Thursday, May 9, 2013

Chargemasters and Used Cars

Recently there's been a lot of discussion about the use of chargemasters in hospitals. It's an often baseless fiction used for bargaining, and the growth in healthcare costs has been attributed to it. This bothers people, not without reason.

Other industries use price shrouding, but this is something altogether different. The situation is most similar to car salesmanship. Opaque pricing, line items that no one can explain, made-up additional charges, and initial prices that everyone knows are not the final prices. This results in consumers generally not being happy at the end of the car-buying process, and a poor reputation for car salespeople. Why is this? Is it just totally path-dependent cultural inertia that has made the pricing in these industries so bizarre and (some would say) unethical? Or is there something inherent to each that encourages it? There are similarities and differences.

In both, people are making large infrequent purchases. They're spending a lot of money without experience in this specific domain. Furthermore they may not know what they should be paying in the first place; this problem is worse for healthcare consumers. When you buy a car you can get some idea what this Toyota model is going for in this area by doing research online, although the salesman hopes you haven't, and you'll have some ballpark idea even without that research - whereas in the hospital, you certainly have no idea what a paracentesis should cost in your city. What probably makes things worse is that most hospital admissions are not planned. If you're in the hospital, it probably wasn't on your calendar ahead of time (unless you were getting an elective surgery, but that's still a small minority of patients.)

Another problem comes from a collision of values, between trade and the value of human life. We see this every time trade - a dispassionate, utility-calculating way of thinking - collides with a highly limbic behavior, involving immediate pleasure or pain, family, tribal identity, or human life. You can see this best illustrated by the goods and services that are most likely across polities to be banned on moral grounds, or those which are socialized. Healthcare is one of those. (If this collision is still not clear: can I pay you $20 to hop on one foot for 1 minute? Sure, I would take that deal. Okay, now what's the price to sell your child? Disgusting and we shouldn't even be discussing it, right? There's the collision.) To begin with, even when they have time, people don't look up hospital quality ahead of time (let alone cost) as with other businesses - we spend more time on ratings sites for restaurants. For one thing, if your kid needs an operation, do you ask yourself "Is the extra $12,000 at the slightly more highly rated hospital across town really worth it?" If you do, you might feel guilty - anyone who has ever negotiated wedding or funeral costs has had a similar experience. But the other side of the coin is that healthcare providers are not trained as profit maximizers, but as life maximizers and pain minimizers. The ED physicians and nurses have no idea what's on that chargemaster, and they don't care. The system would be a lot worse if this were not the case - that is, if hospital physicians were compensated like car salesmen - because they could take much more horrible advantage of patients if they were incentivized. That said, there should be no surprise that healthcare costs go up, because the service providers are ignorant of the cost and there's no feedback loop.

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