Healthcare's Lack of Transparency and Its Impact on Market Creation

Story by Steve Wunker
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Transparency promotes market creation. If customers can understand the quality and cost of new propositions, they can assess whether the offering is a good fit for them. 
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The greater the number of people who can make this assessment, the more likely it is that some segment of customers will find it attractive. Moreover, if customers have direct exposure to this information they can overcome the inertia often found in gatekeeper-oriented systems, where a relative handful of individuals makes decisions about what to bring to market based on sometimes misaligned criteria.
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Teeth whitening works this way. The results of whitening are immediately obvious and the cost is clear. What started out as a procedure performed only in dental offices has migrated into several new markets such as shopping mall boutiques, home whitening kits, and touch up pens. Innovation blossomed.
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The American healthcare system is not transparent in its medical outcomes, service quality, or pricing. Its customers, whether these are defined as patients or their employers, often have little idea of whether they are receiving good value. Gatekeepers — doctors, hospital purchasing departments, health insurers and others — determine whether new offerings should succeed in the marketplace. This makes sense to some extent. Consumers can’t judge whether a new way of performing a surgical procedure is right for them. But because the system reduces the chance for markets to segment, it lowers the probability that innovative offerings will find a viable foothold. Inertia also results from the many layers of decision-makers.

A company called Castlight Health is trying to change that. It has just announced that it raised $60 million from leading investors, including the Cleveland Clinic to become a “Travelocity of Healthcare” for patients and employers. It wants to list online the prices of procedures from a host of competitive providers, gleaning that data from Explanation of Benefits forms.

This is a laudable idea, but it is hard to see it working in the healthcare system we have today. There are currently over 7,000 billing codes, and that number is set to expand by an order of magnitude in the coming years. It is a very complex system to comprehend. Moreover, even for an apples-to-apples comparison of procedures, providers will bill very different rates depending upon what they have negotiated with health insurers. One of a health insurer’s main functions is to negotiate these rates, ensure appropriate billing, and monitor quality. It is not clear why this responsibility should be transferred to patients and employers. Costs can vary inordinately between providers for the same procedure, but insurers have strong incentives to negotiate those differentials away or drop the expensive providers from their networks. This is true whether the insurer is carrying the risk or just performing administrative services for a self-insured employer.

A better approach is to have more transparency in quality. Massachusetts, for instance, makes doctor quality data available to patients online, and sites like Healthgrades.com allows patients to make subjective quality assessments on criteria such as trust in the doctor and whether the doctor helps patients make informed decisions. This data can help patients choose where to seek treatment no matter what procedure they need.
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Another good approach is for employers and their insurers to have very tightly-managed networks of physicians, possibly including an on-site clinic at large companies. In these systems cost and quality can be more easily controlled, good performance can be rewarded, and innovative offerings can take root by running a shorter gauntlet of decision-makers than is otherwise the case. Patients do not have to worry about cost comparison because their employers and insurers have incentives to keep costs low and the tools to maintain high quality. In a closely-aligned system, costs and outcomes are highly transparent to the key decision-makers. If patients are concerned that the resulting lack of physician choice is leading to poor care, they can make their case to people who have the power and information to do something about it.

While transparency is an important precursor to market creation, it can take different forms depending on industry context. Healthcare may not need a Travelocity. It does need a closer coupling between employer, insurer, physician and patient to foster competition and create a more fertile ground for valuable innovations.