Why Price Transparency Cannot Cure American Healthcare

Why Price Transparency Cannot Cure American Healthcare

Jonathan Klein[*]


“Price transparency” is a buzz-phrase one tends to hear a lot in discussions over healthcare reform. Price transparency laws, which require covered health care providers to disclose to consumers cost estimates for health care services, are attractive to lawmakers on both sides of the aisle, and it’s easy to see why. They ostensibly empower consumers by making more pricing information available to them. In theory, consumers can then use this information to shop around, ultimately saving money both at both the individual and systemic levels. As Nino Monea, Class of 2017, noted, greater price transparency will probably generate at least some savings for individuals and the healthcare system as a whole. In this article, I explore the situations in which price transparency is most likely to reduce health care costs, and suggest ways to expand the impact of transparency mandates on the cost of health care.

Perhaps most importantly, transparency laws are premised on consumerism—a premise that is somewhat controversial. Many people are reluctant to view health care as simply another other market good, amenable to price shopping and marketplace competition.[2] Concerns about “reducing” health care to the status of a market good are evident in the language we use: Are those who undergo surgeries patients, or merely “consumers”? Many doctors and patients resist viewing health care as any other market commodity, and as a result may be less comfortable doing what consumers do: shopping for the best combination of price and quality. People feel attached to their doctors, to their hospitals, and to the care they know. They may not be willing to leave the comfort of what’s familiar simply for a better price across the street.

In addition to concerns about the commodification of health care, patient preferences about their roles in the health care decision-making process may also deter shopping. One meta-analysis on patient preferences found that as many as 80 percent of patients preferred to take an active or collaborative role in the decision-making process.[3] These patients were more likely to seek out, or at least to inquire about, alternative treatments. These patients, by extension, may be more likely than passive health care participants to seek out lower-cost providers.[4] Ultimately, if price transparency mandates and other market-driven solutions are to successfully lower the costs of health care, then a paradigm change may be necessary: Patients must acknowledge that the market for health care, while unique in many ways, is ultimately still a marketplace in which they can—and should—seek out the best value for their money.

In more concrete terms, transparency laws are premised on price sensitivity. This means that consumers react when prices are too high. In most markets other than health care, consumers respond predictably to pricing information. Take, for example, two gas stations on opposite sides of the street: When one sells gas for a quarter less than the other station, rational consumers will choose the cheaper station, all else being equal (and emphasis on this point, because other factors like product quality and brand loyalty will alter the decision-making process for some consumers).

However, the healthcare market is fundamentally different than other markets. Consumers of health care often do not have time to shop for lower prices. In emergencies, the decision where to seek treatment is often dictated by geographical constraints (i.e. which emergency room is closest to the patient) and hospital facilities (i.e. whether a hospital has the equipment and staff necessary to treat the patient’s illness). This means price transparency in health care has a limited impact except for elective operations, where patients have time to shop for lower prices. But because emergency care is a relatively small portion of overall spending—estimates range from 2 to 10 percent[5]—price transparency still has the potential to significantly reduce health care costs.

Even for elective procedures, many consumers have too few incentives to seek out lower-cost care. As Jeremy Salinger, Class of 2017, notes, the market for healthcare is fundamentally different than other consumer markets because the party receiving healthcare—the patient—is often not the same party who pays for that care. This is the third-party insurance system, and it distorts patient incentives in a variety of ways. An important distortion that is sometimes overlooked in discussions about healthcare reform arises from the asymmetry between patient and payor preference. If consumers paid the full cost of their healthcare, we would expect rational consumers to be perfectly price-sensitive (provider quality and all other factors being equal). Uninsured patients must pay the full cost of their health care and, consequently, are most likely to search for the lower-cost provider.[6]

One useful way to discuss the different degrees to which patients care about the cost of health care is to categorize patients into different “zones” based on the size of their financial incentive in finding cheaper care. The uninsured patient falls into the first of three such incentive “zones.”[7] On the other end of the spectrum, in a third incentive zone, are patients who have no direct financial stake in the decision-making process.[8] For example, some patients with premium insurance plans may have no co-pays or deductibles, and as a result may be disinclined to search for lower-cost providers. In the middle of the spectrum are patients who have some financial incentive to seek out lower-cost health care; the strength of the incentive corresponds to the cost-sharing burden on the patient.[9]

Caps on patients’ out-of-pocket expenses may have the unintended consequence of making consumers less price sensitive. The Affordable Care Act, by capping cost-sharing (whether in the form of deductibles, co-pays, or co-insurance) at $6,600 for individual and $13,200 for family plans,[10] may disincentivize patients from seeking out lower-cost providers once they reach the cost-sharing cap.

In addition to the psychological hurdle discussed earlier, there are also practical problems with the implementation of a transparency mandate. Unlike many other consumer goods, health care is often not fungible, even for the same type of procedure.[11] In other words, many patients and procedures tend to be unique. This presents a challenge for health care providers, who are often unable or unwilling to give advance estimates unless they can evaluate the patient’s medical history in detail.[12] Inherent uncertainty in diagnosis also makes it difficult for patients to compare prices: Because physicians often cannot make a definitive diagnosis until the patient undergoes testing or an exploratory procedure, patients are poorly positioned to know whether a test or procedure is necessary and whether the hospital is charging an above-market rate.[13] While transparency mandates may have a limited impact on complex, costly procedures, they are likely to achieve cost savings where health care is easily consumed. For example, the markets for prescription drugs and flu shots are highly price-competitive in part because these items do not need to be tailored to the particular needs of each patient.

