Published July 3, 2019, in the Harvard Business Review. Reposted with permission.
There’s movement to make health care prices transparent in the United States.
President Trump has instructed federal agencies to use their authority (established in part under provisions of the Affordable Care Act, which the administration regards as unconstitutional) to develop federal rules requiring disclosure of hospital prices in consumer-friendly, electronic form. This would include not just the list prices that hospitals purport to charge but the actual, negotiated, discounted prices that hospitals agree upon with insurers. These negotiated fees have been treated in the past as tightly guarded trade secrets by hospitals and health plans.
Equally important, the U.S. Congress is acting. In bipartisan legislation voted out of the Senate Health Education Labor and Pensions (HELP) Committee on June 26, Congress would outlaw so-called “gag clauses” that forbid the parties to price negotiations from revealing those fees. The legislation would also establish a new non-profit entity that collects de-identified claims data with actual prices paid for services nationwide. Such data would then be available to state data bases and so-called authorized parties — including large purchasers of health care services. Reports based on the data would be available to Congress, policymakers, and the public.
The rule isn’t written, and the HELP bill is a long way from enactment, so it’s hard to say exactly what either would do, especially given the industry’s strong opposition and its intent to water down the provisions. But there’s no question that the tectonic plates of public policy are shifting on the issue of price transparency. Advocates of markets understand that competition can’t work to discipline health care costs unless consumers know the prices they are paying. For market skeptics, transparency might at least shame institutions that are price-gouging into lowering fees and even spur sufficient outrage to get some states to regulate health care prices. Therefore, the odds that we will soon be seeing much more information on hospital fees are high.
The question then is: Will price transparency lower health care costs? Economic theory and hospital opposition suggest it would, but the answer is not as straightforward as you might expect and could differ from market to market. Health care is a really strange economic sector, and it doesn’t always follow the usual rules.
There is a plausible case that making hospital prices public may actually increase costs. One reason — illustrated by the recent New York Times account of how making cement prices public in Denmark pushed them higher — is that hospitals with low fees may demand the higher prices charged by sister institutions. Since 70% of hospital markets are so consolidated that they lack effective competition, the ability of low-priced institutions to push fees up should not be underestimated.
There is also little evidence from the seven states that currently require hospitals to disclose prices that this results in lower costs. Only one state, New Hampshire, posts the prices online for public consumption. New Hampshire’s experience suggests that consumers with high deductibles who consult the site choose lower priced services, but since only a tiny fraction of the state’s population participates, the overall effects on costs are negligible.
Ironically, some research also shows that in the absence of understandable quality information, some consumers assume that high price means high quality and are actually drawn to higher-priced institutions. There’s a reason, after all, that the Ritz is more expensive than Motel 6. President Trump’s executive order demands that the government also publish quality information. But consumers have had a lot of trouble understanding and using such information in the past.
The complexity and urgency of hospital services are issues as well. Say you need back surgery for a slipped (herniated) disc. To judge the total cost of your hospital care, you need to know not just the cost of the MRI scan that diagnosed the problem but the price of using the operating room, the particular medicines used in your treatment (for example, pain medicines, sleeping pills, the anesthetic you’ll get, and whether you’ll be given general or local anesthesia), the cost of any post-op care (do you need physical therapy and a stay in a rehab facility?), your anesthesiologist’s and surgeon’s fees, and dozens of other items. Perhaps the hospital will pull all this together in a package — or “bundled” — price; perhaps they won’t. And think of the opportunities for gaming: e.g., use the MRI price as a loss leader, then push up other fees to come out ahead. And what if there’s an unexpected complication requiring antibiotics or a cardiology consultation?
Back surgery, if the underlying condition is not very severe, is a so-called shoppable service. Patients have time to check out comparative prices of different hospitals in their market. Shoppable services make up an estimated one-third of the care patients receive. But what about chest pain or stroke? The symptoms come on suddenly, and speed can make the difference between life and death. In these cases and many others, shopping is not an option.
Then there is the issue of physician relationships. If you have an orthopedist or neurosurgeon you trust for your back surgery and she uses Hospital A which is more expensive, are you going to abandon her for another physician who uses the cheaper Hospital B?
And finally, the distorting influence of insurance arises. Price isn’t very important for patients whose costs are covered by insurance. To be sure, deductibles sensitize people to prices (with the downside that they discourage the use of essential as well as inessential care). But 5% of Americans account for 50% of health care spending, and they regularly blow through their deductibles. Once they do, price ceases to be an important influence on their decisions.
That said, price transparency has to be tried. Until it is, we won’t know the efficacy of markets as solutions to our health cost problem. While price opaqueness is indefensible, we would be wise to temper expectations about the therapeutic power of a dose of good price information.