Could price tags save American health care?

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A big part of the reason consumer goods are so cheap in the U.S. is because people always know what they’re paying. As a consequence, consumers can push prices lower by voting with their feet. If CVS tries to sell me a toothbrush for $4 when the one at Rite Aid goes for $3, I will shop at Rite Aid and CVS will learn its lesson. This dynamic almost entirely accounts for the success of Wal-Mart. Yes, Wal-Mart has more efficient (and therefore cheaper) distribution than almost any other company on Earth, but the whole reason Wal-Mart is going for cheap in the first place is because there are hundreds of millions of Americans who demand it—a demand that is listened to because people are able to make well-informed decisions about when to walk away.

Lately I’ve been wondering if we might not be wise to unleash such price-crazed consumerism on the field of health care. The great health care debate has two prongs. I don’t know the best way to expand coverage to the uninsured. But I do have an idea about how to drive down the eye-popping cost of medical treatment: price tags.

I write this as a newly price-conscious consumer of health care. At the beginning of the year, Time Warner changed my health insurance—which, for the record, I am grateful to have. I used to be charged co-pays. About $25 a pop for office visits. Now I am under a system of co-insurance. After my yearly deductible, I pay 10% of all my health care costs, up to an annual out-of-pocket maximum.

This has immediately changed my behavior. I hurt my ankle a while back, but how I did that and what is ultimately causing the pain is a mystery. My first foot doctor was stumped. I went to see another one a few weeks ago and when I checked in, I asked how much the office visit would cost. The desk clerk told me I didn’t have to worry about it since I had insurance. I explained that insurance didn’t cover everything. She came back with “about $700.” That would mean $70 directly from my pocket. I was floored, but I had no way of knowing if I was overpaying. Who could possibly know that?

Then one of the technicians fetched me for an X-ray. I asked how much the X-ray would cost. He said he didn’t know, but he could try to find out… or would I just like to wait and see the doctor first? I said I’d wait.

The doctor came in and asked me a few questions. I explained that I’d been to another doctor. I repeated what that doctor had told me about the X-ray I’d had at his office. My new doctor examined me and told me that another X-ray wouldn’t tell him what he needed to know. And that was how I prevented my very first unnecessary medical test. I still don’t know how much that X-ray would have cost, but I do know neither I nor my insurance company had to pay for it.

My colleague Kate Pickert tells me that some 30% of health-care costs are attributable to waste. I am happy to know I am now doing my part to cut down on that. Well, not happy exactly. Under this new system of co-insurance, I pay a lot more.

Nonetheless, I am an immediate fan. I wish everyone in America could instantaneously have insurance set up this way. I wish that every time any person went to the doctor, he asked: How much does this cost? How much does that cost? Is there a less-expensive way to do this? Naturally, people with high deductibles are already incentivized to do this. So are people without insurance.

But I want to go even further. I want everyone to have easy access to price information, even those people who don’t think—or want—to ask. When I go to a hotel, there is sign on the back of the door that tells me the most the room can cost. When I go to a car dealership, there are sticker prices on every windshield. When I go to Wal-Mart, there are price tags on the shelves.

And that is what I want for doctors’ offices and hospitals, too: price tags. I want a little sign on my doctor’s front desk that tells me that office visits cost $700. I want a placard on every MRI machine in the nation that tells me that an ankle scan costs $1,050. I want the consumer marketplace to be flooded with information about how much health care costs. And then I want tech entrepreneurs to create web sites and iPhone apps to help people comparison shop medical services.

I’m hardly the first to argue we need more consumer skin in the game. Back in the late ’70s and early ’80s, the landmark Rand Health Insurance Experiment found that when consumers have to help pay for medical care they use less of it. The study found that consumers gave up both appropriate and inappropriate care, which might seem worrisome—you don’t want people not going to the doctor at all until they’re in such bad shape that they go to the ER. But the study also found little impact on people’s health.

The widely adopted innovation in the years that followed the Rand study was the co-pay. I think it’s safe to say that mechanism is no longer working.

I have long been fairly quiet about health-care policy because I feel I don’t know enough about the intricacies of the debate. But one thing I do know about is the price-setting power of the enlightened consumer. I know about the effects of price transparency, and I know about what happens when you give Americans the tools to hunt for deals and value. Think about Wal-Mart. Think about going on Expedia to comparison shop airline tickets. Think about the first question you ask when you are considering buying a particular house.

Now think about health care.

UPDATE: Here is how we can make this happen.

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