New Medicare rule is a step forward on price transparency, but more is needed

In July, the Centers for Medicare and Medicaid Services (CMS) released a proposed rule to implement President Trump’s executive order aimed at creating meaningful medical price transparency. The public comment period on the CMS rule ended in September.  

Unlike the disclosure requirement that took effect on Jan. 1, 2019, this new requirement promises to be useful to consumers because it requires hospitals to disclose their negotiated (real) prices for bundled procedure-based services with plain English descriptions.

By contrast, the rule that took effect in January required hospitals to disclose their largely fictitious charge description masters, or CDMs, which contain grossly excessive prices that are worthless for determining the real price of care because they are paid by fewer than 5 percent of patients. Moreover, CDMs are not organized by procedures; they contain a long list of every individual good and service identified with medical billing codes. CDMs are useless to patients.

The disclosure of negotiated prices, however, can be very useful to patients — especially when disclosed for clearly identified bundles of care related to common procedures. Negotiated prices are the prices that hospitals agree to accept as full payment from commercial insurers in their network. In other words, these are real prices, the amounts hospitals actually are paid for their services. 

Under the new rule, for example, hospitals must disclose their negotiated prices for an MRI, the uncomplicated birth of a newborn, or a total knee replacement. These prices and descriptions are meaningful to patients.

In addition, the rule requires health care providers and insurers to provide patients an estimate of their out-of-pocket costs before they receive health care services. With this information, patients finally will be able to price shop for health care — if they choose to.

However, notwithstanding consumer behavior, the new rule will allow self-insured employers to have access to real price information that enables them to evaluate the performance of their third-party administrators (TPAs), insurance brokers and insurers that negotiate with providers on behalf of employers. This likely will lower health care costs across the board.

Self-insured employers pay the health care costs of their employees out-of-pocket, but prior to the new rule employers could not determine whether their TPAs, insurance brokers and insurers were negotiating the best value on their behalf. Now, with the newly available information, employers will be able to exert pressure on these entities to drive more cost-effective contracts with providers.

The new disclosures are designed to make the health care market more competitive by allowing quality and price to drive buyer behavior. However, while real price transparency is a necessary condition to restoring competition, it alone is not sufficient. More is needed.

Specifically, price transparency will not restore competition in markets where large health care systems have effective monopolies. We also need more robust enforcement of antitrust laws to break up large anti-competitive health systems.

In addition, we need to increase the supply of doctors and hospitals. We must build more medical schools and increase the number of residency programs so that we produce more doctors. Likewise, it should be easier to start new hospitals. Ease of entry into the marketplace will increase competition and lower prices.

Finally, to increase patient-level competition we need to make prices relevant to patients. Today, for patients with insurance that pays all or a large portion of health care expenses, even good price information is not very relevant. These patients have little reason to use the available price transparency to seek out better value. A possible solution may come from the combination of the price transparency rule and other pending legislation. 

The Lower Health Care Costs Act — advanced out of the Senate Committee on Health, Education, Labor and Pensions in June and likely to be voted on this fall — contains contract reforms that will allow insurers to encourage patients to seek care that has the highest value. This is an important change that could be used to make consumers more sensitive to prices.

For example, these contract reform provisions may allow insurers to reimburse the average in-network price for an MRI in the patient’s geographic area. If the patient chooses to receive care from a more expensive provider, the patient would be required to pay the difference. However, if the patient chooses to receive care from a less expensive provider, the patient would pocket the difference. A recent study suggests that steering patients toward lower-price providers or setting price ceilings could save from 9 to almost 13 percent.

George A. Nation III is a professor of law and business in the Perella Department of Finance at Lehigh University. Prior to his academic career, he practiced corporate and commercial law in Philadelphia. His recent research concerns health care policy and pricing.