Need Healthcare? Let's Go Shopping or Not

This article was written by Jon Christianson, PhD, Medica Research Institute senior fellow and James A. Hamilton chair in health policy and management at the School of Public Health at the University of Minnesota.We all shop. Every day we decide which products and services to buy. But shopping for medical care, typically, has been different.

In the not-too-distant past, most of us enjoyed insurance coverage that was comprehensive. We knew little about the prices of medical services and had no reason to seek out price information. We judged quality based on the experiences of family members or neighbors, or physician recommendations. For most of us, employers were our surrogate shoppers, choosing the health plans and, consequently, the providers available to us. Employers that offered us a choice among multiple plans, requiring that we contribute more when selecting higher-priced plans, hoped to stimulate competition in healthcare at the “wholesale” level. To be offered by employers, and chosen by employees, health plans needed to compete successfully on premiums, fees, and provider networks.

The intent was that this “managed competition” among health plans would have a “trickle-down” impact on providers, forcing them to compete to be included in plan networks or risk losing access to patients.¹ Employers expected plans to use a mix of financial incentives and utilization management techniques to control the prices and costs of network providers, without jeopardizing quality of care.

For a variety of reasons, culminating in the “managed care backlash” of the late 1990s, employers became frustrated with this strategy.^1-3 Seeking an alternative, many supported the notion that the key concepts of competitive markets should be brought to bear at the “retail level” in healthcare.^4,5

The idea was that “…providing consumers with compelling performance data and increasing their responsibility for the costs of care will slow the increase in healthcare expenditures and motivate clinicians to improve the quality and efficiency of their care.”⁶ In this scenario, providers would compete to reduce costs and improve quality (the “supply side”) in response to pressure applied through the shopping behavior of engaged, informed consumers (the “demand side”).

After 15-plus years, what progress has been made in implementing this strategy? Where do things stand now? And, looking forward, what is the future for “retail competition” in healthcare?

Is Retail Competition a Good Idea?

Before addressing these questions, it is worth noting that this new approach is controversial. Some critics focused on technical problems (described below), but the proposal also re-surfaced deeply held views that market “solutions” to healthcare problems were not appropriate. Skeptics have referred to this strategy as the “…myth of ‘consumer-driven’ healthcare.”⁷ They worry that “the consumer-driven model of medicine unfairly calls on individual patients to interpret all available information and serve as de-facto industry watchdog. This is a weak corrective for all that ails our system.”⁸

In contrast, proponents have argued that “US healthcare would be far better, of higher quality, and less burdensome in terms of costs … if citizens, in their roles as patients and consumers of health services … were ultimately in charge of making the important decisions.”⁷ And, “consumer choice works well in other sectors of the economy, and it can work well in healthcare as well, once consumers are given the tools and incentives.”⁹

Even early advocates acknowledged that reconfiguring both demand and supply sides of the market to support retail competition would be a “heavy lift” given “the paucity of data to guide this new approach and the substantial challenges involved…”⁶ On the demand side, financial incentives would need to be put in place to reward consumers for aggressive shopping, while cost and quality information would need to be made available to help consumers make informed decisions. On the supply side, there would need to be a sufficient number of providers to encourage competition for patients.

Creating Financial Incentives to Shop

Employers have raised deductibles and coinsurance rates in their employee health benefit options substantially over the last decade.^10-12 The introduction and subsequent growth of consumer-directed health plans (CDHPs) with health spending accounts (HSAs) has supported this change. Forty-five percent of employees in large firms now are in plans with deductibles of $1000 or more, as compared to 9% in 2008.¹³ (In an unfortunate turn of phrase, employees sometimes are described now as having more “skin in the game” regarding their healthcare decisions.)

