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OPINION

FEBRUARY 23, 2012

Health Care's Coming Price Revolution

The private sector is moving to give people the information they need to get treatments that are worth the money. But ObamaCare blocks the way.
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By JOSEPH RAGO

The old-line Marxists used to talk about "heightening the contradictions" of capitalism to make things worse and hasten the revolution. One of the great ironies of the Affordable Care Act is that it may be doing just that. Two years on, the major achievement of President Obama's new entitlement and its regulatory apparatus has been to heighten the contradictions and dysfunctions of the health-care status quo even as it creates multiple new problems. The goodand less noticednews is that the growing disruption is driving the industry toward the solution that prevails in the rest of the economy: the price mechanism. In the context of American health care, this might be a watershed. To appreciate what's wrong with the current system, imagine four patients identical in every way except for their insurance coverage. They report to the same doctor for a routine procedure, say, a colonoscopy. The first patient is on Medicare, which controls prices. The program's fee formula sets prices unilaterally for about 7,000 physician services and pays lump sums for 600 general hospital diagnoses, regardless of the quality of care. Medicare pays twice as much on average for a colonoscopy if it is performed in a hospital outpatient setting rather than in a doctor's office. Patients two and three are covered by private insurers, but those insurers are likely to reimburse the doctor at different rateswhatever they've negotiated to include him in their networks. The rate will be higher than competitive to make up for Medicare's below-cost feesthe gap between public and private rates is now about 40 percentage points. The rate is also likely to be a proprietary trade secret, or else literally unknowable: The doctor can only generate price information when he codes his services and bills the insurer. The fourth patient is uninsured. If she seeks treatment, she'll be billed directly from a "chargemaster," a hospital's list of marked-up sticker prices that no one with coverage will ever pay. So one doctor, four patients, four different prices, multiplied times one-sixth of the economy. Price discrimination, or varied pricing, is common in service industries with high fixed and low marginal costs: airlines, colleges, hotels, telecom. But nowhere else but health care are prices so arbitrary, so disconnected from value. The consensus, on the right and left, is that this fee-for-service jumble is incoherent. What liberals usually mean when they complain, however, is that they'll cook up speculative and supposedly better payment formsto pay for "bundles" of care; or to pay more for treatments the government decides are valuable, and less for those the government decides are wasteful; or to encourage physicians to practice this way instead of that way. This is the price-is-"right" fallacy and it always fails: No matter how expertly

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Joseph Rago: Health Care's Coming Price Revolution - W...

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designed, price controls always distort the allocation of resources. The health-care dollar is spent behind a veil of ignorance, instead of revealing value. A more encouraging turn is the gradual emergence of a workable market-driven alternative to all this in the private sector, which is happening for a simple reason: There's no money left. For decades businesses merely absorbed health-cost increases and effectively took them out of employee compensation. But the erosion of real wage increases that this caused is now too large to ignore. RAND recently estimated that health care consumed 79% of the dollars that otherwise would have gone into paychecks for the average U.S. family during the 2000s. Meanwhile, after the enactment of ObamaCare, premiums in employer-sponsored health plans climbed by 9% in 2011, and they're due to rise
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another 9.4% by 2014, according to

Medicare's actuaries. They further estimate that the increase would be 4.4 percentage points lower without ObamaCare's mandates and rules. But now insurers are starting to give workers and businesses the information and tools they need to lower costs. This is, in fact, a remarkable period of industry innovation and creative thinking. All the major insurersUnitedHealth, Aetna, Cigna, WellPointare now mining their billing data and attempting to accurately measure costs and compare them with outcomes. "Moneyball" is coming to health care for the first time. The big insurers now publish transparent, meaningful all-in prices for hundreds of services by hospital and doctors, and they are building Web platforms that allow consumers to shop for providers. Tiered-benefit structures that use cost-sharing to steer patients to more efficient providers finally give patients the means and incentive to make reasoned medical decisions outside of an information vacuum. The insurers are also using this data as leverage in contract negotiations and forcing providers to show that their quality is better than their competitors'. The commercial unit cost trendthe rates insurers pay for servicesfor 2012 is basically flat, after increasing 5% to 10% over the last decade. The other important trend in terms of aligning costs and incentives is the growing interest by employers in defined-contribution insurance. Here companies would give their employees a fixed-dollar payment and allow them to choose from a menu of coverage options and make the trade-offs themselves, rather than having their bosses do it for them. Workers would pay the marginal costs of higher-priced plans, much like what Rep. Paul Ryan has proposed for Medicare. A recurring theme on insurer earnings calls to analysts in 2011 was that this shiftmuch like the migration to 401(k)s from pensionsmay happen within the next decade. As Aetna CEO Mark Bertolini put it in October, "We have heard a lot of talk. We have actually engaged employers in very detailed discussions about what it would take to do it. But we have not seen anybody really interested in pulling the trigger yet." Aetna recently bought Medicity and WellPoint bought Bloom Health, two start-ups that are experimenting with this model. The impulse here is to restore the price signals that will drive U.S. health care to deliver care that is worth the money. But these gainsin transparency and efficient pricing, for instancewill need to be consolidated and expanded to constitute a true revolution. The Affordable Care Act stands in the way. ObamaCare's core philosophies are standardization and centralization, which in practice will mean higher costs for everyone caused by suffocating price competition. The share of

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Joseph Rago: Health Care's Coming Price Revolution - W...

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insurance industry revenue that comes from government now stands at 42%, up from 36% just three years ago, and that's before the new entitlement kicks in. And a wave of ObamaCare-promoted provider consolidation is creating hospital monopolies that can demand higher-than-competitive prices. So a revolution won't come automatically. Still, the market is naturally creating an ObamaCare alternative, and the moment for structural reform may be riper than Washington rhetoric suggests. "Health-care reform" is inevitable. The only question is whether it will run in the direction of prices and choice or more government control. Mr. Rago is a member of the Journal's editorial board.
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