If it works, then I want to lead disgruntled patients and doctors into the future.
    The foundation of a functioning, efficient, and genuine healthCARE system is a well-oiled primary care base (NOT the “medical home”).

    Bruce Hopper Jr MD empowered by HelloHealth

  2. Desmond Joiner says:

    I will add that Third-party payers add favored nation clauses in their Provider Contracts…if the medical provider offers a better deal to one of the Third-Party payers’ members, they have to offer it to all of its insurance members (court case PHCS vs Healthsouth).

    However, it can be interpreted a HDHP is not insurance, permitting the Provider to circumvent this provision.

    One thing for sure…those collecting all the premium dollars now, do not like relinquishing its revenues and fight the promulgation of HDHPs

  3. Beverly Gossage says:

    There is a hybrid of transparency emerging as insurance companies (Humana and Aetna, for example)are beginning to list a range of negotiated prices for common procedures on their website so that members may “shop” providers within the network. I have had HSA clients save hundreds of dollars on tests and procedures by choosing a lower cost facility. This is not the transparency that we would all desire, but a step in the right direction.

  4. Ken says:

    Very good post. We are never going to get real transparency in a third-party payment system.

  5. Michael Kennedy says:

    This is an excellent post. I have considered the French system as a model for reform. They are not exactly what we would want but the basic principle is there. The patient pays the doctor and then gets reimbursed a flat rate by the health plan. What the doctor charges is a transaction independent of the health plan. That is the best health system in Europe, probably the world, and it costs 2/3 what ours costs per capita.

  6. Vicki says:

    Nice piece and nice musical pairing.

  7. Tom H. says:

    I agree with your observation that prices are always transparent in health markets where patients are paying with their own money.

  8. Howard Long says:

    Dr. Goodman,
    As the “father of HSAs”, (I was an uncle) you promote them well.

    Prices, (true prices, as on my card and Patient’s Record) are, indeed, the best monetary guide for patients.

    We can pray for the growth of a Congress that will pass Dr Price’s HR 3400 to solve the Medicare and Medicaid insolvencies. TEA Party activity could do that.

  9. Virginia says:

    I think the market has to do this. It’s going to take consumers demanding to know the price of a procedure. It would be nice if people decided to go to cash-only doctors for most of their needs and only use their insurance plan for large-ticket items. It doesn’t solve the problem entirely, but it helps to mitigate the large number of doctors that don’t know how much they charge for a flu shot.

  10. Bart Ingles says:

    Third-party payment isn’t the problem. It’s the negotiated reimbursement agreements required of preferred providers. If not for the ability of insurers to negotiate fees in advance, it wouldn’t matter whether the provider or the patient receives the check.

  11. Don Levit says:

    Are you recommending that there be no negotiated reimbursement agreements?
    I liked Michael’s reference to the French system.
    Would you tend to support their method of payment?
    How can people be assured there is not a huge balance outstanding?
    Don Levit

  12. Ralph Weber says:

    The complete lack of transparency is the biggest factor contributing to the growth of medical tourism, along with lack of patient choice and privacy. This is EXACTLY why we formed
    The key difference between traditional medical tourism, and MediBid, is that we also allow US doctors, and hospitals to submit a bid on providing medical care right along side overseas facilities.
    At MediBid, if you submit a request for a knee replacement, you will get a bid from India, Thailand, Singapore, Korea, Japan, Mexico, across state lines in the US, and Canada

  13. John R. Graham says:

    With respect to France, Michael Tanner of Cato Institute wrote a compelling article, in which he points out that France has largely avoided the waiting-list problem. Because balance-billing is allowed, 92% of French residents buy complementary private insurance (

    Beverley Gossage points out that some insurers are posting prices. While this is not ideal (because the prices are still determined by providers negotiating with insurers, not patients), it is a step in the right direction.

    For health insurers to transform into insurers for catastrophic medical/hospital expenses only will be a wrenching change for them; and one which threatens careers of many executives within those firms. So, it’s not surprising that they have resisted.

    Nevertheless, if Congress repeals ObamaCare and goes back to the status quo ante, the growth of HSAs/HRAs/FSAs would be so rapid that, eventually, insurers would get out of insuring primary care entirely. If repeal was followed with real reform, giving patients the dollars that their employers and insurers use for medical care, the transformation would be faster.

  14. Bart Ingles says:

    Don: I wasn’t recommending anything (other than more precise argument), just making an observation. But it seems to me that “no negotiated agreements between insurers and providers” is a subset of the French system Michael describes.

  15. Bart Ingles says:

    …or more precisely, is a subset of changes required to get to the French system.

  16. John Goodman says:

    I think Bart’s point is a very good one. It is not third-party payment that is the problem. It is the third-part setting of fees. Once that is done, there is no possibility of the physician competing on price.

