The benefits of government requiring health care price transparency

One major difference between the health care sector and other economic sectors is the opacity and complexity of prices for medical goods and services. While in other sectors, prices for similar goods or services are generally analogous, health care prices can vary widely depending on where the service is received and who is paying. For this reason, shopping in health care is more important than shopping in other economic sectors.

But shopping is limited in health care, in part because prices are generally hidden until after the purchase. Over the last two years, the federal government has taken steps to compel hospitals and health insurers to post their prices to enable better shopping.

Some free-market economists are skeptical that this will work. Their doubts aren’t unfounded: Substantial third-party payments insulate consumers from the direct cost of many of their health care consumption decisions, and government regulatory actions often produce negative unintended consequences. Some worry that compelling price transparency might enable “tacit collusion” and cause low-priced providers to raise prices. Such critiques miss the mark by neglecting evidence and failing to appreciate the mechanics of how transparency will work.

First, government transparency efforts have already increased shopping and pushed prices down. More than a decade ago, New Hampshire was the first state to establish a website with health care price information. New Hampshire consumers who used that information to shop saved a great deal, with average savings of 36 percent for medical imaging services, for example. With the growth of high-deductible health plans, patients are increasingly incentivized to find lower-priced providers for services like labs, diagnostic tests and basic medical care.

Second, only focusing on the direct effect of transparency on patient shopping ignores the more significant mechanism for how price transparency can help by making it easier for employers to create benefit designs that encourage the use of high-quality, lower-price providers. Technology developers and entrepreneurial businesses are beginning to develop apps that leverage pricing information to help employers improve benefit design and “steer” plan members to higher-value providers. In essence, making prices transparent will loosen the third-party payment problem by giving payers a reason to restructure their products to incentivize consumers to seek out the best prices. So long as prices remain hidden, providers and insurers can more easily maintain negotiated arrangements that help themselves.

One way to do this is through reference pricing in which the plan pays a set amount per service regardless of where it is received. Reference pricing models can significantly lower payments for medical services without adverse effects on quality. Reference pricing structures will be easier to establish with more complete pricing information.

When California adopted reference pricing for state employees a decade ago, consumption shifted from high-price facilities to lower-price facilities. This caused high-priced facilities to lower their prices to avoid losing customers. Overall price reductions averaged 20 percent. The biggest benefit was in “spillover effects:” Roughly 75 percent of the savings from California’s reference pricing model accrued to people other than state employees because providers lowered prices universally. 

The tacit collusion argument likely fails as well. Hospitals generally know the prices of their local competitors. It’s the patients and employers who are in the dark. And hospitals and insurers, which both benefit from higher prices and spending, are the biggest political opponents of price transparency requirements, which turns the collusion argument on its head. It is price opacity that has induced insurers and providers toward collusion. 

Having more information about prices will enable employers to more effectively monitor the middlemen – generally health insurers – they have hired to negotiate rates. Such monitoring is crucial because insurers generally make higher profits on larger revenues as health care spending increases. In other words, insurers’ incentives currently may not align with those of employers and employees who are seeking lower-priced care. 

Improved price transparency tools and apps will help employers compare provider rates across both payers and regions. This will enable competition among insurers and other middlemen and allow employers to replace those that are ineffective and shop for the best care at the best price.

More complete pricing information will also enable employers to construct “centers of excellence” models, where plan members are steered toward higher-value providers outside of local markets. As an external benefit, merely the threat of consumers leaving a local market has been demonstrated to pressure local hospitals to lower prices.

Greater attention on excessive prices can also create public pressure for lower prices. Indiana employers have recently pushed for increased transparency of hospital prices. For example, Parkview Health System in Fort Wayne negotiated outpatient service prices with Anthem, the state’s largest insurer, that were more than four times Medicare payment rates. When these rates became public, community outrage forced Parkview and Anthem to lower prices by 25 percent.

Government regulations always produce unintended, and sometimes adverse, consequences. In this case, however, government is intervening to require the sine qua non of markets: transparent prices. Economic theory is clear that prices are crucial to ensure the most efficient allocation of resources. But the current arrangement blinds purchasers to health care prices. Price transparency is just one aspect of a health reform agenda that harnesses choice and competition to improve the status quo. The recent federal rules that require both hospitals and insurers to provide price information are an important step to help patients and employers direct their resources in ways that allow purchasers to reduce overcharging, punish high-priced, low-quality providers and ultimately generate better value out of the health care system.

Brian Blase was a special assistant to President Trump at the National Economic Council, 2017-19. He is president of Blase Policy Strategies. He authored research on the benefits of health care price transparency for the Galen Institute in 2019.