Make Transparent Health Care Prices A Price Of Any Future Aid To The Health Care Industry
JUNE 16, 2020
The country’s leaders are understandably focused on policies to help American businesses and workers deal with the ramifications of the coronavirus recession. In addition to broad-based relief, Congress has targeted aid to hospitals, health care providers, and clinical laboratories, despite their relative wealth. Two bills enacted in March provided a nearly $175 billion bailout for hospitals and providers.
On May 15, the House of Representatives passed a bill that would add another $100 billion to this bailout and provide substantial taxpayer funds to health insurers through a full subsidy for employee COBRA coverage, an increase in Affordable Care Act subsidies, and a provision that would largely offset any insurer losses in 2020 and 2021 with taxpayer money.
It’s time for Congress to stop focusing its efforts on supporting the wealthy health care and health insurance industries and it’s time for these industries to help American families and businesses and drop their fight against health care price transparency. This starts by equipping Americans—both families and employers—with tools to be better purchasers of health care. Specifically, Congress should lock in the Trump administration’s price transparency rules to end the legal battles over them and to give the American people the information they need to make smarter decisions about their health care and coverage. Enhanced shopping will increase competitive pressures in health care markets and lead to lower prices and enhanced quality of care.
The American People Want Health Care Price Transparency
It’s extremely rare that nine in ten people agree with a political position. But, 88 percent of Americans believe that the government should require hospitals and insurers to disclose prices. This includes people like me, who almost uniformly oppose government mandates but who recognize that price transparency is necessary to fix serious dysfunctions in America’s health care sector.
While serving as Special Assistant to the President at the White House’s National Economic Council, I helped develop the Trump administration’s initial price transparency efforts. Since I left the administration in the summer of 2019, the Department of Health and Human Services (HHS) has finalized a rule requiring hospitals to post price information (the actual payments hospitals receive for the hundreds of services they provide). HHS, along with the Department of Labor and the Treasury, is preparing to finalize another rule in the next few months to require insurers to post price information (the actual rates they pay to hospitals and other health care providers). Given broad public support for price transparency, President Trump should be clear about the steps his administration has taken to force hospitals and insurers to provide American consumers with the information they want and need about prices.
Health Care Price Transparency Will Help Families And Businesses
Americans shop constantly. We obtain the most benefit when shopping for items that represent larger parts of our budgets and with wide price variations. After housing, health care represents the largest component of family budgets, and hospital care accounts for nearly 45 percent of all spending by private health insurers. (According to the California Health Care Foundation, private health insurance paid $1.079 trillion in 2018, with $481.1 billion on hospital care. Out-of-pocket spending on health care was another $375.6 billion in 2018.) Numerous studies show significant variation in hospital prices, across hospitals and even within hospitals, for the same procedure by the same physician. Thus, the conditions are ripe for health care shopping to produce significant benefits.
In a September 2019 piece published by the Galen Institute, I wrote that health care price transparency should have four key benefits: 1) better-informed consumers and patients, 2) better-informed employers that help workers shop for value, 3) improved ability for employers to monitor insurer effectiveness and eliminate counterproductive middlemen, and 4) public pressure on high-cost providers.
In the paper, I reviewed evidence that price transparency leads to more shopping by consumers and helps employers establish payment models so their workers can maximize value from their health care spending. The great news is that increased shopping by some consumers in certain areas caused providers, particularly high-priced ones, to lower prices. Perhaps even more important, there were “spillover effects”—people benefitted who did not shop as providers lowered prices for everyone, not just for the active shoppers.
Economists Christopher Whaley and Timothy Brown found that in California, which spurred shopping by setting a flat payment rate for certain orthopedic procedures for public employees and retirees, 75 percent of the price reductions benefitted people outside the payment program. The reason: when the largest health plan in the state—the public employees’ and retirees’ plan—incentivized shopping for certain procedures, the prices went down for everyone due to increased shopping and competition in the marketplace.
A 2019 article estimated the total waste in the United States’ health care system to be as high as $935 billion, about 25 percent of total spending. The two largest drivers of waste are administrative complexity ($265.6 billion) and pricing failure ($240.5 billion). If transparent prices were available to patients before receiving care, both of these wasteful cost drivers would be reduced.
For example, consumers are often hit with ‘surprise’ medical bills after the fact, resulting in drawn-out processes among consumers, hospitals and other care providers, and insurers over who should pay and how much should be paid. Upfront pricing would minimize a great deal of this frustrating complexity. Moreover, it would help employers establish payment models with providers, such as reference pricing and direct contracting, that would lower spending and reduce the administrative role, and associated costs, of insurance intermediaries.
The Health Care Industry Hates Price Transparency
Much of the health care industry is likely in the 12 percent of the population who oppose health care price transparency. Hospitals are currently suing to block the Trump administration rule finalized in November 2019, that would require them to post their prices. Hospitals, along with insurers, are threatening to sue over a second rule proposed that same month that requires pricing transparency from insurers. Hospitals and insurers have several dubious arguments for why Americans should remain in the dark about health care prices.
Hospital And Insurer Claim Number 1: Transparency Will Increase Prices
Hospitals claim that hiding prices allows them to offer large discounts to insurance companies. First, this claim should be greeted skeptically since, like every rational economic actor, hospitals aim to maximize their profits. The fact that they are so opposed to efforts in Washington and state capitols to require them to disclose prices suggests they believe that easily accessible pricing information will reduce their profits.