  17. Bob Geist says:

    #5 Money for primary care (using debit cards) is in a bill in the MN House for the Medicaid population. The party controlling the legislature is not interested. So what’s new about that from politicians, who think they know better than patients and doctors of what is “necessary” and, who want to control “the system” for the “good of society”. As one doctor said, legislators always talk about populations and doctors about patients–it’s like two ships passing in the dark. Bob

  18. Steven Bassett says:

    TPAs and employers could grease the skids to a marketplace: A handful of employers now send their employees and companion to certain best cost / quality facilities for select procedures. I believe the product design ultimately should award a fraction of savings achieved to the consumer. If we do this and cut primary and other low cost care as an insurable expense then cost and quality will go in the right direction.

  19. Ralph Weber says:

    By CMS setting prices “price fixing”, they force providers to pay the game of trying to add up enough procedures to break even. Doing un needed EKG’s etc. If I asked you to get me a Grey Goose Martini, and told you I’d only pay $5 for it, you’d get me one, and ask me for my $5. THEN you’d ask for a $3 delivery fee, $1 per olive, and $2 glass rental.
    Medicine is no different.
    That’s why doctors need to set their own rates, and the consumer will make market based decisions.

  20. H.Carroll says:

    It surely is the “third party payer negotiating/setting of prices” that is the evil. Consistent pricing must be added to “market based” and “transparent” pricing requirements for the market system to work. It should be illegal for a provider to do a “special” deal with any patient based on that patient’s affiliation with a particular third-party relationship, whether that third party is a self funded TPA, a health carrier network, or any government program. Balance billing should be required, though the provider is free to modify the resulting patient “net” responsibility (after cost sharing of the insurance plan, if any, and any balance billing, if applicable) in any way they choose (bringing back control to the “charity” aspect of the provider/patient relationship). The key is that this situation forces a truer market determination of value for the service and quality of that service. Until the pricing mechanism is fixed, no other area of “reform” can be properly measured, no quality improvement properly valued, and no true total cost to the system can be determined. Fix the metric.

  21. Charles Johnsen says:

    A market of values and prices generated by millions of transactions between individual willing buyers and willing sellers is a natural system born with us as human beings. It works for everything from arrowheads to jet planes, from whores to church collections. It takes no regulation and no law beyond punishment for fraud. In contrast all imposed systems, be they democratic or monarchical, distort prices and value for political reasons. Good intentions are not enough, majority vote is not enough, pity for the poor is not enough. ANY interference with that individual transaction is foolish, mean spirited, and outdated. The market for medical care is way too complex for any person, computer network, or government agency to grasp or control. Yet a single completely local deal between two human beings mechanizes a natural ecology of trade and cooperation. Give it up. The time of history for authoritarian markets is past. The picture of the political system trying to freeze our world in the 1950’s, or even the 1860’s, is risible and dangerous.

  22. Robert H Bruce says:


    Thank you for posting this. I know we’ve kicked it around before, and truly any real reform is going to include “menu pricing”, or full public disclosure of what everyone, including insurance companies, is paying for a service. Now THAT’s FREE MARKET!

  23. Ralph Weber says:

    Exactly right Charles and Carroll! And it’s working really well. The doctors are setting their own rates, and the patients get to chose. But they are not only looking at the price, they are looking at location, and the doctor’s profile as well, something not possible under the old model

  24. Ralph Kristeller says:

    My understanding of Quality, Value and Cost:

    Physicians are experts in the Quality of Medical Care.

    Patients are experts in the Value of the Medical Care they receive.

    When the patient directly pays the physician a fee for service, Quality and Value tend to come together very appropriately.

    The source of the funds that the patient uses to pay the physician are, and should be, strictly the responsibility of the patient.

    Cost (and transparency) falls into its proper place when the above are functioning optimally.

    However, I also believe that the true Professional takes into account the patient’s ability to pay when establishing a fee.

  25. Frank Timmins says:

    As someone who works in this system on a daily basis, I can attest that the biggest monkey wrench in the process to achieve “transparency” is the current process of provider contracting. To be specific, the predatory contracting methodology of BUCA (The Blues, United Healthcare, Aetna) make any effort to move to a system of transparency and individual responsibility most problematical.

    Bart is correct in his assessment. I don’t fully understand how BUCA (especially UHC) has avoided federal prosecution under anti-trust legislation. Clearly these carriers control both the buyer and seller in their methodology which eliminates the normal buyer seller (quality/price) market control. It is eerie how such a disfunctional and self serving process (for insurance companies) has woven itself firmly into the multi-billion dollar healthcare system while we paid no attention.

  26. Ralph Weber says:

    Well put Ralph, and Frank you’re right too. BUCA wants clients to think that THEY are single handedly beating up the “greedy docs” on price, and getting knee replacements reduced in cost from $58,000 to $28,000. Meanwhile MediBid is sending people across satte lines for medical care every day where the meshing or quality and value occurs.