Peeling Away Health Care’s Sticker Shock

We loved this article by Andy Grove on Wired Magazines website from last month. If you didn’t get the chance to read it then, we’re giving you another chance!

Original Article by Andy Grove on 10/16/12 from Peeling Away Health Care’s Sticker Shock

Health Care Prices In the early 1950s, it was nearly impossible to know the value of an automobile. They had prices, yes, but these would differ radically from dealer to dealer, the customer a pawn in the hands of the seller. This all changed in 1958, when US senator Mike Monroney of Oklahoma shepherded a bill through Congress requiring that official pricing information be glued to the window of every new automobile sold in the US. The “Monroney sticker,” as it came to be known, has been with us ever since. It became an effective means of disclosing the manufacturer’s suggested retail price, or MSRP, and a billboard for other data disclosures to the consumer: the car’s fuel economy, its environmental rating, and so on.

The sticker price was one of the triumphs of consumer-rights legislation and has made buying a car an easier—though never altogether easy—experience. What’s more, window stickers made automobile pricing rational and understandable. A customer who knows the base price going in will expect more value coming out. In economic terms, the sticker turned a failed market flummoxed by information asymmetry into something resembling a functioning, price-driven marketplace.

If there is ever an industry in need of a Senator Monroney today, it is health care, in which 1950s-era thinking still rules the day, and irrational and inexplicable pricing is routine. The health care industry plays a gigantic game of Blind Man’s Bluff, keeping patients in the dark while asking them to make life-and-death decisions. The odds that they will make the best choice are negligible and largely depend on chance. Patients need to have data, including costs and their own medical histories, liberated and made freely available for thorough analysis. What health care needs is a window sticker—a transparent, good-faith effort at making prices clear and setting market forces to work.

Exploding Health Care Costs

Since 1987, US health care spending per capita has more than doubled, and the cost borne by patients continues to rise.

Chart design: Luke Shuman
Sources: Archives of Internal Medicine, US Centers for Disease Control and Prevention

How bad is it? Uwe Reinhardt, a leading health care economist, described the pricing of hospital services as “chaos behind a veil of secrecy.” Chaos due to lack of predictability; veil of secrecy because many organizations take a proprietary attitude toward data.

Consider a recent study of the costs of routine appendectomies performed throughout California. Though the procedures were largely identical, the charges varied more than 100-fold—from $1,529 at the cheapest to $182,955 at the most expensive.

What accounted for this bizarre spread? Good question—but efforts to discover the answer turned out to be futile. Although the research highlighted how large the bills for these hospitalizations were, various costs were declared to be trade secrets. The providers (i.e., the hospitals) and insurers involved in the study would not share how much the insurers actually paid for the visits, only what the providers charged. To me, understanding the logic here requires a chain of reasoning that could appear only in Alice in Wonderland. We don’t just need an MSRP sticker—we need a medical Freedom of Information Act!

In business, as time goes on, weak industry participants will try to improve their status, and, of course, incumbents will attempt to protect their positions. Two common ways of imposing or maintaining market power are by forming coalitions or by outright acquisitions, and that’s what has happened in medicine. Consolidation among health care providers has resulted in a number of large organizations becoming even more powerful as they’ve started to use their size and reach. And they’ve wielded this power to keep a lid on some of the information that would make for better health care.

The past several decades have seen major strides in technology of all kinds. Improvements in semiconductors have allowed faster computation and communications, as well as the construction of databases that outdo themselves every year. In many industries, technology development has spurred further improvements in efficiency—a virtuous cycle. In health care, this process is happening at a much slower rate. It has taken decades to complete even relatively simple tasks such as digitizing medical records.

Out-of-Reach Insurance

As the number of uninsured Americans has risen (today more than 15 percent lack coverage), basic care has become out of more people’s reach. This means that costs like additional emergency room visits must be borne by the rest of the population.

Chart design: Luke Shuman
Source: US Census Bureau

What’s more, in most industries technology has served to automate processes and reduce costs. At Intel, we worked to introduce and deploy technologies in a variety of industries. The most difficult to penetrate was the field of medicine. The paradox of health care is that technology has driven costs higher. In fact, half of the increase in medical spending is related to the deployment of new medical technologies.

