Morgan Stanley
  • Research
  • Feb 4, 2019

Reduced Healthcare Costs Could Be a Click Away

Could the same e-commerce trends that disrupted the travel industry help reduce skyrocketing healthcare costs? Why a new approach could save patients and payors billions of dollars.

It's no secret that U.S. healthcare costs have climbed sharply over the past several decades, particularly for elderly and poor people. What may be more shocking, however, is the hidden amount of waste in these costs due to overtreatment, pricing failures, fraud and other factors. 

Online tools that improve price and quality transparency could turn the healthcare delivery model on its head.

Turns out, e-commerce may be the cure. A new Morgan Stanley Research BluePaper finds that arming healthcare consumers with the same tools that revolutionized how they shop for travel or select restaurants could help bring costs and waste under control.

“Our research suggests that online shopping tools would be the most comprehensive and practical solution to better managing costs," says Ricky Goldwasser, head of research for Healthcare Services and Technology. “As we've seen in other industries, the use of reviews and price transparency could bring significant savings."

In the report, Goldwasser and her colleagues examine why putting better data in the hands of consumers and payors could go a long way toward curbing needless spending. With the online-travel-agency industry as a model, the analysts dubbed the hypothetical tool "HCX."

The upshot: Reducing spending waste could cut up to $800 billion in yearly U.S. healthcare spending costs, with $260 billion of that coming from Medicare alone.

Heathcare as a Percentage of GDP

Source: KFF, Morgan Stanley Research

Shopping for Healthcare

For many Americans, healthcare is a major household expense. According to a Kaiser Family Foundation study, U.S. healthcare spending rose to 18% of GDP in 2017 from 6% in 1970, far outpacing the comparable country average, which increased to 11% from 5%.

Morgan Stanley estimates that fewer than half of patients know the cost of service prior to a procedure; even fewer know their out-of-pocket costs. However, many would be shocked to find out that prices for the same procedure, in the same market, can vastly differ from one provider or facility to the next.

In a 2015 study from Blue Cross Blue Shield, the cost of a hip replacement in Boston varied by 313% between the lowest- and highest-cost providers. The price for cholesterol-screening swung 1,275%. While not every medical procedure could be price-compared online, an estimated 30% to 40% of all medical procedures are “shoppable.”

The big issue here, of course, is price transparency. Even when providers are upfront about costs—and a new rule requires that hospitals post their prices online—it's difficult for consumers to get an accurate estimate. No uniform standards exist for how procedures and prices are described, and insurance coverage further muddies the waters.

“The healthcare sector is built on intertwining relationships between providers, manufacturers, payors and patients," says Zack Sopcak, equity analyst covering Healthcare Facilities and Managed Care. “But the combination of healthcare costs increasingly shifting to the patient, accessibility of information, and technology is empowering individuals to approach healthcare as consumers rather than as just patients."

Estimates of U.S. Healthcare Waste in 2011

$ in Billions
Annual Cost of Medicare and Medicaid in 2011a Annual Cost of U.S. Healthcare System in 2011
Low Midpoint High Low Midpoint High
Failures of care delivery 26 36 45 102 128 154
Failures of care coordination 21 30 39 25 35 45
Overtreatment 67 77 87 158 192 226
Administrative complexity 16 36 56 107 248 389
Pricing failures 36 56 77 84 131 178
Fraud and abuse 30 64 98 82 177 272
Totalb 197 300 402 558 910 1263
% of Total Spending 21% 34% 47%
a Including both state and federal costs
b Totals may not match the sum of components due to rounding
Source: JAMA, Morgan Stanley Research

HCX Could Change Prognosis for Incumbent Industries

To be sure, just as digitization has dramatically changed media, retail and communication, online tools that improve price and quality transparency could turn the healthcare delivery model on its head.

“We envision a site along the lines of online travel entities, with physicians, facilities and procedures searchable by reviews and costs,” says Brian Nowak, who covers the U.S. Internet industry. “As costs increasingly shift to the patient, individuals will approach healthcare as consumers, empowered by technology and the accessibility of information, particularly boomers who tend to be savvier at online price-comparison than they often portrayed.”

It's too soon to say which entities could take the lead, but an early 2018 announcement of a joint venture between the world's leading e-commerce company and two major financial services firms fired a warning shot across the bows of the industry.

The joint venture may develop the firepower to crack open healthcare spending, but innovation could come from other sources. Consumer-centric tech companies with high brand recognition and the ability to create user-friendly experiences could join the fray. Insurers could also use their incumbent status to enter the field, but first they will need to navigate regulatory complexities, contractual relationships and the fragmented nature of the healthcare system.

Whatever its form, HCX represents a $240 billion revenue opportunity for entities that create the tools, with $70 billion in revenue for Medicare alone. Managed-care companies may ultimately benefit from any efforts to empower patients, but high-priced facilities and providers could feel more than a pinch.

Innovation Should Start with the Sickest Patient: Medicare

The solution for plugging healthcare spending leaks will likely come from the private sector. Even so, the U.S. government could be an ideal administrator of a ready-made tool focused on Medicare, which accounts for 15% of the federal budget.

“Medicare has the most concentrated pool of money and is the least complex to navigate," says Leigh Pressman, equity analyst on the Healthcare Facilities and Managed Care team, who notes that the program has taken a significant step toward a managed-care approach with Medicare Advantage.

Meanwhile, Baby Boomers are becoming the largest cohort of Medicare users. Many in this group are comfortable with technology and accustomed to shopping online for other services.

10% of Medicare Beneficiares Spent 59% of Their
Total Income on Healthcare Costs in 2013

Source: Kaiser Family Foundation, CMS Medicare Current Beneficiary Survey 2013, Urban Institute, Morgan Stanley Research

“For the Medicare population, saving money on out-of-pocket costs would be incentive enough," says Sopcak, who notes that, by 2029, all boomers will have aged into Medicare. “Although HCX is geared for the patients' use, we expect that a more engaged patient would alleviate the burden on the system."

Morgan Stanley estimates that even relatively modest cost reductions could add up to $52 billion in savings for Medicare. Once HCX is proven within Medicare, it would likely be widely adopted by the employer market, the largest cohort in the U.S. All told, more efficiencies in pricing could save $157 billion in unnecessary expenditures at the midpoint of estimates—and more than $800 billion at the high end.

For more Morgan Stanley Research on healthcare and technology, ask your Morgan Stanley representative or Financial Advisor for the full report, “Click Here for Healthcare Savings" (Jan 16, 2019). Plus, more Ideas from Morgan Stanley's thought leaders.