Both hospitals and insurers argue that revealing their prices will lead to collusion and cause prices to rise. This claim is dubious, as I wrote in the Galen research:
Concerns … that collusion could result from price transparency appear unjustified. Local markets right now are characterized by a limited number of providers, particularly hospitals, who engage in repeated interactions. They already tend to have knowledge of each other’s payment rates, particularly relative to each other. Moreover, hospitals and other providers already provide consumers with pricing information in the Explanation of Benefits documents when they bill patients.
Insurers likewise claim that they are already getting the best discount and that revealing pries will hurt their ability to negotiate discounts and save employers and families money. Yet, it is more likely that insurers have been failing American employers and families for decades, in large part because health insurance is more the pre-payment of medical care than actual insurance. Insurers benefit from higher health care spending because they often take a percentage of total premium collection; larger premium collections therefore lead to greater profits for insurers. This is likely especially true for self-insured plans where the employer bears all the risk and the insurer’s primary role is as a claims processor.
A 2019 RAND study found that insurers pay more than twice Medicare rates for inpatient care and nearly three times Medicare rates for outpatient care, on average. While it’s unknown what the optimal price point is because of abundant third-party payment and many government-induced distortions, private insurers are almost certainly paying well above what is necessary since almost every provider takes Medicare.
Moreover, people often can secure better deals if they don’t use their insurance. A 2016 Wall Street Journal investigation found that hospitals frequently offer far better deals for people who pay in cash rather than use their insurance. Economist Larry Van Horn analyzed a large data set and found that cash prices average 40 percent below the rates that insurers pay. The ideal health care pricing future is epitomized by the Surgery Center of Oklahoma. The center provides up-front, bundled prices in a consumer-friendly format. Their prices tend to be far below their competitors. Fortunately, it appears additional medical facilities are beginning to adopt a more transparent pricing approach.
Hospital And Insurer Claim Number 2: Health Care Is Too Difficult To Shop For
Hospitals and insurers, as well as many health policy experts fond of central planning, claim that health care is too complicated and not ideally suited for shopping. While it is true that individuals dealing with a medical emergency are generally unable to shop for services, most health care transactions are for routine, elective, or non-emergency care. In “Reforming America’s Healthcare System Through Choice and Competition,” the Departments of Health and Human Services, Labor, and Treasury wrote:
The vast majority of healthcare services are routine or elective services that can be organized by markets to enhance patient welfare. One study found that emergency department spending is roughly six percent of total United States health spending. Another study classified 43 percent of healthcare spending as “shoppable,” with another 11 percent of spending on prescription drugs, an item that is generally shoppable. Distinguishing between shoppable and non-shoppable healthcare services is important, and encouraging normal market economic forces to govern the shoppable transactions constituting the majority of the sector is prudent. As this report explains, government policy and regulation often does precisely the opposite, actively discouraging the application of normal market forces to the shoppable category of healthcare services, and, in effect, treating the whole sector as if it were similar to emergency services.
The claim that health care is too complicated is also paternalistic and doesn’t recognize that people will rely on heuristics or feedback loops, like Yelp, just as they currently do for nearly all other purchases. Technology has made it easier than ever to research prices for houses, vacations, electronics, and hundreds of other products and services. Transparent, accessible health care pricing will also lead entrepreneurs to develop even better tools and apps to help facilitate shopping for health care services.
It’s true that Americans—both employers and families—will need to become more comfortable with shopping for health care. The need to be better health care shoppers has been spurred by the growth of high deductible health plans. According to the Kaiser Family Foundation, 30 percent of covered workers were enrolled in a high deductible health plan in 2019, triple the percentage from a decade earlier.
Based on survey data, it appears that people are becoming more comfortable with health care shopping and that such shopping is increasing. A random sample of U.S. adults over the age of 18 showed that 36 percent used the Internet or a mobile app during the previous year to compare the quality and cost of medical services, up from just 14 percent of respondents in 2012. This increase was driven by millennials, with slightly more than half saying that they shop for health care services online.
Now’s The Time For Reform
Congress has provided significant financial support for the politically powerful health care industry in several major pieces of coronavirus relief legislation. Last month, the House has voted to provide much more with their latest bill, adding another $100 billion in a health care industry bailout that would primarily benefit hospitals. Their legislation would also send more than $100 billion of additional taxpayer subsidies to insurers while protecting insurers from potential losses with more taxpayer funds.
We need an approach other than pouring subsidies on an inefficient system. The best recipe for reform is a competitive market with abundant consumer choice so health care can function more like other economic sectors. In fact, smaller and rural hospitals may have some advantage in a more competitive market, as they are often lower-cost.
Health care price transparency will need to overcome industry opposition. While the industry is seeking government aid with its left hand, with its right hand it’s trying to block Trump administration efforts to require the price disclosure from hospitals and insurers that consumers overwhelmingly say they want. Price secrecy helps hospitals and insurers increase their profits by minimizing competitive forces, so their opposition is understandable. However, price secrecy harms consumers looking to maximize the value they receive from the health care system, as well as employers who foot a large share of the nation’s health care tab, and the employees who ultimately bear the tab through lower wages.
Americans need and deserve a health care system that offers higher quality at lower cost. Major reforms are needed, but let’s start with price transparency and codify the Trump administration’s rules that require hospitals and insurers to post prices.
