Why Data on Health-Care Price Variation Doesn’t Itself Solve the Problem

This was published as a Wall Street Journal Think Tank column on January 27, 2015.

The Blue Cross and Blue Shield Association (BCBSA) last week put out one of the best reports I have seen on price in U.S. health services. The report documents “extreme price variation” across the country for knee and hip replacements. It called for arming consumers with more price information but stopped there; it did not suggest there was anything large insurers—such as Blue Cross–could do about the problem themselves or call for greater government action.

The association examined hip and knee replacements in 64 markets across the country and found more than a threefold difference in the average cost of knee and hip replacements across markets. Perhaps even more startling, the analysis found that prices within markets can vary by as much as 313%.

In Dallas, for example, the cost of a knee replacement ranged from $16,772.02 to $61,584.86 and the average cost was $39,622.96, a 267% difference from highest to lowest. In Boston and Worcester, Mass., the cost of a knee replacement ranged from $17,910.25 to $73,987.05, with an average cost of $26,591.55, a 313% variation.

The report ended with just one prescription: “As more consumers shop for healthcare, insurance companies must use their data to empower consumers and employers with information that demonstrates cost and quality of doctors and hospitals and helps them find the highest value options for care.”

Certainly, giving consumers more price information would empower them to shop when they can, and consumers facing higher and higher deductibles would be especially motivated to shop. Still, there are limits to how price-sensitive even consumers with high deductibles are when they face big medical bills, because insurance plans cap patient out-of-pocket costs at some point and pay 100% of bills after that.

It can also be difficult for consumers to go to a particular place when their doctor has recommended another, or to choose a cheaper hospital or surgical center if it scores lower on quality rankings or its staff has less experience with a complex procedure. While consumers urgently need better price information, it’s hard to see that being a complete antidote to massive price variation.

To be fair, this was a study and not a policy report on what can be done about price variation. But it is revealing to see a group that represents large insurers suggest that the main answer to price variation is to empower consumers with information to fend for themselves, as if all the insurers can do is collect price data but lack the clout in the current marketplace to do much about the problem themselves. In some markets, insurers may have little leverage over powerful hospital systems, which have been consolidating in recent years. But in many markets insurers have leverage too. And with no signs in today’s anti-government climate that government can regulate to moderate price variation, if the insurance industry isn’t prepared to own more of the problem it’s not clear how much progress can be made.