Even when providers are comfortable giving quotes in advance, many patients find themselves comparing apples to oranges.[14] One study of California hospitals found that not all hospitals included the total cost of the operation in their price quotes; they often excluded doctors’ charges and facility fees, which can account for a significant portion of the overall cost.[15] The presence of these “hidden fees” makes it difficult for consumers to accurately compare total price—the most relevant number from a consumer’s perspective—across providers. If lawmakers create an inclusive definition of what price must be disclosed, then they can help level the playing field for consumers.

Even if consumers gain better access to useful price information, there are reasons to believe that price transparency mandates will either not change or will increase the overall cost of health care. As Mr. Monea suggested, there are at least two circumstances in which price transparency mandates are especially unlikely to succeed. First, in markets with a single provider (for example, specialists in rural markets), the only way for consumers to seek out a lower-cost provider is to travel out of market, which may not be feasible for ill patients or lower-income patients who cannot afford to travel. New Hampshire’s experience confirms that mandated price transparency has minimal impact on rural health care markets.[16] Second, price transparency mandates may facilitate collusion by giving health care providers better access to their competitors’ pricing policies.[17] In this scenario, transparency laws could enable providers to discreetly call competitors, determine how much they charge for a particular procedure, and ultimately set their prices at the same rate.[18] Ultimately, this means that price transparency is likely to save consumers—or patients, depending on one’s perspective—money only where patients have meaningful choices between higher- and lower-cost providers.

[*] J.D. Candidate, Harvard Law School, 2016; B.A., University of Georgia.

[2] For an overview of the debate over health care as a market good, see Edmund J. Pellegrino, The Commodification of Medical and Health Care: The Moral Consequences of a Paradigm Shift from a Professional to a Market Ethic, 24(3) J. Med. Phil. 243 (1999).

[3] Jochnanan Benbassat, Dina Pilpel & Meira Tidhar, Patients’ Preferences for Participation in Clinical Decision Making: A Review of Published Surveys, 24(2) Behavioral Med. 81, 85–87 (1998).

[4] Id.

[5] See Louis Jacobson, Does emergency care account for just 2 percent of all health care spending?, PolitiFact (Oct. 28, 2013), http://www.politifact.com/truth-o-meter/statements/2013/oct/28/nick-gillespie/does-emergency-care-account-just-2-percent-all-hea/ [https://perma.cc/7YHB-VX7D] (citing Michael H. Lee, Jeremiah D. Schuur & Brian J. Zink, Owning the Cost of Emergency Medicine: Beyond 2%, 62(5) Ann. Emergency Med. 498 (2013), http://www.annemergmed.com/article/S0196-0644(13)00313-2/pdf []).

[6] Cf. Alan B. Krueger & Ilyanan Kuziemko, The demand for health insurance among uninsured Americans: Results of a survey experiment and implications for policy, 32(5) J. Health Econ. 780 (2013) (finding significant elasticity of demand for health care insurance among uninsured).

[7] Lecture by Prof. Christopher Robertson, Visiting Professor, Harvard Law School (Oct. 2014) (articulating the concept of “zones of insurance” to describe the different financial incentives facing health care consumers).

[8] Id.

[9] Id.

[10] See Out-of-pocket maximum/limit, U.S. Ctrs. for Medicare and Medicaid Servs. (Jan. 3, 2015), https://www.healthcare.gov/glossary/out-of-pocket-maximum-limit/ [https://perma.cc/SK75-8Z59].

[11] See, e.g., Mathew W. DeCamp, Ethics and the Physican-Patient Relationship: Medico-moral Consequences of Commodification, 19 Einstein Quart. J. Biol. Med. 135, 136 (2002) (rejecting health care as a commodity in part because it is not a fungible good); Pellegrino, infra note 14 (discussing fungibility in the context of commodification).

[12] See Kate Stockwell Farrell, Leonard J. Finocchio, Amal N. Trivedi & Ateev Mehrotra, Does Price Transparency Legislation Allow the Uninsured to Shop for Care?, 25(2) J. Gen. Internal Med. 110 (2009).

[13] Renee Y. Hsia, Abbas H. Kothari, Tanja Srebotnjak & Judy Maselli, Health Care as a ‘Market Good’? Appendicitis as a Case Study, 172 Archive Intern. Med. 818, 819 (2012).

[14] See Farrell et al., supra note 11, at 110–111.

[15] Id.

[16] See Ha T. Tu & Johanna R. Lauer, Ctr. for Studying Health System Change, Impact of health care price transparency on price variation: The New Hampshire experience (2009), http://www.hschange.org/CONTENT/1095/1095.pdf [https://perma.cc/TFN6-YU93].

[17] See Paul B. Ginsburg, Shopping for Price in Medical Care, 26(2) Health Affairs w208, w214–15 (2007) (explaining how price transparency mandates could facilitate collusion among health care providers).

[18] Id.

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