Part of the problem has been due to well-established prejudices. Consider a recent encounter: A friend of mine, a professor at a major medical school who is in charge of the clinical training of doctors, described a spirited exchange with his students about their choice of a psychoactive drug. There are many such medications. Generic versions apparently show no significant difference in efficacy from newer, branded drugs. An FDA review published in 2009 confirmed this. However, they do show huge differences in cost, with the new medications, by virtue of their patent protection, being much more expensive. Try as he might, my friend could not persuade the residents to prescribe any of the older, less expensive alternatives. The residents insisted that if a new drug was available, even at a much higher price, it would be unethical to not use it.

Investment patterns in health care reinforce this tendency. The largest single spender on medical research and technologies development—more than $30 billion annually—is the National Institutes of Health. Though NIH emphasis has been on new research, not cost, it has made some effort to address the issue. In 2000, a new agency, the National Institute of Biomedical Imaging and Bioengineering, was created to exploit emerging technologies with an eye toward economic benefit. But this effort has been largely marginal and is under constant attack by vested interests: The 2013 fiscal year budget currently circulating in the House of Representatives, for instance, would limit pragmatic funding throughout the NIH.

This cultural bias being baked into policy is not new. In 2009 Congress approved funds aimed at identifying the comparative effectiveness of various treatments. But language opening the door to “comparative cost-effectiveness” was deemed too radical and was cut from the bill. That’s like comparing the performance of a Ferrari to a Kia without knowing which one costs more.

Widely Varying Fees

The price charged for any given medical procedure seems to defy logic. For example, a 2009 study found that the amount billed in nearly 20,000 uncomplicated appendectomy cases in California ranged from less than $2,000 to close to $200,000.

Chart design: Luke Shuman
Sources: Archives of Internal Medicine, US Centers for Disease Control and Prevention

In a transparent health care market, pricing and other patient data can be consolidated and analyzed to yield new insights. A previous head of the Prostate Cancer Foundation, Leslie Michelson, once said that every clinical examination contains the elements of a clinical trial. “Life itself is the greatest clinical trial of them all,” he said. “It’s just a little too big.” But new database tools could speed up the processing of information and allow a clinician to gain useful information from a single patient—in real time. Managing comparisons of data matrices, unthinkable just a few years ago, is entirely practical today. With computers developed for this purpose, correlations could be analyzed, relationships between diseases and treatments studied, and individual treatments generated. In short, the “blinded” patient would benefit from technology, with results much more easily obtained. Meanwhile, every new patient changes the database by adding real-life data elements to the collection. The resulting “digital sticker” would play a major role in bringing order to chaos. It could potentially have just as much impact on the health care business as the MSRP had on the automotive business.

This opportunity will flourish only if a new mindset spreads throughout the health care industry, starting with doctors. The use of new technology, its cost and deployment, all must be taken as seriously as the technology itself. Today it is not. I have particular interest in the nascent discipline of translational medicine, which moves discoveries from the proverbial lab to the bedside. I helped initiate one such effort in this field: a graduate program offered jointly by UC San Francisco and UC Berkeley. The curriculum took off in record time, but disappointingly 91 percent of the students registering for it are engineers and scientists, not doctors. This limits the special value of this effort.

The health care business is about patients. But the patient population has been largely powerless and remains so even as the members of the medical community—hospital chains, nationwide insurers, large employers—have become much more powerful. Over time, the patient—the raison d’être of the health care business—has been reduced to merely another raw material.

This should not last. What technology can do is change the game—change the basis of competition, change what it takes to win in the health care marketplace. In time, some players will compete better than others by making good use of technology. In this competitive environment, patient use of the available pertinent information, with all its benefits, is going to be critical, giving them more economic power. They will likely demand to know more about their various conditions and what their dollars are being spent on. That’s how American consumers have always operated, and I predict they will here as well.

But what they’ll need is transparency in treatment, cost, and institutions—in other words, a digital sticker. Getting that transparency has to be Job One.

Andy Grove, senior adviser to Intel, was the company’s chief executive officer or chair from 1987 until 2005.