What’s the True Cost of Health Care? [Part 1]

In the first post of this series, we will discuss rising healthcare spending and the increasing variation of prices for medical services.

We all know that healthcare prices are too damn high in America. This problem led to a divisive debate and a national overhaul of the healthcare system. Although growth in spending slowed down due the recession, it’s now rising again as the economy improves and more Americans are covered under the Affordable Care Act. National health spending is projected to grow to almost 20% of GDP by 2022. If 1 out of every 5 dollars will be spent on health care, then shouldn’t it be simple for people to shop for it? It should. But it isn’t.

In reality, prices for medical services don’t reflect the true cost of care and they dramatically differ for the same procedure. As a case study, let’s look at prices for an MRI: a common procedure performed 30 million times a year in the US. The average price of a lower back MRI scan in San Jose, California is $1,742. But does this price reflect the true cost?Apparently not.

The prices that facilities charge for a lower back MRI scan drastically varies from about $500 to $2000 in California alone (see graph below). Can the costs of administering the same MRI vary that widely? We understand that doctors need to make a profit to stay in business — so do car dealers — but the variation in healthcare prices is downright crazy.

The $1.6 trillion health care industry views you as a customer, not just a patient, and so should you.

Let’s look at the car market for comparison. There are about 17 million new cars sold every year in the US. That’s a big market but not nearly as many as the number of MRIs done each year. Like doctors and facilities, car dealers mark up their prices. But patients don’t usually negotiate down the sticker price to pay fair market value, as customers do when buying a car.

While it’s true that you might pay a different price then someone else for the same car, the difference is minimal. On the other hand, the difference between the same procedure can vary upwards of 2,000%!

Why the madness? Healthcare pricing is terribly opaque.

Seriously. If you visit your doctor, you won’t know what you will have to pay until weeks after the visit. This is because insurance companies negotiate confidential contracts with hospitals and private physicians about how much they’ll cover. Unfortunately these prices don’t reflect costs.

Instead they reflect the relative market power between hospitals and insurance companies to muscle a deal. This hurts patients because hospitals have an incentive to inflate prices and insurance companies have an incentive to not cover their patients’ expenses.

How can patients navigate this complex system?

Read the second part of this series to find out.