A bigger problem than the lack of insurance

Increasing the number of Americans with health insurance will do nothing, on its own, to address the issue of rising health care costs. A new Bloomberg Businessweek article focuses on a larger issue: the lack of transparency in health care pricing.

Imagine taking your car to a mechanic who has no clue how much a battery or muffler costs—and has no way of finding out. Substitute “artificial hip” for “battery” and “doctor” for “mechanic” and you get a pretty good picture of the convoluted market for medical implants. Asked to estimate the cost of common devices such as replacement knees or spinal screws, physicians at seven major academic hospitals in the U.S. were wrong 81 percent of the time, according to a January study published in the journal Health Affairs. The survey of 503 orthopedists at institutions including Harvard, Stanford, and the Mayo Clinic considered doctors’ answers correct if they came within 20 percent of what their hospital paid suppliers. The worst guesses ranged from a small fraction of the actual price to more than 50 times what the hospital paid.

The doctors did so poorly in part because many medical device manufacturers require hospital purchasing departments to keep prices confidential, allowing sellers to charge some institutions more than others for the same products. “Widespread dissemination of device prices is not an option at many institutions,” note the authors of the study, which didn’t disclose what hospitals included in the survey paid. Prices “often varied considerably across institutions.”

Total spending on medical devices in the U.S. reached about $150 billion in 2010, or roughly a nickel of every health-care dollar, according to the Advanced Medical Technology Association (AdvaMed), the industry’s trade group. The device is often the most expensive part of an orthopedic procedure, and the bill is ultimately paid by either private insurers or Medicare and Medicaid. On average, hospitals paid suppliers $5,842 for an artificial hip in 2012, according to Orthopedic Network News; a replacement knee averaged $5,104.

This is another piece of evidence pointing toward the need for functioning markets in health care.

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