Peeling back the veil of ignorance — why medical costs vary so much, and what Health 2.0 might do to help

The burgeoning movement known as “Health 2.0″ makes some pretty big claims about the power of social networks and Web services to transform the sprawling mess we like to call the U.S. healthcare system. One of the central principles is that providing individuals with better information about medical treatments and procedures will make them better “medical consumers” capable of exerting market pressure that can improve quality and lower prices.

There’s nothing at all wrong with that notion in the abstract, although there are plenty of reasons to doubt whether “empowering patients” this way will really produce significant change. Among them are the fact that the majority of medical costs in any given year are run up by a small minority of the population, many of whom are often so sick that they aren’t in any sort of position to shop around for the best deals. Measuring the quality of healthcare is also a thorny problem that no one seems to have really gotten a handle on at this point.

Still, anything that helps better inform patients and enables them to make the best medical and financial decisions possible has to be applauded, and that’s a direction that many Health 2.0 startups seem to be headed in. I’ll be writing more about a number of these efforts over coming weeks and months, because some of them are already starting to shed some interesting light on medical and insurance practices that were previously all but invisible.

One of them is a Nashville, Tenn., startup called change:healthcare. The company is probably best known for its site MedBillManager, a subscription service intended to help people with complex or “consumer directed” health plans — such as those with high deductibles — cope with their medical finances. Until late last year, change:healthcare also offered a physician and hospital site called FindYourDoc.com, which also presented some preliminary information on medical costs at some hospitals. That site has been down while the company integrates its offerings under the change:healthcare brand and unveils a new emphasis on letting people share and compare their medical costs. I’ve held off reviewing either service until the integration is done, which change:healthcare says will happen by March 1. The company raised $1 million last October, which we wrote about here.

In the meantime, though, change:healthcare has produced a couple of interesting case studies that illustrate how widely the cost of drugs and medical tests can vary within a single geographic area — a fact of which most people (myself included) are almost wholly unaware. This is the sort of information that could be very useful to the uninsured and anyone without a comprehensive, major-medical style health plan that covers just about everything — the very sort of plan that is quickly going out of style at the moment.

To gauge the variation in drug prices, change:healthcare conducted a phone survey last November of six well-known pharmacy chains in four different Nashville neighborhoods, asking each for the price of six prescription drugs: Copaxone, an injectable multiple-sclerosis drug; the antidepressant Zoloft; the fibromyalgia drug Lyrica; Lipitor, a statin that lowers cholesterol; the sleep aid Ambien; and the allergy/asthma drug Singulair. The survey turned up some surprisingly wide disparities among the pharmacy chains, such as the fact that a Lyrica prescription costs more than twice as much at Rite-Aid as it does at Walgreens. No single pharmacy was consistently the cheapest, and prices could vary considerably even at different branches of the same chain. Kroger, for instance, charged twice as much for Singulair in one Nashville neighborhood (Green Hills/Belle Meade) as it did in another (Franklin).

These are obviously price disparities that can only exist because of the system’s opacity and, to be fair, the lack of incentive for many insured individuals to shop around for the best prices in the first place. All this leaves pharmacies free to take advantage of information asymmetries, even to the extent of cutting deals with pharmacy-benefit managers that disadvantage anyone who’s paying full freight for their prescriptions. You can see the full results of the survey here at change:healthcare’s blog (scroll down for the PDF link).

The second survey involved looking at the cost of a simple medical test for streptococcus infection, the sort of thing anyone with a sore throat and a fever might need. Here, change:healthcare not only found wide price gaps among 13 different Nashville-based healthcare providers — all selected randomly from a list of general practitioners produced by a major insurer — it was actually unable to get information from five of them for a variety of reasons. (Two phone numbers were incorrect, one office turned out to be a sleep-disorder center, another suggested a walk-in clinic, and the last insisted that the caller select the doctor as a primary care physician before they’d provide the test.) The cost of the test ranged from a rough estimate of $50 to potentially as much as $259. The full study is available here.

To be sure, two small case studies don’t necessarily prove anything about the state of healthcare pricing on a national level, much less lend support for the notion that giving individuals better information will restrain overall healthcare costs. What’s more, they’re provided by a company with a vested interest in building demand for services that will help individuals compare healthcare costs, so some perspective is definitely in order. Still, these results are indicative of the irrational pricing that undoubtedly affects many areas of medicine, which is likely to impact increasing numbers of Americans as insurance coverage grows ever more miserly. At least, that is, in the absence of some sort of comprehensive nationwide healthcare reform, although that’s a subject to revisit another day.

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