The price transparency trap

The government's new rules will have little impact on consumer behavior

A 73-year-old woman recently injured her back lifting a large flowerpot. Day by day, her pain grew worse. On day five, she began vomiting what little food she’d been able to swallow.

When her dry heaves continued for an hour with no signs of abating, her frantic husband called 911. The EMTs arrived within minutes to rush her to the nearest hospital, ignoring the husband’s plea to take her to a different hospital a few minutes farther away where her primary care provider practiced.

Though the ER wasn’t busy, it took two hours before she saw a nurse. Over the next five hours, she received intravenous fluids, several imaging tests and a physician consultation. She returned home with several prescriptions, including an opioid for the pain. The diagnosis was severe sciatica, which would take anywhere from several weeks to several months to resolve.

A little over a month later, she received her Medicare billing statement. The $3,532 for the ER visit and $3,264 for the CT scan led a long list of charges that totaled $12,164. Medicare paid $264, $188 and $716, respectively, for those services.

Now, two-and-a-half months after the event, she’s back to normal (thanks in part to the new stretching exercises she’s added to her morning routine). She and her husband are awaiting a final statement resolving any disputes between her supplemental insurance plan and the hospital.

I recount this story not to illustrate the ridiculously high hospital charges or the surprisingly low Medicare payment rates, but to show why the hospital price transparency rules that just went into effect are largely irrelevant to most peoples’ experiences with the healthcare system. The presumption behind price transparency is that empowered patients will use the information to shop for services, thus allowing the magic of the marketplace to drive down the cost of care.

But, as this older woman’s experience suggests, few hospital encounters are shoppable. Nearly 20% of the more than 400,000 people who visit the ER each day wind up getting admitted, and those cases account for about 70% of all hospital admissions.

No excuses for opposing transparency

That’s no excuse for the hospital industry’s aggressive opposition to price transparency. They had no problem with the original requirement contained in the 2010 Affordable Care Act, which only required publication of their so-called chargemaster rates. Almost no one (except the uninsured before they head off to bankruptcy court) pays those inflated prices. Medicare and Medicaid pay a fraction of those rates. Private insurers also negotiate steep discounts, although they still pay anywhere from 60% to 250% of Medicare rates.

But in 2019, the Trump administration upped the ante by requiring public reporting of not just the gross charges but the median rates negotiated by insurers with de-identified minimum and maximums rates. The requirement applied to 300 services considered shoppable, including most imaging and blood tests, orthopedic and cataract surgeries, colonoscopies and other procedures often performed at rival ambulatory surgical centers. The rule also required the rates be published in machine-readable formats so third-party developers could use the published rates to produce consumer-friendly shopping tools.

Last year the American Hospital Association filed suit to block the changes. A federal appeals court dismissed the AHA’s request for a stay and the new rule went into effect in January.

Their opposition didn’t stop there. Fierce Healthcare reported in early February that 30% of hospitals are not complying with the new rule, which isn’t surprising given that the penalty for non-compliance is only $300 a day. A Wall Street Journal investigation published in late March revealed a majority of large hospitals in the country initially deployed software code that made it impossible for consumers to find the price data using Google and other search engines.

A number of major systems removed the code after those shenanigans were exposed. And in late March, CMS issued a guidance requiring all public postings be in formats “available to the public without restrictions that would impede the re-use of that information.”

Insurers are up next

Free market advocates are now hoping a companion rule for insurers will pick up the slack. The latest rule requires insurers – starting in 2023 – to provide consumers with the information they actually need to shop for some services. In addition to the rates they negotiate with different providers, the insurers must list how much their plan members will pay out-of-pocket for each service.

Ideally that information will be contained in computer or smart phone apps that provide instant comparisons to all providers in that insurer’s network. Conservative think tank advocates are hoping CMS will eventually include quality and outcomes measures to the reporting requirements so “consumers are well-informed about the cost and value of their therapeutic options.”   

“The payer rule is more important,” said Lynn Rogut, a director at the New York-based United Hospital Fund Quality Institute, which recently issued a report for the state’s Department of Health on how to create a single statewide shopping website and cost estimator for patients. The provider-driven websites and tools are “very hard for consumers to understand, even if it’s easy to find,” she said. “CMS is requiring (payers) to incorporate that information into the cost estimators for their members.”

But will consumers be able to use this information when it becomes available? Will it actually lead to greater competition and bring down prices? Some argue “just the act of unveiling negotiated rates has the potential to transform a market,” Rogut said. “I don’t know if that will actually happen.”

In a recent Health Affairs blog post, hospital industry officials and their consultants admitted hospitals will face increased competition from outpatient clinics, labs and surgical centers, but “the impact on consumer decision making will be minimal.” They warned of unintended consequences, predicting hospitals would use their market power to raise prices on non-shoppable services to recoup any lost revenue.

They also predicted price transparency will force financially troubled hospitals to seek out partners and lead to greater consolidation since the data will give insurers a temporary upper hand in rate negotiations. Hospitals will use that greater market power to continue raising prices, which insures will simply pass along to their customers.

A free good with few benefits

It’s hard to argue against transparency. As long as fee-for-service medicine remains the dominant mode of paying for healthcare in the U.S., it will, at the least, help educate the consuming public about the wide variations in medical prices; the large disparities in the prices paid by public and private payers; and the share of out-of-pocket costs patients pay in different insurance plans.

But promoting price competition at the hospital level will never cure the root causes of high health care spending in the U.S. Those include high drug prices, high medical device prices, high physician salaries and, at most hospitals and hospital systems, their administrators’ ongoing love affair with fee-for-service medicine, where the more they do, the more revenue they generate, and the more the administrators and the physicians earn.

No patient armed with a smart phone app can stand in the way of those incentives. Stronger medicine for controlling prices is called for.