Price transparency alone won’t keep health care costs down

Photo illustration of nurses in a hospital
Photo illustration by FS Productions.

Surveys consistently show that affordability of healthcare is a top issue that Americans want their elected officials to address. The United States spends twice as much per capita on health care as other developed nations — $10,586 compared with the $5,086 OECD average. It’s a tremendous burden on federal and state budgets, businesses and public services, individual and family budgets — and crowds out investments in critical areas such as education, housing, environmental protection and infrastructure.

The cause? It’s not because we go to the doctor too much. On average, Americans are not using more health care services or more technology compared to other countries. So if it’s not that, then what is it? It’s not overly complicated. For years, health care economists have known that the single biggest cause of this difference is the prices charged by American health care vendors compared with those in other countries. A comparison by the International Federation of Health Plans and the Health Care Cost Institute showed that for almost any procedure or treatment, prices in other developed countries were typically less than 50% of comparable American charges. In addition, rates paid by private insurers are now averaging 50% higher than Medicare rates, a rise from just 10% higher in 2000.

The rest of the world pays lower prices for medical procedures. Source:

Hospitals and other vendors have raised prices substantially in the last two decades, now averaging from two times the Medicare rate to as high as 23 times. As those numbers indicate, there is tremendous variation in costs from vendor to vendor, often even in the same city. This rate variation continues partly because the prices actually paid — negotiated by various insurers on a vendor by vendor basis — are traditionally secret. In addition, the consolidation of health systems has led to oligopoly vendors in many places, giving them tremendous pricing power. Meanwhile, the emergence of some health systems as desirable “premium” vendors, like the Mayo Clinic, has strengthened the negotiating position of many health care systems and weakened the power of insurance companies to cut costs. Generally, health care systems in many areas have developed the power to reject reimbursement that is near the Medicare rate and insist on much higher prices.

Hoping that price transparency will bring down costs, a new federal executive order requires hospitals to disclose their standard prices. Another would require similar transparency, requiring health insurers to disclose cost information on a public web site and upon request. Not surprisingly, the American Hospital Association has announced it will sue the federal government over the transparency rule. Even if the government prevails, hospitals may just pay the $300 per day fine to keep the information secret.

Republicans have latched on to the idea that if consumers know the price of procedures, they’ll shop around, and Adam Smith’s vaunted invisible hand will push down the price of artificial knees as it has for TVs. But the efforts have thus far been unsuccessful, and there are reasons to think the entire premise is faulty.

Patients are often motivated by considerations other than cost or quality. They prefer to keep relationships with doctors and hospitals they know and trust, to seek referral to high-prestige “elite” centers, and to avoid seeking services from unfamiliar sources. The perception is you get what you pay for. Patients don’t want to travel outside their immediate area. And, of course, about 40% of health care services are emergencies or semi-emergencies in which the patient is unable to do any shopping. In general, patients tend to avoid making price comparisons and frequently reject the opportunity to shop for prices of medical service, feeling they are unqualified to make decisions. For those who do feel qualified, the lack of information on quality is problematic.

What about programs that would penalize patients for not shopping around? Programs that introduce penalties — high deductibles or ceilings on payment rates — to encourage patients to consider price have actually been shown to frequently cause patients to defer or avoid needed health care. Which leads to eventual higher costs.

The shop around solution also fails to consider the market power of oligopolies. Information on prices is of little use if there is no competition that might force health systems to reduce their prices.

Even if the prices negotiated between hospitals and insurers are no longer secret, many health care systems have such vast market power that they will cancel those secret discounts to insurers and charge more, not less.

The partner of high prices in driving American health care costs is overutilization — the use of treatments and tests that are not needed and in some cases even harmful. If the transparency of price data leads to decreased income for providers and hospitals, then that may encourage more overutilization in an effort to maintain revenue. In other words, cut their prices, and they’ll just order up more work done.

All these factors together suggest that efforts to treat patients like consumers of televisions won’t have the desired effect on prices. Indeed, smaller programs to accomplish these goals in limited geographic or employer settings have been much less successful than might be hoped.

In the end, the fact that no other health care systems in other countries use this approach strongly suggests that it will not be the tool we need to control costs. What has worked elsewhere is intervention by government or quasi-government groups to set prices, usually with input from health care providers and hospitals. Aggressive negotiation by government entities has been successful in holding down health care costs. Indeed, even in the United States, federal systems like Medicare and the Veteran’s Administration have been successful in keeping their costs far below those paid in the private system. In addition, in other countries, care guidelines set by organizations or by special boards to address appropriate utilization have also decreased overutilization and ineffective care. When these ideas have been introduced in the U.S., however, we hear shrieks of “socialism” and “death panels.”

In the end, Amercans need to realize that whoever seems to be paying for their health care — whether an employer, the government, or an insurance company — the money is actually coming out of our pockets, and out of our family budgets. Armed with that knowledge, we may finally be motivated to bring costs under control. The most powerful tool in holding down the high rates in the United States would be a general public consensus that prices are too high and that something must be done.

In the meantime, the Republican solution of shopping for health care is unlikely to work.