Dr. Uwe Reinhardt was famous for quipping, and writing, “it’s the prices, stupid.” Although I’d never let my own children use the pejorative term, there’s much to admire about the sheer simplicity of the message. If you want to know why health care in the United States costs so much, you have to look at the prices.
However, as Dr. Sherry Glied offered in the 2021 Reinhardt Lecture at the 2021 Annual Research Meeting, to truly understand the role of price, you have to look beyond prices as reimbursement for products and services, and see them instead as signals to which health care providers (or producers as she terms them) respond. A transcript of her address has recently been published in the journal HSR.
In her remarks, Dr. Glied makes a solid case for prices as signals drawing on international comparative evidence as well as U.S. spending patterns, including examples from Medicare and Medicaid. Her commentary points out that in this view, high prices signal to producers (aka providers) that consumers value a service, and they respond to that demand. She says,
“The prices-as-signals view turns the compensation calculation on its head. Rather than high US health prices being a consequence of high underlying input costs under a fixed production function, high US health prices could lead producers to increase the inputs used in production – even if underlying input costs do not change.”
Such signals could create a variety of incentives that drive up costs. High prices might lead providers to invest in new technologies or amenities to attract more patients willing and able to pay those prices – think adding new MRIs or fancy lobbies that each respectively appeal to a privately-insured patient base. They might also encourage providers to invest in additional staff and supports to streamline the volume of services or encounters a clinician or institution can perform – the higher the price per encounter, the more profitable a high volume of encounters become. Finally, high prices can drive higher administrative costs, whereby provider organizations invest in staff and expertise to improve coding and utilization to get the highest price for each encounter.
Glied concludes her commentary with the Reinhardt-esque question: Are the prices right? That is, if prices are a signal of value, are amenities, volume and coding really what US consumers value? Probably not.
“There is no reason to believe that current prices provide incentives that reflect either underlying costs or consumer preferences,” she concludes.
Health care prices still matter, of course, not only because they raise costs, but because consumers and providers respond to them and make investment and allocation decisions accordingly. The challenge to health services researchers, Glied asserts, is to understand not only the documented price variation and its causes and effects, but whether those prices are sending the right signal.