UsableMarkets

In last week’s FT there was an interesting article about the lack of success of market-based healthcare plans in the US. The article – Republican healthcare plan ‘in jeopardy’ – reports on a survey that documents consumer rejection of these types of plans.

As the survey states: “Any consumer product that scored as low [as the consumer-driven health plans]…would be significantly retooled or pulled from the shelves.” The cause of this rejection is the “naive assumption that people would automatically be confident purchasers of healthcare.”

Trust, or confidence in the product, is often considered (and certainly in my mind) a quality of usability. So one could say: market based healthcare plans, as they are currently designed, are not usable. They do not understand how people think about healthcare (their mental model), or how they use it.

Some background.

As most people know health care costs are rising fast. In addition, the number of uninsured is also rising. There are two (very generally speaking) alternative solutions to this state of affairs. Universal coverage, as one sees in Canada and Britain, or some form of market-based solution in which the consumer pays a greater share of their healthcare. In this second solution healthcare insurance might be seen more along the lines of auto insurance, where you pay for the basics (gas, oil changes, etc.) but get coverage for the big things (accidents).

One of the beliefs of the second solution, and why business is certainly pushing so hard for it, is that since the consumer will be paying more of their healthcare costs, they will be more judicious consumers of it. In other words, since the consumer has to pay, they will be more willing to do cost comparisons and shop around for the best price, and only “buy” healthcare when they absolutely need it. This “reality” of the market will force hospitals, clinics and doctors to “compete” for business, thereby bringing down costs. And since healthcare is often paid for by companies, this would in turn bring down their own costs of doing business.

In many markets transparency will indeed bring down the price. If I know the price that everyone is charging for a widget, then, all other things being equal, I will buy the cheapest widget.

But this market-based approach to healthcare reform makes many un-examined assumptions about healthcare consumers.

1. People will be able to think rationally about healthcare costs.
Kenneth Arrow, (you might have heard of him before) wrote a seminal article – Uncertainty and the Welfare Economics of Medical Care (PDF) – which makes several points about the healthcare market and why it is different than other markets.

Among the various points he makes is this one: the outcome of most healthcare treatments are unknown at the time of purchasing, so it is hard for people to be able to put the right price on a particular procedure.

In many ways, asking someone what they think a procedure should cost is to ask them to put a value on their life. This is an extremely difficult thing for anyone to do. It’s priceless, after all, since it’s their life.

In addition, he makes the point that bargaining for healthcare interrupts the trust relationship between a physician and his patient. A physician once told me about how his patients who were physicians were just as likely to put themselves “totally in his hands,” despite the fact that they were physicians. In other words, just because they were knowledgeable consumers didn’t mean they weren’t feeling vulnerable. They were in no position to bargain over price – their life was at stake, after all.

In my own research (unpublished and mostly unscientific), I have found that the greater the risk of the procedure, the more likely people will search for a physician who has a personal recommendation, preferably from someone in the healthcare field (either another doctor or a nurse). People just don’t particularly care about the price when the procedure is critical. And this is true for both people with insurance, and without.

So, this idea that people can think rationally about healthcare costs might hold true on the lower end of the spectrum (getting treatment for a cold, for example), but certainly no longer holds true for the most expensive, and most critical procedures. Because of the stakes (their life), the uncertainty of the outcomes, and the need for (some would say absolute) trust in their physician for high risk procedures, cost becomes almost irrelevant.

2. Making people pay for healthcare will improve the transparency of the healthcare market
In the world of healthcare there is never a single price for anything. Depending on who is paying, the price can vary greatly. A hospital, for example, will often have several prices, one for each insurance company (and these prices are not disclosed), and then a public price, which is almost always the highest price. Hospitals will continue to work under this arrangement until healthcare insurance is no more, or they are obliged by government to publish all prices.

True, there are companies like Vimo who are trying to make the healthcare market transparent, but it will be a very long time before I can easily look up the true cost of a knee surgery at the various hospitals in my neighborhood.

There is a very good reason why this information is not easily available. Because, to a hospital (and many clinics and physicians), the customer is not the patient, the person being treated, but the insurance companies. And to publish costs is to reduce their negotiating power with their true customers. As a patient you don’t figure into the pricing mechanism at all. And, honestly, most patients probably prefer it this way (see point 1).

So, until the insurance companies go away (extremely unlikely), getting the true cost of any medical procedure will be hard to get.

3. That people are willing to pay more (either in time, or money) for their healthcare
At the core of the universal coverage solution, and many current healthcare insurance plans, is a very powerful, very usable, idea: One price (or no price!) for most procedures.

As a consumer this is a very easy to understand concept. I go to the doctor, I bring my $20, and I get the treatment I want.

The consumer costs for a market-based plan are numerous. A. I have to spend time finding the price of a procedure, which is not always easy to do, and then deciding at which price I should purchase this healthcare procedure. B. I will have to pay more than $20. C. And then I have to manage the billing process, which is often in complicated language and with numerous prices, many of which I don’t understand.

So, as a rational consumer, which would you chose. Existing healthcare plans win hands down.

In summary:
Market-based plans have a big usability problem to overcome: they ask people to search for prices that are hard to find, and even harder to understand; to negotiate a price with someone whom they need to trust; and to give up what is often enough – to them – a perfectly good model.

As always, thanks for listening.
~alex

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