Hidden healthcare pricing: MRIs tell the story, and consumers are the answer. Entry 24 -2008.

How much does the cost of healthcare vary? It never ceases to surprise me.

Recently, one of our clients asked us to analyze the cost of MRIs of the knee across six local facilities used by their employees in one metropolitan area. The amounts paid by our client’s two health insurance companies for such MRIs ranged from below $700 to above $2,400, which is more than a three-fold spread! More dramatic: the amount billed to their insurance companies (before discounts were applied) ranged from $1,100 to over $4,000.

For those unfamiliar, an MRI (Magnetic Resonance Image) is a type of diagnostic picture taken by an expensive, high-tech machine. MRIs allow an extremely detailed look inside the body to see if something looks amiss. Among many other uses, MRIs are commonly used to better understand potential sources of knee, neck, or back pain. And, despite the incredible range in price, there really is no difference in image quality from one machine to another.

Because approximately 300 MRIs were done annually in this population, simple math tells us that if our client’s employees were to choose the lowest-cost provider of MRIs instead of the highest-cost provider, it would save about a half a million dollars per year for just one type of diagnostic procedure in one company in one city.

Extrapolating the same price difference to MRIs in ten cities, for ten employers, for ten different procedures, and the total rises to a half a billion dollars that could be saved not by eliminating the use of MRIs, just by choosing the lowest-cost providers.

So, why don’t employers simply require their employees go to the lowest-cost provider? The answer is simple: they don’t know who it is.

Health plans carefully guard payment information because they have different negotiated deals with different providers, and they don’t want one doctor to discover that another doctor is being reimbursed more for the same procedures. So when an employer chooses a health plan for its employees, the deals are already set. Services provided will be reimbursed at the plan’s negotiated amount (whatever that is).

In fact, although we could make some educated guesses, we could not tell the employer with complete certainty which of the facilities were paid which amounts, only that they differed by a range of $1,700.

Why choose MRIs to make our point about variation in the price of healthcare services?

Because, the rate of MRIs has tripled over the past ten years (1), and one-third of them are considered unnecessary (2). Also, MRIs generate significant revenue for healthcare facilities, so there are financial incentives encouraging their use. Studies indicate that radiology costs (which include X-rays, as well as MRIs, CT scans and a few other types of images) have risen faster than any other category of healthcare costs (3).

Anyone who has had an MRI taken of their knee joint or other body part can’t help but be amazed at the detail and clarity with which tiny aspects of bone, cartilage, ligaments and other tissues can be seen. Often patients feel more confident “seeing” what is wrong. But, as we have mentioned before, simply seeing a “flaw” does not necessarily confirm that it is the source of one’s pain or limitation. Studies show that as many as 36% of pain-free knees show the same signs of cartilage damage as painful ones (4). Similarly, MRIs of pain-free backs reveal bulging discs 64% of the time (5). The truth is: something that looks “wrong” in an MRI is not necessarily conclusive that surgical treatment is required. And, apparently some doctors agree, as seen in the following example.

By coincidence, the same week we examined MRI costs at work, a friend of mine—Jane—went to see an orthopedic surgeon for knee pain. Upon examination, the doctor diagnosed a probable meniscus tear, and likely wearing on the underside of the knee cap. Recommendation: surgery to trim the torn part of the meniscus and a cut along the joint capsule, called “lateral release,” to change how the knee cap moves against the thigh bone. Surgery was scheduled for that week. Jane asked about getting an MRI, and her doctor obliged, with an off-hand comment that he would not use MRI results in his surgery. Those pictures were “just to make the patient feel better.”

Her MRI results showed no meniscus tear, but significant wearing of the knee cap. Recommendation: surgery was still the best option, and the surgeon claimed the MRI was probably incorrect. He reported he would do what was necessary once he put his scope inside the knee.

Jane made it through surgery safely, hopefully recovering to have less pain than she had before. She did not ask how much the MRI cost, nor did she know afterward. Jane has a good insurance plan, a low deductible, and no reason to concern herself with price. Plus, it’s late in the year, so she pays less before the deductible starts over. An extra image—that the doctor didn’t intend to use and didn’t believe—was just part of usual healthcare. Neither patient nor doctor had sufficient incentive to simply say: “if the MRI won’t change our course of action, let’s not do it.”

