A sense of resignation pervades the conversations about cost in the American healthcare sector. Cursory visits to a specialist’s practice or a quick check-in at a local urgent care center can leave patients with a bill that counts into the hundreds or thousands — and yet, the vast majority of patients and providers grimly accept the high cost as a toll affiliated with quality care, despite the fact that those in the U.S. tend to have worse healthcare outcomes and pay more than those in other developed countries.


There are a number of reasons for this, not the least of which is that many patients and providers have little idea as to the total cost of care. Insurance structures and tax breaks often shield patients from the immediate brunt of rising health costs, leaving them with little incentive to look beyond their direct financial responsibilities.


Providers face similar blindfolds: while doctors may know their own rates, they might be less well-informed about those for the other specialists or hospitals within a given patient’s network and thus lack a clear idea of the total sum affiliated with a care program.


This issue can spread to impact whole institutions, as a recent article in the Wall Street Journal illustrated in its coverage of the Gunderson System’s financial review of its hospital in La Crosse, Wisconsin. Researchers for the project wanted to know if its list price for a knee replacement surgery — which in 2017 topped $50,000 — accurately reflected the procedure’s expenses. To their dismay, they found that administrative cost-analysis was more often based on guesswork than formal price-tracking and that the follow-up services provided were inconsistent across providers. The actual expense of a knee-replacement surgery comes to just over $10,000 — a mere fifth of the usual asking price.  


The discrepancy is shocking and reveals a real problem in the way we consider cost in healthcare. Some experts in the field have posited greater transparency for consumers as the answer to the health sector’s pricing problems. The logic behind their suggestion is relatively simple.


Consumers are more than willing to assess price and value during a hunt for a new phone, car, or home; therefore, offering them that same flexibility and transparency should provide them more power to check their healthcare costs. As biotech analyst Geoffrey Porges commented about a recent 9.8% hike in drug prices for the Wall Street Journal: “You can’t take the price of the iPhone…up 10% a year.” Porges implies that if consumers were more aware of cost leaps in the healthcare industry, they would incite a firestorm of protest equal to any given after a rise in any other popularly-used product.


In 2016, researchers tested the assumption that patients who had access to a price-comparison tool and the means to make cost-value assessments independently would drive down health costs. Surprisingly, they found that increased cost transparency for patients did not lead to meaningful savings — in fact, tool usage may have driven spending even higher. Instead, patients tended to choose high-priced clinicians over lower-cost providers even when their out-of-pocket responsibilities were the same. However, prices rarely provide any reliable insight into a provider’s skills – and yet, if a patient with this mentality were to suddenly find themselves with the chance to receive care at a significantly lower price point, they might be suspicious of the care’s quality. Within this context, the uptick in health spending found in the study tracks: patients tended towards more expensive in-network providers because they believed that price has a positive correlation with quality.


I believe that this patient assumption is intrinsically flawed; as New York Times writer Reed Abelson wryly notes in an article on the problems of price transparency tools: “It is impossible to know […] whether a dermatologist who costs twice as much as another can more successfully diagnose skin cancer.”


Over a decade of public data and my own experiences have taught me that arming physicians, not patients, with cost of care data is a more powerful tool to effect meaningful change.


Unlike most patients, providers are in a prime position to take on the responsibility of managing costs and determining what a patient needs to have a quality care experience. Doctors are even better suited to this task than most insurance companies, as they have a view of the context of each patient’s case and the intricacies of the market. As HealthCare Partners CEO Dr. Robert Margolis commented in a report on capitation models in California: “Medicine is a local, not even a regional, business.” Insurance companies are too far from the front lines to understand the market in as many details as doctors do. To quote Dr. Margolis again: “Physicians organized in integrated groups could control medical care.”


In other words, the healthcare industry is long overdue for a shift to a capitation-centric model.


In a capitation payment model, the responsibility of managing financial risk for patients shifts from insurance providers to fall directly on the providers themselves. Insurers pay a percentage of the insurance premium for a given market to an integrated care organization, which is in turn responsible for providing clinical services to a defined population. Typically, these organizations encompass primary care physicians, post-acute specialists, hospital services, and prescription drugs.


Unlike in a traditional fee-for-service model, the cost of care in a capitated model does not break down into an itemized list of individually-accounted services. Instead, providers received a fixed amount per person that takes each patient’s anticipated needs into account over a preset period. The capitation model is one of the only billing frameworks that aligns healthcare cost minimization with providers’ financial incentives: by placing responsibility for financial risk on providers’ shoulders, the model encourages doctors to offer a high caliber of care at a low cost.


Within the capitation model, integrated health providers also benefit from increased transparency. Primary care doctors can see which cardiologist orders excessive treadmill testing, or determine which hospitals have a record of handling patients quickly and effectively at a low cost. Using this information, they can build preferred provider networks and optimize the way they refer to specialists. The model works: capitation-based frameworks allow providers to trim inefficiencies, reduce suboptimal care, and eliminate preventable wastes.


This success isn’t a theoretical one. In 1995, a report recording the impact of a newly-implemented capitation system on six California-based medical groups was published in the New England Journal of Medicine. According to the study’s researchers, the mean number of hospital days used by enrollees dropped by nearly half within a year.


Providers have the skills and inclination needed to solve America’s health care cost crisis  — all they need now is the cost transparency and payment models to do it.


Vance Vanier’s first article on payment innovation can be found on Linkedin.