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Why savvy shoppers can’t fix health-care spending

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One popular view of how to corral out-of-control health-care spending is to empower smart shoppers -- to arm individual patients with the information and incentives to shop around for the cheapest imaging scans or blood draws.

A boom in high-deductible health insurance plans is supposed to give patients what economists call "skin in the game." The thinking is that, if people can save themselves some dough, they'll make the effort and society will reap the benefits, too -- less health-care spending means lower health-insurance premiums. States have passed regulations to increase transparency in health-care prices, and online calculators have sprouted up to provide patients the information to make the best choices.

But a growing body of evidence suggests that this faith is misplaced: Even a wise consumer making thrifty health-care choices doesn't appear likely to make much of a dent in overall health-care spending.

There are three big reasons:

1) People given the incentive to cut costs simply stop seeing the doctor.

A working paper by academic researchers published last year found that a high-deductible plan did cut health-care spending, but not for the reasons health economists and doctors wanted. Instead of shopping around or avoiding unnecessary procedures, patients simply reduced their use of health care altogether.

"People on high-deductible health plans reduce health-care spending by a lot. But in reducing health-care spending, we want to do it in an efficient way; we want to get rid of the stuff that is less efficient first," said Jonathan Kolstad, an economist at the University of California, Berkeley.

Instead, the study found that people were cutting back not just on gratuitous imaging scans, but also on important preventive services. The reductions in care were seen even among the sickest patients, who had prior diagnoses that suggested they might benefit from routine care. After patients reached their deductibles, they stopped cutting back.

2) The broader effect of smart shopping is inherently limited.

A new report from the insurance industry-funded Health Care Cost Institute suggests that consumers' savvy shopping can only affect a small portion of the health-care spending pie. Here's how that slice shrinks, according to the new analysis:

Among people with health insurance provided by employers, the study found there was $524.2 billion spent on health care in 2011. At the very most, 43 percent of that was spent on services considered "shoppable." For instance, someone in an ambulance on the way to the emergency room won't spend time looking for the best deal.

But if people are going to shop, they're going to most likely be paying attention to their own wallet, not the societal cost of a procedure. That adds up to $80.8 billion, and less than half of that amount -- $37.7 billion -- was considered to be on "shoppable" services. And nearly a third of that "shoppable spending" was on copayments, which tend to be flat fees associated with doctor's visits that are unlikely to be dramatically cut by price shopping.

The result? There's about $27.4 billion in annual health-care costs where smart shoppers might be able to cut costs by finding cheaper knee replacements or MRIs.

On top of that, it's not always feasible to shop for medical services, noted Amanda Frost, a senior researcher at the Health Care Cost Institute. "If you’re in a rural area with one hospital, you can’t shop around for a cheaper price," Frost said. "If you’re looking for a service such as a blood draw you may be able to find a cheaper blood draw, but will the doctor even do it" if you're not his patient?

3) Even if patients want to shop around, the tools to understand health-care costs are limited.

Frost's analysis did find that some states were smarter to shop in than others, with the greatest variation in costs in Kentucky, Texas and Georgia. But a survey released last month by the free-market think tank the Pioneer Institute found that it can sometimes take multiple phone calls and arcane, insider knowledge of hospital billing codes to discover those substantial price differences and take advantage of the savings.

In New York City, for instance, the cost of a left knee MRI without contrast varied from $428 at Meadowlands Hospital Medical Center to $4,544 at Montefiore Medical Center. In Los Angeles, the procedure varied from $400 to $2,850.

"You can’t save and choose wisely in terms of a price, quality combination of health care if you don’t have the information," Barbara Anthony, a senior fellow in health care at the Pioneer Institute said. "And so without the information you’re in the dark, and that’s not way for a market to operate."

Information could become more readily available as transparency efforts continue, and people might save themselves some significant money by examining their health-care spending more quickly. But the three factors show how the deck is stacked against consumer shopping, and how the faith that consumer self-interest alone will make a serious dent in the health-care outlay that by 2024 will make up a quarter of the total economy may be misplaced.

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