The popular answer to controlling the price of MRIs? Third-party negotiators are waiting in the wings, but as usual, they’ll bring more layers of cost and complexity.

Not unlike the Prescription Benefit Manager (PBM) industry that emerged a decade ago, new “imaging management” organizations have appeared (6, 7). They offer to “manage” imaging costs by getting a package deal on imaging services and overseeing appropriateness. Just as PBMs made bulk-purchase arrangement with pharmaceutical manufacturers and offered to share those discounts with employers, imaging management services offer to do the same.

As we all know, PBM drug deals provided some discounts for employers. However, the deals included lucrative kick-backs to the PBMs, some of which worked against their advertised primary objective of delivering the most cost-effective price and outcomes to their customers. Examples emerged where PBMs had potential conflicts of interest (8), sometimes choosing to position a medication that delivered them high rebates ahead of a lower-cost option delivering lower rebates (and less profits for themselves).

Now, imaging management companies offer to help employers choose the most cost-effective imaging services and make them more appropriate (see the Wall Street Journal article about Radiology Police (9)), which sounds all too familiar. Even if they do provide some initial price relief, they too intend to make a profit by adding a layer of rebate or referral fees. In the end, inevitable perverse incentives and conflicts of interest will result; their interests come first, the client (employer) second, and providers and patients (who are the true parties in the transaction) come last.

Additional third-party contributors are not the ultimate solution. They emerge because consumers do not play their normal role in healthcare.

Regular readers know we advocate giving individuals funded, portable health accounts to encourage price sensitive consumerism. In fact, a recent report confirms that H.S.A. account holders, as one would predict, pay more attention to price, while managing their own health issues as well or better than those whose healthcare fees are paid by others (10).

Imagine if the employees in our study (or my friend Jane who is a bargain shopper in most areas of her life) had an average of $5,000 of their own money in their H.S.A. accounts and a website where certified imaging providers in the community—and recent paying customers—could post their MRI prices?

Spending their own money, how often would anyone choose to pay $2,400 versus $700? How soon would the expensive providers begin to drop their prices or provide greater value in some other form? Further, if individual health account holders had information regarding the uncertainty inherent in MRI results, how many might choose to avoid getting an unnecessary image (or one that the doctor said he didn’t really need)?

Employers don’t need another third party making deals on their behalf. They need informed consumers who have something to gain by understanding value and price.

Why this matters: Excess spending in healthcare is rampant. One only has to look at isolated examples like MRI pricing to understand the extent of the problem. While the tendency of policy makers is to try to control, manage and enforce their way into better quality and lower prices, third-parties simply cannot achieve the greatest efficiency because their own incentives get in the middle. Individuals, spending their own money, making their own decisions, using readily available information about price and quality, are the best way to reduce waste and bring rationality to pricing and more affordable healthcare to all.

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References

1. Baker LC, Atlas SW, Afendulis CC. Expanded use of imaging technology and the challenge of measuring value. Health Aff (Millwood). 2008;27:1467-78. Accessed November 20, 2008.

2. Goldstein A. Medical Scans Waste $30 Billion a Year, Insurers Say. Bloomberg.com; 2008. Accessed November 20, 2008.

3. Allen G. Right image, right time. Predictive modeling makes radiology management more lean and effective. Health Manag Technol. 2007;28:12, 14, 16 passim. Accessed November 20, 2008.

4. Brett AS. Meniscal Tears Are Common in Asymptomatic Knees. Journal Watch General Medicine; 2003. Accessed November 20, 2008.

5. Moyer D. The Truth About Herniated Discs. Rebuild Your Back; 2006. Accessed November 20, 2008.

6. MedSolutions. Are employers concerned about radiology costs? A national survey of large employers' response to rising radiology costs. MedSolutions, Inc.; 2006. Accessed November 20, 2008.

7. National Imaging Associates. National Imaging Associates, Inc. website. Accessed November 20, 2008.

8. Frederick J. FTC scrutinizes PBMs, explores conflict-of-interest claims. BNET Business Network; 2004. Accessed November 20, 2008.

9. Mathews AW. Insurers Hire Radiology Police to Vet Scanning . Wall Street Journal. November 6, 2008:(Personal Finance). Accessed November 20, 2008.

10. New BCBSA Survey Finds CDHP Consumers Are More Health And Cost Conscious. Fierce Healthcare ; 2008. Accessed November 20, 2008.