Jun 7, 2019

Want Higher Healthcare Costs? Try Mandatory Price Transparency

This month, the Trump administration is set to issue an executive order imposing price transparency mandates on healthcare providers. The exact content of the new policies is still unknown, but sources close to the matter have indicated that this is only the first of several initiatives to reduce opaque pricing in an increasingly expensive and electorally-relevant industry.

At first, this proposal could seem like a good way to promote competition and lower prices. If patients have more information about the prices that insurance companies and providers negotiate, then maybe they could make better healthcare decisions and save money. Consumers could shop for better value. This may have a secondary effect of inducing more price competition among insurance companies and providers.  

But we could be in for a nasty surprise: mandatory price transparency might actually hurt competition and raise prices. This is because forced transparency does not consider the incentives of providers and insurers to bargain for lower rates.

It is likely to also bring about new obstacles to innovation, a reinforcement of anti-competitive behavior in healthcare, and the provision of unnecessary care. Worst of all, mandatory price transparency will probably not lead to the kind of transparency that meaningfully cuts costs in the long run. To make the market transparent, we ought to look to other solutions.

Top-down Transparency Requires Bundling, Which Invites Cronyism

Currently, insurers negotiate down hospitals’ and physicians’ rates, such that the price paid for any given service is lower than the quoted amount. On the whole, that’s a good thing.

Even if consumers are not involved in the negotiation, insurers have an incentive to negotiate prices down, which ultimately benefits them. The negotiated prices are visible to patients after the fact, so there exists a certain level of transparency under the status quo.

Forced transparency before the fact is a different kettle of fish. If we want to enable patients to make apples-to-apples comparisons between the offers of different providers, we would need standardized bundles of services. This is because healthcare services are complex and can’t be compared to each other unless there is a certain level of uniformity across offers.

Large-scale standardization of healthcare services is undesirable for three main reasons. First, codified bundles prevent the introduction of innovative and potentially cost-cutting care delivery systems. Second, they give insiders the opportunity to design bundles that serve their interests, making it difficult for smaller providers to do the right thing for their patient and for new entrants to compete successfully. Finally, bundles may include unnecessary services that hurt rather than help patients.

Mandatory Price Transparency Means Higher Prices

Counterintuitively, transparency can lead to price increases. One interesting empirical study of online marketplaces—Amazon, eBay, and the like—found that platforms pursuing a low-cost, high price transparency approach led to stable or even higher prices. Rather, marketplaces that focused on product differentiation outperformed the others because it was a better platform for seller competition. While the price transparency inherent to online shopping might make us believe that consumers are getting better deals, this is not always the case.

Researchers have also observed drastic effects where transparency measures were made mandatory. In Denmark, policymakers were uneasy with the fact that sellers of ready-made concrete had extensive leeway in how they priced the commodity. They decided to force dealers to disclose their rates. The mandate resulted in a price increase of 15 to 20 percent, as it effectively provided sellers with an opportunity to build a cartel in broad daylight.

Mandatory price transparency creates additional opportunity for collusion in an industry often accused of anti-competitive behavior. What’s more, not only have experts already discussed the harmful effects of mandatory price transparency, but the Federal Trade Commission (FTC) itself has ruled that transparency mandates for healthcare are conducive to anti-competitive behavior. Policymakers would be well-advised to heed these warnings.

People Don’t Seem to Care about Prices Anyway (for Good Reason)

It is fair to assume that policymakers are pushing for price transparency because consumers are demanding it. But while “transparency” is projected to be the word of the year in 2019, it may not be much more than a buzzword when it comes to healthcare purchases.

Even when price comparison tools are available, consumers choose not to use them, and costs don’t go down. Harvard researchers found that among a nationally-representative sample of non-elderly adults, only three percent had sought to compare offers before receiving care.

The reasons why patients don’t shop around are complex. A major obstacle to price shopping is the disconnect between beneficiaries and payers. As soon as a person hits their deductible, there is no reason to look for low prices, as insurance pays for any additional services.

Additionally, people are limited by network requirements, so they have a restricted pool of providers to choose from. Another natural limitation is geography; travel costs might outweigh the benefits of receiving care at a cheaper hospital.

And not all services are shoppable either. A study by the Health Care Cost Institute found that at least 57 percent of services were “unshoppable,” which means that no meaningful comparison can be made between them.

Consumers are rationally ignorant when making healthcare purchases, as there is a high cost of searching for information and low or no rewards for choosing best-value options. We must then look to other alternatives to bring about transparency in a way that will incentivize patients to seek out better deals.

For Real Transparency, Let Patients Choose Better Value Options

Providers and insurers aren’t always to blame for murky pricing. Up until October of 2018, it was illegal for pharmacies to tell patients when the cash price for a drug was lower than their copay using insurance. This “gag clause” actively prevented patients from saving money and putting pressure on drug manufacturers and pharmacy benefits managers (PBMs).

But this was just the tip of the iceberg. The counterpart of transparent pricing is transparent quality. Around 20 percent of prescription drugs are used to treat conditions not specifically approved by the FDA, yet the agency prevents manufacturers from labeling and advertising the products accordingly. Without access to such crucial information about potential treatments, patients are less able to make informed decisions and take control over their health.

More generally, regulatory reforms should be designed to make it worthwhile for consumers to care about prices and overall value. Such savvy patients shouldn’t be prevented from reaping the benefits of their efforts.

One example is individuals and families who use direct primary care for their day-to-day medical needs, which gives them access to a wide range of routine care services against a fixed monthly fee. Currently, those patients are not allowed to use their tax-free Health Savings Accounts (HSAs) to pay for care. If they were, we could expect a larger number of patients to sign up for this kind of low-cost, high-quality care.

Other proposals include the Right to Shop, which was written into law in Maine in 2017 and gives patients the right to compare services within select categories. Consumers are provided with meaningful pricing information by their insurance company and receive rewards for choosing low-cost providers, thereby aligning their personal incentives with the overarching goal of cutting costs.

Conclusion

If we want to cut costs, mandatory price transparency is not the right avenue. It might actually increase costs, slow down innovation, give providers the opportunity to collude, and provide unnecessary care. As long as patients don’t have an incentive to care about their own healthcare expenses, initiatives to increase transparency will not achieve their goal.

Instead, we should remove regulations that make it hard for patients to shop for great value. Providers should be allowed to tell patients about the best treatments and the lower-cost options available to them, and patients should reap the benefits of the time and energy spent searching for better deals.

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