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October 22/29, 2014

Health Care Price Transparency and Economic Theory

Author Affiliations
  • 1Woodrow Wilson School of Public and Internal Affairs, Princeton University, Princeton, New Jersey
JAMA. 2014;312(16):1642-1643. doi:10.1001/jama.2014.14276

Citizens in most economically developed nations have health insurance coverage that results in only modest cost sharing at the time health care is used. Furthermore, physicians, hospitals, and other clinicians and entities that provide health care within most systems outside the United States are paid on common fee schedules uniformly applied to all clinicians, health care organizations, and insurers. That approach spares the insured the need to seek out lower-priced health care and obviates the need for transparency on the prices charged by individual clinicians and organizations that provide health care.

Not so in the United States, where every private health insurer negotiates prices with every health care practitioner and organization, where large public health insurance systems such as Medicaid and Medicare pay fees that do not cover the full cost of treating patients covered by these programs, and where uninsured, self-paying patients can often be asked to pay whatever can be extracted from their household budgets, sometimes with the help of debt collectors and the judiciary.1,2 Economists call the approach price discrimination, which means the identical service is sold to different buyers are different prices.

This approach to pricing health care has led in the United States to a system in which, at one end of the spectrum, hospitals and physicians are expected by society to treat low-income patients free of charge, on a charitable basis,3 or for modest fees that do not cover the cost of those treatments and then to finance that informal catastrophic health insurance system for the poor out of the other part of their enterprises that they can operate as profit-maximizing business firms. This is true even in some of the large segment of institutions referred to as not-for-profit. The harsh excesses that this quest for profits in health care can unleash—even among not-for-profit hospitals—have been well reported in various articles in the popular press.

Private employers in the United States have played a pivotal role in the evolution of this system. They hired as their agents in health care the private insurers who helped put that system into place, and they supported it.4 To gain better control over the growth of their health spending, employers have of recent resorted to a technique long recommended to them by the market devotees among health economists, namely, putting the patient’s “skin in the game,” as the jargon goes. It is done with health insurance policies imposing on the insured very high annual deductibles before insurance coverage even begins, followed by significant coinsurance, perhaps requiring patients to pay 10% to 20% of every medical bill, up to a maximum total annual out-of-pocket expenditure that can potentially exceed $10 000 for a family.

This approach of shifting more of the cost of employment-based health insurance visibly and directly into the household budgets of employees amounts to rationing parts of US health care by price and ability to pay and delegates the bulk of the hoped-for belt-tightening to low-income families. Because the word rationing is anathema in the US debate on health policy, the strategy has been marketed instead under the felicitous label of consumer-directed health care,5 presumably designed to empower consumers in the health care market to take control of their own health care. However, this strategy, based mainly on economic theory, so far has put the cart before the horse.

In virtually all other areas of commerce, consumers know the price and much about the quality of what they intend to buy ahead of the purchase. This information makes comparison shopping relatively easy and is the sine qua non of properly functioning markets. By contrast, consumer-directed health care so far has led the newly minted consumers of US health care (formerly patients) blindfolded into the bewildering US health care marketplace, without accurate information on the prices likely to be charged by competing organizations or individuals that provide health care or on the quality of these services. Consequently, the much ballyhooed consumer-directed health care strategy so far has been more a cruel hoax than a smart and ethically defensible health policy.

Part of the problem is a technical one. A large number of distinct goods and services comprise all but the simplest medical treatments. The “charge masters” (ie, schedules of list prices) used by hospitals to negotiate prices with individual health insurers contain roughly 15 000 or more of these distinct items,6 most of them with names that virtually no lay person could ever understand. The nomenclature for physician fees contains approximately 7000 distinct items with generally incomprehensible terms.7 It is technically daunting to distill these thousands of items into larger aggregates for medical treatments—eg, heart valve replacement or knee-replacement operations—with names of procedures that prospective patients might understand.

A second problem involves the contracts on prices that insurers negotiate with health care entities. Typically, contract stipulations formally bind health care organizations and insurers to secrecy. Although it is possible to understand the quest for secrecy on prices from the commercial perspective of insurers and health care entities, that secrecy certainly interferes with creating the price- and quality-conscious consumer of health care services (about whom economists have dreamt in their philosophical musings).

Fortunately, there may be solutions to this opacity if employers will act more responsibly in this regard than they previously have. Employers can insist that their employees facing high cost sharing be given greater price transparency for health care services. Entrepreneurial start-up companies have emerged, bent on penetrating the shroud of secrecy surrounding the US health care business with the power of modern information technology.2

In this issue of JAMA, Whaley et al8 provide an early glimpse of the potential ability of greater price transparency in health care to influence the choices patients make about procurement of health care services. The authors evaluated the medical claims from approximately 500 000 employees at 18 large, self-insured firms from 2010 to 2013. Available to these employees was an online information platform that enabled them to see their out-of-pocket share of the prices that different, competing clinicians or health care entities charge for a set of standard health services, such as laboratory tests, advanced imaging services, or clinician office visits, before receiving care for those services.

The authors compared total claims payments (the sum of employer and employee spending for each claim) for employees who searched online for the prices of the selected services before receiving them vs those employees who used these services without a search on prices. Using sophisticated statistical methods, the authors found what economic theory would predict, namely, that those employees who searched for prices prior to using a service paid lower prices for these services than employees who did not search for prices.

Following access to the platform, 5.9% of all laboratory test claims (N = 2 988 663), 6.9% of advanced imaging claims (N = 76 768), and 26.8% of all clinician office visit claims (N = 2 653 227) were associated with a price search prior to using the health care services. Compared with those who did not use the platform to search for prices, those who did had lower relative claim payments and lower absolute payment differences for laboratory tests (13.9% lower, $3.45 less), for advanced imaging procedures (13.2% lower, $124.74 less), and for clinician office visits (1.02% lower, $1.18 less).

To check for possible selection bias in these results—for example, the possibility that those who searched for prices would have sought care from lower-priced clinicians or health care organizations even in the absence of price information—the authors conducted an additional analysis demonstrating that, on the contrary, prior to the availability of the search platform, the price-searching employees compared with those who did not search for prices tended to rely on higher-priced clinicians and health care entities.

The authors fully recognize a number of limitations of this early evaluation of this approach to price transparency. The number of services explored was small, as was the number of employees using the online search engine for prices. Furthermore, the absolute cost savings in dollars for some of the services (laboratory tests and office visits) was small. Nevertheless, this study is merely an early glimpse at the issue, before the approach has fully matured, and useful data for a more ambitious follow-up study will not be available for a year or 2. At that time, presumably more employees will have become familiar and comfortable with the search routine and the relationship between searching, so outcomes related to a larger number of services could be explored.

The findings reported by Whaley et al indicate that price transparency works as economists would expect it would. However, one important caveat on price transparency must be registered. As Brand et al9 of the Federal Trade Commission properly have noted, greater transparency about prices and quality in health care are not helpful if the relevant market for health care is monopolized. Transparency can promote savings and encourage better quality only if there are enough competing entities that provide health care in a market. It is a point that is sometimes overlooked but is an essential ingredient for patients to benefit from knowing the price and quality of the health care services they purchase.

Editorials represent the opinions of the authors and JAMA and not those of the American Medical Association.
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Article Information

Corresponding Author: Uwe E. Reinhardt, PhD, Woodrow Wilson School of Public and Internal Affairs, Princeton University, Robertson Hall, Princeton, NJ 08544 (reinhard@princeton.edu).

Conflict of Interest Disclosures: The author has completed and submitted the ICMJE Form for Disclosure of Potential Conflicts of Interest and none were reported.

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