As a result, employees have a stronger incentive to be “price conscious,” or at least more aware of out-of-pocket differences across providers. Moreover, because a large number of employer-sponsored health benefits options still feature relatively low deductibles, supporters of the retail competition strategy see unrealized potential for higher deductibles to reduce cost growth. Researchers at the RAND Corporation have estimated that if 50% of Americans were enrolled in high-deductible plans with HSAs, annual health spending would be reduced by $57 billion.¹⁴ In fact, enrollment in these plans continues to grow.¹⁵

However, there is research that questions the notion that aggressive price shopping occurs under CDHPs.¹⁶ Unsurprisingly, there have been concerns that high deductibles will discourage use of needed services and impose financial hardship on those consumers who do seek care.^10,17,18

Some large employers (eg, CalPERS and Safeway) have dramatically increased the reward for price shopping by instituting “reference pricing” for specific services.^19-21 Under reference pricing, the employer sets a fixed level of reimbursement for a service. If the consumer chooses a provider with a price that exceeds this level, the consumer pays the difference, and the “excess cost” does not count against that person’s deductible or coinsurance payments above the deductible. Research suggests that consumers faced with reference pricing are more likely to choose providers with prices under the set reimbursement level, with many providers reducing their prices to attract consumers.

Although promising, reference pricing does not seem applicable to all types of medical care and all situations.^9,19 Consequently, some researchers see it as “not a panacea, but a useful and important tool.”⁹ Others view it as a piece of the healthcare puzzle with the potential to generate “modest” savings.²²

Supporting Informed Shopping Behaviors

For the retail strategy to work as intended, healthcare consumers must have ready access to useful information that supports their decision making. Here again, there has been change in the direction envisioned by proponents of the retail strategy. A national movement supporting the development, vetting and dissemination of clinical quality measures has emerged.²³ However, it has proven difficult to reach consumers with these measures by simply posting them online, the most common method of dissemination.^24,25 Even among the 20% of people who say they are aware of the measures, less than half find them useful when shopping for providers.²⁶ If they go beyond seeking advice from family members, friends, and their physicians, most consumers find greater value in measures of consumer experience or consumer ratings of physicians and user comments shared through the internet.²⁷

Providing consumers with useful cost information has proven even more difficult. Most public reporting sites offer, at best, average costs at the group or practice level. Frequently, costs or prices are reported as averages for a geographic area. As one critic notes, “you can’t act on those numbers” to choose a specific provider.²⁸ Moreover, the actual cost to consumers depends on their benefit coverage along with the rates that their insurance companies negotiate with providers.^29,30 Some insurers have developed cost calculators to aid consumers in estimating out-of-pocket costs when receiving services from different providers.³¹ While promising,^32,33 these efforts are in their early stages. In addition, the growth of narrow network benefit options has complicated matters, as plans must keep calculators up to date on “in-network” provider status—a task that some find daunting.

Even for consumers armed with information on quality and costs, discerning provider options—an essential component of shopping—can be challenging.³⁴ Consumers may find that the physicians they choose are not accepting new patients,³⁴ or cost-conscious consumers who choose in-network providers may find that they still incur out-of-network charges.^34-36 For example, a patient may choose an in-network hospital for surgery only to find later that the anesthesiologists in the hospital are part of a group that is not in the health plan’s network. Problems such as these are likely to discourage shopping behavior on the part of consumers. But, they can be overcome if health plans and employers are willing to devote sufficient attention and resources to addressing them.

Maintaining Provider Market Structures that Support and Reward Shopping

While employer attention has been directed mostly at creating an effective demand side of the retail market—hence the frequent use of the term “consumer-centric healthcare”—the supply side is equally important. The retail strategy presumes that multiple providers of specific medical services exist within a geographical market, and that those providers have the capacity to add patients. However, medical care markets are becoming more and more consolidated,^1,37,38 a development that my colleagues Carlin, Feldman, and Dowd (2016)³⁹ and others^40,41 have found contributes to medical care price increases.

