The Impact of Healthcare Price Transparency

John McCracken, PhD

Provider price transparency would have a game-changing impact on the cost of healthcare, and despite industry efforts to derail it, it’s an increasingly likely prospect. 

True healthcare price transparency would require purchasers to have direct access to all relevant information on prices and quality in a reliable and understandable format.  This would give them the ability to choose the best alternative and put pressure on providers to lower prices and improve quality.  Absent such competitive pressure, less efficient providers or those earning excess profits remain in the market, and prices will be higher than they otherwise would be. 

Informed consumer choice requires adequate information on both cost and quality.  If consumers are poorly informed about quality, they cannot make a fully informed purchasing decision and prices are unlikely to converge to efficient levels.  In the absence of accessible and comprehensive quality information, consumers may inaccurately equate lower prices with lower quality, defeating the purpose of price transparency

Industry opponents of healthcare price transparency argue that it could have the perverse effect of causing prices to increase, either by making collusion among sellers easier or by altering the strategic incentives of sellers, inducing them to become tougher bargainers. While there is evidence shows that this has occurred on a few occasions in certain unique situations, the majority of empirical evidence finds that greater price transparency leads to lower and more uniform prices. 

As it is currently structured, the healthcare industry—which represents 18% of the total U.S. economy—is shrouded in a veil of secrecy.  This is largely due to the fact that virtually all payer-provider contracts contain confidentiality (gag) clauses, and many contain a most-favored nation (MFN) clause.  Gag clauses prohibit the contracting parties from disclosing negotiated prices to third parties, which effectively prevents consumers being able to compare prices.  MFN clauses prohibits a provider from giving any other payer a deeper discount than the contracting payer.  This protects a dominant insurer’s position in a market by making it impossible for a competing insurer to negotiate a lower price.  Gag and MFN clauses are the contractual barriers that have effectively blocked efforts to increase healthcare price transparency. 

Change is coming, and it’s coming swiftly.  Both types of contract provisions are banned in Title III of the Lower Health Care Costs Act of 2019 (S-1895), which was reported out of the Senate HELP Committee on a 20-3 bi-partisan vote at the end of June.  Subsequently, the Congressional Budget Office scored Title III as representing a $2.7 billion savings in the federal budget over the next 10 years.  Most observers give the act a high chance of passage either in this legislative session or the next. 

Additionally, at the end of July the Department of Health and Human Services (HHS) issued a Notice of Proposed Rulemaking proposing an administrative rule to require all hospitals to make payer-specific negotiated charges publicly available for all inpatient and outpatient items and services, including DRGs and bundled services.  Further, the data must be in a format that is useful for developers who could use these data in consumer-friendly price transparency tools.

Who Would Benefit From Price Transparency?

To date, most price transparency initiatives have targeted consumers, with the avowed goal of creating better-informed buyers who would use price and quality information to purchase lower-priced, higher quality care.  There are structural reasons, however why consumers might not make effective use of transparent cost information.   

Individual consumers are primarily concerned about the amount of out-of-pocket payment for which they will be responsible.  For insured consumers, the price they pay for care is only a small fraction of the overall cost, with insurance picking up the rest.  Two different consumers with different deductibles and co-payments could face significantly different out-of-pocket costs for the same identically priced service, depending upon the plan. Moreover, by the time a patient reaches a hospital, the out-of-pocket limit for many insurance policies may have been reached making the patient insensitive to price.

A second reason price transparency might not motivate consumers to become more discernable shoppers is that patients do not typically choose which hospital they enter.  Rather, patients choose a physician and the physician’s admitting privileges determine where the patient goes.  Available evidence suggest that most physicians admit the bulk of their patients to one hospital.  If a patient wishes to go to another hospital, he must select a physician with privileges there.   Over time, physicians likely would become more sensitive to differences in costs among various hospitals on behalf of their patients, but in the interim, the patient would have only partial influence over the selection. 

The most receptive target of healthcare price transparency would be the nation’s employers, who provide insurance coverage for approximately 160 million employees and their dependents. Knowledge of insurer-negotiated prices would enable self-insured employers to demand lower prices and develop networks of high value providers. It would also enable employers to develop reference pricing for shoppable services, i.e., those that can be scheduled in advance by a healthcare consumer. In its 2019 Annual Report, the Council of Economic Advisers determined that 73% of the highest-spending inpatient services and 90% of the highest spending outpatient services were shoppable.

Reference pricing is a system in which an insurer or self-insured employer selects a price it is willing to pay for a health care service. Enrollees who obtain care from a provider with a price at or below the reference price pay only the normally required cost sharing (e.g., deductibles, coinsurance). Enrollees obtaining care from a higher-priced provider pay not only the normally required cost sharing but also an additional cost, typically the difference between the reference price and the allowed charge. Such a system can provide consumers strong incentive to seek care at lower-cost providers and can also put pressure on providers to lower their prices.

In 2011, the California Public Employees’ Retirement System (CalPERS) set a maximum contribution it would make for the cost of knee and hip replacement surgeries, colonoscopies, cataract removal and a handful of other elective procedures.  Patients who decided to get a procedure at a hospital with higher prices had to pay the difference out of pocket.  The result was that patients largely sought care at lower-priced hospitals and outpatient centers, and both prices and total spending on the procedures fell dramatically.  In contrast, typical healthcare prices paid by employer-sponsored health plans increased by 5.5 percent over the same period.

Potential for Market Disruption

The cost-cutting pressures created by pricing transparency would disrupt business-as usual for hospitals by putting pressure on wages and salaries.  It would also put those health systems with high fixed costs and those unable to quickly adjust their cost structures and operating procedures at a disadvantage to more nimble competitors, particularly the new breed of non-traditional providers seeking to enter the healthcare market (e.g., CVS, Walgreens, Amazon, Google and others).

Hospitals also provide Medicare, Medicaid and indigent care for which they claim they are not wholly compensated.  Financing this care requires cross-subsidies from commercial payers.  Imposing greater transparency of healthcare prices may have an impact, at least initially, on the availability of these subsidies and therefore on the availability of under- and uncompensated care. 

In the five year period 2013-2017 hospital inpatient and outpatient prices, adjusted for service intensity, increased 15.6% and 18.9% respectively.  Price transparency in all likelihood would significantly slow the rate of future price inflation, primarily through the mechanism of reference pricing by employers.  It would also create winners and losers, just as airline deregulation created winners and losers.  But to the extent that it ultimately allowed healthcare markets to function more efficiently, it would create a significant overall increase in social welfare. 

John McCracken is Director of the Alliance for Physician Leadership, an educational partnership between the University of Texas at Dallas and The University of Texas Southwestern Medical Center which offers an MS/MBA program in healthcare leadership and management exclusively for physicians.