• A Clear Solution for Health Care Costs

    by Nino Monea, Class of 2017

    The market for health care is an economist’s nightmare. Many of the market forces that would militate against rising prices in other industries simply do not exist for the health care market in the United States. Sudden injuries and illnesses create demand uncertainty by preventing consumers from planning in advance when they will purchase care. Third-party payers distort incentives to reduce costs.[1] But perhaps most vexing of all, the true cost of most medical services are obscured, leading to dramatic markups in prices.[2] Anecdotes of overpriced products are widely available. $50 disposable gloves.[3] $500 IV bags.[4] $1,000 toothbrushes.[5] The list goes on and on. All of them are examples of patients, ignorant of the price of a good or service until after it has been charged, who are unable to discern the actual value of their care.

    Of course, these are just isolated examples; we may also look to more systematic variations in costs caused by pricing failures. Costs vary widely not just between products, but also between regions. The average cost of a Medicare enrollee in Miami, the most expensive city, verses Honolulu, the least expensive, was $16,000 and $5,300. One might assume that this was simply the result of aging populations, but even spending in the last two years of life showed a dramatic difference between the two cities: $72,000 and $43,000 respectively.[6]

    Taken together, pricing failures are estimated to add anywhere from $84-131 billion in unnecessary spending.[7] Greater transparency in health care prices could alleviate these huge disparities in prices. This would take the form of making health care information assessable to consumers online. By allowing consumers to make more informed choices, providers will be forced to compete to lower prices to attract more business. Price transparency has been successful at reducing spending in other industries, such as toll roads and electricity.[8] For example, by making consumers aware of real time prices of the electricity they were using, they chose to shift usage to lower priced, off-peak hours. Additionally, transparency could indirectly lower prices by giving insurance companies more information, and therefore, more bargaining power with care providers. This could allow them to negotiate better prices with hospitals.[9]

    It must be noted that the policy solution is not as simple as posting the prices online and leaving market forces to work. The Centers for Medicare and Medicaid Services (CMS) has already posted the raw data for hundreds of hospitals, but it is in a form that is not readily accessible to the average patient. There are three specific principles that must be incorporated into a price transparency policy in order for it to achieve maximum potential effectiveness. First, the disclosure website should be user friendly, and actively promoted. Second, disclosure should include not only sticker price, but also negotiated prices, as well as quality of care information. Third, disclosure must be done with an eye towards preventing collusion among health care providers.

    On the first point, as the CMS data release showed, simply putting out raw data does not necessarily provide average consumers with usable information. Some states, by contrast, have turned raw data into helpful information for consumers. After New Hampshire passed a price transparency law, the state’s Insurance Department compiled and published comprehensive information on physician services, out-of-pocket costs, and total prices. In California, visits to the state transparency website spiked after the commencement of a publicity campaign. [10] Making raw price data into something that is useable to consumers—and promoting the use of that information—is essential to controlling health care costs. Closely related to this point, patients should also be provided with information on quality of care, such as mortality rates for procedures, complication rates, and average length of stay, so that they can make informed decision about what procedures they want.[11] A comprehensive price transparency law makes sure that data is translated into useable information and that consumers are aware that the information is available to them.

    But regulators must be wary about the dangers of collusion if comprehensive price transparency is enacted. Although collusion is usually associated with secrecy, in markets with high concentration and low competition (such as health care), care providers might take advantage of transparency by raising, rather than lowering, prices to match their rivals. At the same time, firms may have less incentives to cut prices if they know that the move would be matched by other providers, eroding any competitive advantage they would have had.8

    The Federal Trade Commission (FTC), working with the Department of Justice, is already active in policing anti-competitive behavior. And cases have already been filed against medical device suppliers, pharmaceutical companies, and hospitals for monopolistic practices. Thus, there may be no need for new enforcement laws, so long as current ones are adequately enforced.

    So what would be the potential costs and benefits of a disclosure website of the type I am advocating? To account for my lack of methodical rigor, I will be generous when estimating costs, and conservative on benefits. A study from the University of Chicago found that price transparency could be responsible for a 6.5% reduction in the cost of an angioplasty.1 On a broader scale, a white paper from Thomson Reuters calculated that price transparency could shave off $36 billion in health care spending per year.10 Costs are a little more difficult to estimate. First, there is the cost of building the actual website. To use a timely comparison, the federal government recently built and rolled out Healthcare.gov. Cost estimates for Healthcare.gov vary, but its staunchest critics claim $350 million.[12] Second, there would be costs of fighting any increase in collusion. The total budget of the Antitrust Division of the Department of Justice is $163 million, and the FTC spends roughly $25 million on “promoting competition” through stopping collusion. Taken together, that’s about $200 million to prevent collusion in all industries. Add the costs together can you get $550 million.


    [1] Christensen, Hans B., Eric Floyd, and Mark Maffett. 2013. “The Effects of Price Transparency Regulation on Prices in the Healthcare Industry.”: http://chess.bsd.uchicago.edu/events/documents/CFMPriceTransparency10913.pdf.

    [2] Berwick, Donald, and Andrew Hackbarth. 2012. “Eliminating Waste in US Health Care.” JAMA, 14-March: 1513-1516.

    [3] Rosenbaum, Lisa. 2013. “the problem with knowing how much your health care costs.” http://www.newyorker.com/online/blogs/elements/2013/12/price-transparency-health-care-costs.html.

    [4] Bernstein, Nina. 2013. “How to Charge $546 for Six Liters of Saltwater.” http://www.nytimes.com/2013/08/27/health/exploring-salines-secret-costs.html.

    [5] Rosenberg, Tina. 2013. “The Cure for the $1,000 Toothbrush.” New York Times. August 13. Accessed March 21, 2014. http://opinionator.blogs.nytimes.com/2013/08/13/the-cure-for-the-1000-toothbrush/?_php=true&_type=blogs&_r=0.

    [6] Schieber, Sylvester J., Dana K. Bilyeu, Dorcas R. Hardy, Marsh Rose Katz, Barbara B. Kennelly, and Mark J. Warshawsky. 2009. “The Unsustainable Cost of Health Care.” Social Security Advisory Board, September 1-37.

    [7] Berwick, Donald, and Andrew Hackbarth. 2012. “Eliminating Waste in US Health Care.” JAMA, 14-March: 1513-1516.

    [8] Congressional Budget Office. 2008. “Increasing Transparency in the Pricing of Health Care Services and Pharmaceuticals.” http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/92xx/doc9284/06-05-pricetransparency.pdf.

    [9] Muir, Morgan, Stephanie Alessi, and Jaime King. 2013. “Clarifying Costs: Can Increase Price Transparency Reduce Health Spending.” William & Mary Policy Review, Vol. 4: 319-366: http://www.wm.edu/as/publicpolicy/wm_policy_review/Archives/Volume%204%20Issue%202/MuirAlessiKing_s13f.pdf.

    [10] Coluni, Bobbi. 2012. “Save $36 Billion in U.S. Healthcare Spending Through Price Transparency.” Thomson Reuters, February: 1-16.

    [11] Government Accountability Office. 2011. “Health Care Price Transparency.”

    [12] Kessler, Glenn. 2013. “How much did HealthCare.gov cost?” http://www.washingtonpost.com/blogs/fact-checker/wp/2013/10/24/how-much-did-healthcare-gov-cost/.

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