Revealing negotiated prices won’t reduce health care costs

The Trump administration recently announced that the president would issue an executive order requiring insurers to disclose the actual prices they have agreed to pay health care providers for various treatments. Doing so, President Trump argued, would help consumers make informed decisions about their care and help them save money while bringing down health care costs. 

The unfortunate fact is that no executive order — and certainly not this one — can reduce health care prices. In fact, forcing insurers to reveal the particulars of their negotiations with providers likely would serve to upend those negotiations, ultimately resulting in higher insurance premiums.  

There’s no great mystery as to why our health care prices are so high. For starters, the fact that most of us have comprehensive health insurance that pays for most of our health care costs, routine and emergency, instead of bona fide “insurance” that simply covers costly catastrophes, has created a moral hazard problem that is — probably more than anything else — the primary cause of high prices. 

Insurance companies try to correct for that as best they can by making customers pay something for most services they receive. However, providing them information on how much their insurance company pays for that service — which doesn’t impact their own cost in the slightest — shouldn’t affect their decision at all. Perhaps some patients would blanch if their insurance company paid $200 for a physical therapy session that costs them $20 out of pocket and would get a gym membership to diligently perform their exercises without a therapist, but most people don’t think that way, the evidence shows. 

Besides imposing co-pays, the other primary way insurers attempt to reduce costs is by negotiating with providers to obtain a lower price for their services. The deal they offer them is simple: They will provide a steady stream of customers and a locked-in revenue stream and, in return, they ask for a sizable discount. 

The recent trend amongst insurers is to create narrow networks that consist of relatively few providers that give even greater discounts, sacrificing a modicum of consumer choice in exchange for lower costs for insurers and, in turn, lower premiums for consumers. 

The discount insurers obtain from the provider’s non-insurance or “list” price can be substantial, depending on how many customers the insurer has, the overall health of the population, competition from other insurers in the provider’s area, and the dynamics of the actual negotiation between the two. A large insurer in a large market with a savvy negotiating team might extract lower prices than its smaller, less agile competitors. There’s nothing anti-competitive or anti-consumer about this result.

However, if the outcome of those negotiations were made public, their dynamics would become completely different. The ability of providers to charge different prices to different insurers likely would disappear, and the ensuing price harmonization would not occur at the lower price obtained by the big insurer. The inevitable outcome would be that higher discounts for larger insurers would be impossible, and everyone would pay the same — higher — price. 

The other main contributor to high health care costs in the U.S. are the actual costs of discovering new and better treatments, and we are indeed getting a return for these investments. In the past few years, drug companies have discovered cures for diseases such as Hepatitis C that heretofore had been virtual death sentences for those afflicted. Since reducing the enormous costs of research and development and testing of new drugs is almost impossible, politicians invariably look for other ways to reduce health care costs — which becomes akin to the proverbial man looking for his lost car keys a block from where he lost them because the light there is better. 

The assumption that negotiations between insurers and providers are inherently flawed and are a key contributor to high health care costs is nonsensical — but certainly consistent with the Trump administration’s puzzling predilection to blame the accursed middlemen for this, and myriad other, problems in the economy. 

That the executive order will fail at reducing health care costs is not in doubt. Its motivation must lie in the hope that no one realizes it is making the problem worse until after the election. 

Ike Brannon is a senior fellow at the Jack Kemp Foundation, a nonprofit charitable organization committed to advancing growth, freedom, democracy and hope. He is a director of the nonprofit Organ Reform Group and Network, which seeks to find ways to increase people’s access to organs for transplants. Follow him on Twitter @coachbuckethead.