In his recent speech on health care, President Trump highlighted a proposed rule that hospitals make their prices public. It’s time for hospitals to comply. Transparency will likely lead to lower prices and a reduction in health care spending.
Many policy experts dismiss the importance of price transparency in health care. Skeptics argue that because health insurance insulates patients from prices, patients have little incentive to seek out the cheapest provider. These critics also cite studies showing that few patients use price transparency tools and that minimal savings result. On both these points, they are right. But their analysis is incomplete.
Studies show that consumers who do shop save a lot. Those who used a New Hampshire price website prior to medical imaging visits saved 36 percent, for example.
More fundamentally, however, price transparency will help American employers — of enormous importance since family premiums through their companies now top $20,000.
Price transparency will help employers establish better payment structures for their employees. For example, under a “reference price” model, the employer or insurer agrees to pay a set amount per procedure. Reference pricing creates both a transparent price and provides patients with an incentive to shop as they bear the cost above the reference price. Economists found that a reform by Safeway that linked price transparency with reference pricing led employees to save 27 percent on laboratory tests and 13 percent on imaging tests.
Most employers don’t yet offer reference pricing models. Additional price transparency aided by consumer-friendly applications to help employees navigate options should lead to greater employer adoption and sizeable savings.
If enough people become shoppers, higher-priced facilities will begin to lower prices. This happened in California when the state adopted a reference pricing model for state employees. The result: a 9 to 14 percentage point increase in the use of low-price facilities and a 17 to 21 percent reduction in prices.
Both the New Hampshire price website and the California reference pricing system produced “spillover effects,” meaning that people benefitted who didn’t shop. They benefit because providers lowered prices for everyone. In California, about 75 percent of these price reductions spilled over to people who were not subject to the reference pricing model.
Skeptics also argue that price considerations are only useful for shoppable services like colonoscopies, MRI scans, and laboratory tests. Again, the mistake is looking narrowly at the direct consumer effect of price transparency. Employers can use increased price transparency to discipline the middlemen, mostly insurers, they have hired to negotiate on their behalf.
Employers — actually employees because all the health care spending comes out of their wages — are paying rates far more than hospitals’ marginal costs for providing services. According to economist Larry Van Horn, cash prices average nearly 40 percent below negotiated rates. According to the Rand Corporation, Medicare rates average nearly 60 percent below negotiated rates that insurers pay for hospital services in employer plans.
It is increasingly clear that insurers lack the same desire as employers and consumers to obtain the lowest possible cost for quality care. Insurers often receive payments that are a function of total spending, which creates an incentive for them to prefer higher costs.
With transparency, employers can monitor the effectiveness of insurers by comparing different rates received by providers across payers and across regions. With limited transparency, employers often maintain status quo arrangements, with mid-level human resources managers relying on the advice of insurance brokers, who tend to be funded by the insurer and are often paid percentage-based commissions. Again, this status quo arrangement creates incentives for higher spending.
Transparent prices will help employers eliminate counterproductive middlemen and contract with other entities that will incentivize employees to utilize lower-cost providers, including ones outside of their local region. Merely the threat of consumers leaving a local market puts pressure on local providers to bring prices down.
Another benefit of federal price transparency is to “free the data” and allow other private companies to innovate. Entrepreneurs are currently stymied by the fact they have to get claims data from employers and insurers. This is a huge barrier to entry. Releasing this data into the market would encourage smart business ideas, including revolutionary new payment models, for example.
Ultimately, sunlight is the best disinfectant. Recent media reports about the noxious collection practices at tax-exempt hospitals have caused them to change their practices, often within days. Many of these artificially high charges won’t be able to withstand public scrutiny.
The hospitals and insurers are the most concerned about price transparency efforts. They argue that prices would be higher if they weren’t secret. Yet, their objections lack credibility because they benefit from higher prices. Rather, they are afraid that price transparency will put the brakes on their gravy train.