During the 20 years or so since managed health care burst on the scene in a big way, a certain scenario became ingrained in the minds of employers and their employee consumers alike.

That is, an employer negotiated and contracted with an insurance carrier or third-party administrator (TPA) for a provider network. Plan members found doctors in that network and paid them a fixed co-payment, with the employer (in the case of a self-insured company) picking up the rest of the tab. Rather than getting information on individual claims, the employer received aggregate plan data (largely in order to maintain the privacy of plan members). 

Lost in the mix was that pricing for health-care services, particularly highly specialized ones, varied vastly within a network (and still does), even among providers in a single plan in the same zip code. The employee had no incentive to choose a lower-cost provider and no easy way to compare prices, while the employer remained somewhat clueless about the inherent waste in the system.

With the relatively recent stampede by self-insured employers to consumer-directed health plans (CDHPs) and other high-deductible plans, employees now have a clear monetary incentive to choose lower-cost providers. Yet it is still difficult to compare providers’ pricing and make a truly informed choice.

Enter a new crop of companies that provide pricing transparency for employees of self-insured employers. Generally, they use new technology to analyze a company’s historical claims data – which is notoriously difficult to decipher into usable data – and allow users to compare pricing for specific services on a provider-by-provider basis within their plans. Because a third party performs the analysis, and members’ identities are omitted from the information provided to the client employers, the confidentiality of employees’ health records is preserved.

The vendors are so new that none yet has a large customer base. The apparent early leader in the market, Castlight Health – which received notable press attention for winning $81 million in venture funding – announced its first customer, supermarket chain Safeway, in June 2010. Castlight announced a second customer early this year and reportedly expects dozens of new ones to launch its service for 2012 health-plan years. Other players in the emerging space include Health Care Blue Book and Share-Net.

“It’s probably the biggest no-brainer on cost savings for a self-insured company,” says Ethan Prater, vice president of product marketing for Castlight. “Prices have been hidden in back rooms between plans and providers, and the employers who were actually paying the costs either didn’t know, didn’t think, or didn’t care to ask about it.”

Pricing for such services as colonoscopies, endoscopies, radiological imaging, cardiac catheterizations, and many others can, in one plan and geography, be several times greater for the highest-cost provider than the lowest-cost one. Jeffrey Rice, CEO of Health Care Blue Book, cites an example of colonoscopies for a real client in a single plan year. There were 18 such procedures, the most expensive being more than $3,500; the least being under $1,000 (see chart at the end of this article).

“If you’re building cars, you buy metal, tires, windshield wipers, and so on,” says Rice. “And there is no way your procurement department would agree to pay 3.5 times more for some tires than for other, identical tires. But everything we look at has the same kind of curve. It happens in every city with every carrier.”

Health Care Blue Book, which began targeting corporate clients a year ago after several years of running a health-care pricing Website for consumers, recommends a fair price for each type of service under a specific plan in a specific geographical location. For the colonoscopies in the above example, the recommendation was for $1,300.

The client, of course, has the discretion whether to accept the recommendation and, if it does, whether to make that fair price a guideline for members, provide an incentive to adhere to that price, or make it a “reference price” with members responsible for any excess cost. A simple search function allows users to sort providers by price and location.

Prodigy Health Group, a holding company that owns a TPA, a pharmacy-benefits manager, and a medical-management company, hired Health Care Blue Book to analyze two years’ worth of internal claims data for its 1,255 employee health-plan members and their dependents. “Doing the analytics behind that is a Herculean task,” says Sarah Gardner, Prodigy’s vice president of benefits and employee relations. “Blue Book provided a fairly quick turnaround time.”

Armed with data, Prodigy opted to build its own high-touch front-end system. Employees don’t use it themselves, but rather call in to a concierge-like help desk to talk through the provider decision.

“Over the last six years we’ve changed to CDHPs and done various wellness programs to get the population healthier,” says Gardner. “None of it really had the ROI that I was looking for.”

Gardner estimates that Prodigy employees, for example, get about 500 MRI tests per year. The company can now save $200 to $300 per MRI on average, “and that’s just one of the [many services] we’re looking at,” she says.

Meanwhile, the vendors also dispense information on the quality of providers, but in a less-scientific way. Health Care Blue Book includes any quality data in its clients’ possession, and Castlight uses quality data from independent and publicly available sources, such as the federal Department of Health and Human Services. But, Rice claims, “All the good studies show there is no correlation between price and quality, and there may even be an inverse correlation.”

Indeed, a 2010 study by the Massachusetts attorney general concluded that, “Wide disparities in payment levels are not explained by differences in quality or complexity of the health-care services provided. . . . It is clear that prices paid for health-care services reflect market leverage.”

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