Healthcare Price Transparency in a Privately Insured United States: Is Patient Ignorance Bliss?
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It is no secret that the United States is the only industrialized nation without a single-payer universal healthcare program. Among the many issues created by the high cost of healthcare, both parties agree that unexpected, and often extremely expensive, medical bills present a serious threat to financial security in a nation where around two-thirds of individuals declare bankruptcy due to an inability to afford medical care. Despite both parties agreeing that surprise medical bills are a pressing issue, there is little agreement concerning what an appropriate solution might look like.
On June 24, 2019, the Trump administration issued an executive order requiring hospitals to make negotiated pricing information accessible to the public. In November 2019, the Department of Health and Human Services, in complying with the order, created a “final rule” requiring all hospitals in the nation to publish the prices of certain procedures on their websites. The American Hospital Administration (“AHA”) and several other hospital networks subsequently filed a lawsuit challenging the administration’s authority to impose such a requirement. The AHA asserted that the rules imposed by this executive order would require more administrative positions to organize and deliver the requested pricing data, an increased cost that ultimately would be passed on to individuals seeking care. The AHA also argued that releasing price information for certain procedures would not help patients determine their out-of-pocket costs because an individual’s out-of-pocket costs are not determined by the negotiated rate between the insurance provider and the hospital, but are influenced by several other factors, including the patient’s health plan design and features (including co-insurances and deductibles) and the patient’s individual medical needs, which may not be fully known before a procedure commences.
On June 23, 2020, a district judge in the District of Columbia issued an opinion rejecting the AHA’s arguments that the price transparency requirements were unlawful and would result in administrative burdens that drive up the cost of care. The court also granted the Secretary of Health and Human Services’ motion for summary judgment, finding that the agency action did take the AHA’s concerns into account and that the agency’s final rule was not implemented in an arbitrary or capricious way. The judge echoed an argument made by many conservatives, including President Trump, that “informed customers” could limit inflation in healthcare markets by exerting market pressure on healthcare providers who charge higher prices for medical services and procedures. Part of the court’s reasoning rested on the hope that price transparency would result in lower healthcare costs over time, although the judge admitted there is no consensus in the economic community about whether price transparency does, in fact, lead to lower costs.
Economists’ lack of agreement about the effects of different types of economic regulation on healthcare markets stems from: 1) a lack of models and analyses that take the unique complexities of the U.S. healthcare system into account, and 2) the unpredictable behavior of the healthcare market as compared to other markets. For conservatives who oppose a single-payer system, price transparency and market pressure by consumers could provide a solution without increasing taxes or enabling complete government control over healthcare market prices. This perspective assumes that a healthcare market would behave like other U.S. markets that readily respond to consumer demand, but that is not the case. In healthcare markets, rather than service providers negotiating directly with the consumer for payment, third-party intermediaries can have a significant influence on the price-setting side of the transaction process. Private insurers act as intermediaries for approximately 90% of healthcare consumers, indicating that private insurers, not individual consumers, are in control of price negotiations in the U.S. This raises questions about whether price transparency would make any difference to individual consumers who do not carry negotiating power in the price-setting aspects of healthcare transactions. In a single-payer system, where the government has more control over setting prices for different procedures, private insurers could be removed from the transaction process altogether. Under the current system, however, as long as private insurers serve as intermediaries with financial interests in higher overall costs, the healthcare market will not behave like a standard supplier-to-consumer market.
Proponents of price transparency should also consider the elasticity (flexibility of consumer demand) of healthcare demand. Those in favor of transparency also assume that there is enough elasticity in the demand for medical care to allow for consumers (i.e., patients) to influence prices. For these proponents, the fact that 43% of healthcare spending is considered “shoppable” indicates there is enough room for healthcare consumers to seek out lower-cost options and drive down prices over time. Critics of price transparency, however, view this 43% figure from a glass-half-empty perspective. For these critics, the key takeaway is that over half of medical services are not “shoppable,” indicating inelasticity in the healthcare market. Furthermore, the 57% of non-“shoppable” or emergency services may become more expensive in order to offset the revenue reduction caused by consumers shopping and driving down the costs of elective and non-emergency care.
Lastly, the supply of healthcare services in the U.S. is not fixed or uniform. Since 2013, healthcare providers have become more concentrated across the U.S., making the healthcare services market less competitive. This trend has correlated with an increase in healthcare costs, which are more pronounced where there is higher market concentration. While not necessarily a causative relationship, this correlation does indicate an intuitive economic principle: when there is less competition, prices will rise. Competition is greatest in urban areas, and lowest in small cities and rural areas of the U.S. Proponents of price transparency consider the U.S. healthcare economy in the aggregate. This approach, however, is flawed, because it fails to assess the relatively reduced ability to influence prices by “shopping” in areas where there may be only one healthcare provider or hospital network. Furthermore, by openly embracing a market-driven model, individuals in less-developed areas with fewer providers may be subject to higher healthcare costs than those in more developed areas with more healthcare options.
Forcing hospitals to disclose prices up front may resolve some issues in certain urban, competitive healthcare markets. The concept of transparency and accountability in healthcare pricing is attractive, and perhaps, a step in the right direction. Proponents of price transparency, however, tend to favor a market-driven approach to healthcare that may harm those in emergency situations and those in communities with limited access to healthcare providers and perhaps only one hospital system providing healthcare services. Additionally, the focus on hospitals and hospital networks alone fails to address the rising cost of pharmaceuticals, diagnostic products, and medical devices, which drive the increasing cost of medical care. Without a single-payer system and healthcare price regulations in place, healthcare costs in the U.S. will continue to rise because of the information asymmetries inherent in modern medical care and the inflexibility of patient demand in non-elective medical care and procedures.
About the Author: Gabriella Pico is a J.D. candidate for the class of 2022 at Cornell Law School. Prior to attending Cornell, she completed her B.A. in Public Policy and French at Hamilton College. Gabriella is a member of LALSA and serves as President of Cornell’s Cuban American Bar Association. Last spring, she participated in Cornell’s 1L Immigration Law and Advocacy Clinic where she provided direct services to DACA recipients in the Cornell community. Some of her academic interests include immigration, education, and health policy in the U.S.
Suggested Citation: Gabriella Pico, Healthcare Price Transparency in a Privately Insured United States: Is Patient Ignorance Bliss?, Cornell J.L. & Pub. Pol’y: The Issue Spotter (Feb. 8, 2021), https://live-journal-of-law-and-public-policy.pantheonsite.io/healthcare-price-transparency-in-a-privately-insured-united-states-is-patient-ignorance-bliss/.