There is little evidence regarding whether engaged, informed consumers can moderate cost growth in consolidated markets or bring about greater competition with respect to quality. For instance, in communities dominated by small numbers of integrated delivery systems (IDSs), consumers may shop for providers within, or between, IDSs but shopping within an IDS is not likely to create the same degree of competitive pressure on providers to reduce costs. In addition, prices continue to be set through negotiations between health plans and providers⁴² with larger systems having greater negotiating leverage. More aggressive antitrust action might moderate the consolidation trajectory,⁴³ but it is unlikely to unwind past mergers and acquisitions, something that would need to occur in many communities for effective retail competition to take place.

What Are the Limits of Retail Competition?

White and Eguchi²² addressed this question in their assessment of reference pricing. They used the term “shoppable services” to encompass services that must be scheduled in advance, where more than one provider exists in a geographic area that could provide the service, and where there was price data available for the different providers. Using data from autoworkers and their dependents to assess the potential impact of applying reference pricing to a range of services, they found something of broader importance. With an expansive version of the “shoppable” definition, they concluded that shoppable services only “…accounted for about a third of total spending if both inpatient and ambulatory services are included.”²² By implication, the effectiveness of a retail model in controlling healthcare costs would be limited to those services.

Frost, Newman, and Quincy^44,45 revisited the shoppable services issue using a claims dataset weighted to be nationally representative of a population 65 years and younger. They found that 42% of spending (an upper bound) was for shoppable services. Under existing benefit designs, consumers paid out of pocket about 15% of that, or about 7% of total spending for all US medical services. Consumers attempting to reduce their deductible and coinsurance payments through shopping could affect about 65% of that 7%. These authors observed that further changes in the demand side of the market (eg, further increases in deductibles) could raise their estimate of the spending that consumers might influence through more aggressive shopping. But they stated that “we need to be realistic about the power of consumer shopping to rein in excess healthcare pricing when selecting medical services”⁴⁵ (page 59).

Back to the Future?

It seems fair to conclude that, after 15 years, consumers have better access to quality and cost information and stronger incentives to use this information when choosing their care providers. These developments on the demand side, and the momentum they have generated regarding price and quality transparency, should please advocates of retail competition. In contrast, developments on the supply side appear to have moved the health system away from effective retail competition—perhaps irrevocably in many communities. Looking forward, what options does this leave employers?

One option involves greater direct engagement with providers.⁴⁴ Some employers are pursuing value-based payment models, such as bundled or global payments, that incorporate various degrees of provider risk sharing. Others support a return by health plans to the aggressive utilization management approaches employed in the 1980s and 1990s, increasingly in combination with more limited provider networks. Employers also are being urged to pursue new strategies in the arenas of behavioral healthcare and specialty drugs.⁴⁶ This type of hands-on involvement is what employers had hoped to avoid by establishing a successful retail market for healthcare. Additionally, growing provider consolidation is likely to be a formidable longer-term obstacle to payment reform and aggressive utilization management.

Some employers continue to prefer a less hands on approach, retaining faith in competitive market forces to restrain cost increases and improve quality. They are investigating private health insurance exchanges⁴⁷ operated by health plans and benefit consultants as a way to create competition in consolidated markets.⁴⁸ For example, health plans could offer employers an array of options for their employees, some of which are IDSs with narrow networks.³ As in managed competition, employees would pay more for more expensive options.

To date, large numbers of employers have not taken this step.⁴⁹ There likely would need to be at least 3, preferably more, integrated systems participating in the exchanges to encourage competition on cost and quality, and multiple employers in a given geographic area would need to adopt the strategy to maximize its impact. In an early experience with a version of this approach, which was managed by an employer coalition in the Twin Cities, maintaining commitment over time on the part of employers proved problematic.⁵⁰

These 2 paths are not mutually exclusive, and the demand side changes that have occurred may facilitate their implementation. However, both paths could be characterized as “back to the future.” They suggest declining employer confidence in retail competition as a strategy that, by itself, could bring about the desired health system outcomes. And, they underscore the limits that provider consolidation places on competitive approaches to healthcare reform more generally.⁵¹ Drawing on the wisdom of Yogi Berra: “The future ain’t what it used to be.”

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