Health’s price perception paradox

Standing under a sign reading “pain relief,” I scanned the shelves, my legs throbbing after a 10K race that morning. I spotted a familiar red box: Tylenol Extra Strength, 100 pills for $7. Right next to it was the drug store’s generic version, offering 100 pills for $5.

This should have been a nobrainer. I’m a physician, and I know the active ingredient, acetaminophen, is the same in both. It’s a simple molecule — a six-carbon hexagonal ring at the center with two side chains poking out — something any biochem major could manufacture in an afternoon. The U.S. Food and Drug Administration also makes certain that generic and brand-named drugs are identical. There were only two differences here: the packaging and the price.

And yet I grabbed the more expensive box of pills.

In that moment, my mind played a common trick on me — one that tells us why it’s so difficult to rein in healthcare costs.

When it comes to our health, we are convinced that more expensive is better. If a brandname pain reliever costs $2 more, we believe it must be safer and more potent. If a diagnostician wants to run duplicate tests, we shrug and agree. If a surgeon recommends a more complex and costly procedure, we presume there must be a good reason.

But why do we perceive that expensive is more effective?

Here’s one explanation: “Expensive medications tend to make us feel better, even when they’re no different than cheap generics.” That’s the first sentence in a fascinating article in the journal Science last year.

It goes on to detail a German study in which people were asked to evaluate a side effect of two new anti-itch creams. Both were exactly the same, both fakes, but one came in a handsomely designed blue box and the other in a white box with bad orange lettering. Patients who used what they perceived to be the more expensive drug reported a much stronger physiological response.

They weren’t making it up: The effect could be identified on brain scans and spinal-cord measurements too.

It’s not just patients who fall prey to such price-distorted perceptions. A recent study in JAMA Internal Medicine found that roughly 1 in 10 doctors still believe generic drugs are less effective than the brand-name versions. Hospitals shell out billions for surgical robots and proton-beam accelerators that, time and again, fail to deliver better outcomes in clinical studies.

In some cases, a doctor’s referral is the equivalent of brandname packaging. A study published in July looked at 50,000 adults who needed a knee or hip MRI. MRIs are virtually the same everywhere, but prices vary widely. Still patients went where their doctor suggested, bypassing an average of six lower-priced MRI providers on their way. Patients shelled out significantly more in co-pays and deductible expenses, but only 1% bothered to compare MRI prices in their area.

Americans are told again and again that we spend nearly twice as much on healthcare as other high-income nations (and get poorer clinical outcomes). Still, we keep treating healthcare like any other retail product or service, assuming that competition will boost quality and lower prices. But competition isn’t effective because consumers are unable to act rationally when it comes to medical decisions.

We need to acknowledge this and help doctors and patients make smarter decisions.

Patients, for instance, can make a habit of asking if there is a generic alternative for prescribed drugs. Similarly, before choosing a hospital or surgeon, they should be encouraged to review data from independent researchers such as Leapfrog Group, JD Power & Associates or the National Committee for Quality Assurance. Often a friend or colleague’s recommendation of a “great” doctor or hospital is contradicted by the objective data.

But we also can’t rely on patient choice to shrink healthcare spending. Businesses and government purchasers will have to play a bigger role.

Look at what happened when the Pacific Business Group on Health, a coalition of companies, crunched the numbers on hip replacements. PBGH found that hospitals charged $30,000 to $120,000 for the procedure. The more expensive locations may have luxurious lobbies and slick marketing materials, but their outcomes were no better. So PBGH members decided to contract only with in-patient facilities that would accept the $30,000 rate. Every hospital in California agreed to the new price.

Recognizing that our brains conflate higher prices with higher quality, we could also nudge consumers toward wiser choices at the point of purchase. Perhaps it’s time for the FDA to step in and demand that Tylenol, and other drugs with identical generic alternatives, carry a new warning label: This product is no better than the less-expensive generic.

Had I seen that warning after my 10K, I’d probably have put that Tylenol back.

Robert Pearl, former chief executive of the Permanente Medical Group, is the author of “Mistreated: Why We Think We’re Getting Good Healthcare — And Why We’re Usually Wrong.”

Our brains insist that expensive means effective treatment.