So it should tell you everything you need to know that insurers and hospitals have joined together to oppose new rules proposed by the Trump administration last month that would require them to disclose the prices they now negotiate in secret. Their fear is that disclosure will confirm what many have long suspected: that the biggest insurers and hospitals already have the power to raise hospital prices and insurance premiums, increasing their profits and making it easier to drive smaller hospitals and insurers from the marketplace.
In today’s market for medical care, the cost for an MRI or a hip replacement at the most expensive hospital in one region can be three times the cost at the least expensive hospital somewhere else. Even within regional markets, the prices paid to the most expensive provider can be twice as much as the least expensive. And within the same hospital, the price for an uninsured patient can be five or seven times what is charged for a patient covered by the largest private insurer.
There are various reasons for this “price dispersion,” as economists call it, but surely one is that prices are treated as trade secrets. The only time most patients find out the price is after the treatment has been delivered — and even then it often requires an accounting degree to figure it out. I’m guessing that the last time you saw a price list at a doctor’s office, a hospital or an imaging lab was — well, never. And if hospitals and health insurers have their way, that is the way it will remain.
In just about every other consumer market you can think of, the Internet, by making prices instantly available and comparable, has resulted in prices that are lower, more uniform and more closely tied to costs. But in health care, where pricing remains opaque, prices are rising faster than inflation, faster than costs and faster than the incomes of the people paying for it. And it is that problem that the Department of Health and Human Services is proposing to fix.
The new rules would require hospitals (and the doctors whose practices are owned by hospitals) to publish, in an easy-to-use format, their minimum and maximum rates for 300 common services, along with the amount the hospital is willing to accept from someone without insurance. The aim is to make it easier for uninsured patients, or insured patients with co-payments and deductibles, to shop around for the best value.
More controversial, however, is a second rule that would require health insurers to create an interactive website that would tell customers what their out-of-pocket cost would be for a service at any provider, whether in network or out, as well as the price it has negotiated for that service with in-network providers. The effect would be to let every hospital and insurer know the rates negotiated between every other hospital and insurer — rates that under current contracts must be kept secret.
Within minutes of these regulations being announced, the hospitals and the health insurers announced their opposition, warning the rules would result in higher prices for consumers. Call me a cynic, but that strikes me as rather rich, coming as it does from industries that for decades have been deeply implicated in runaway medical price inflation.
Their argument is that if negotiated rates were made transparent, then the hospitals offering the deepest discounts would feel compelled to stop doing so out of fear that they would be forced to offer similar discounts to all insurers. In highly consolidated hospital markets — which at this point describes two-thirds of the country — there is also concern that allowing hospitals to share price information would make it easier for them to tacitly collude and keep price competition to a minimum.
There are several gaping holes in this argument.
The first is that while contracts between insurers and hospitals strict contain nondisclosure clauses, major hospital chains and insurance already have a pretty good sense where they stand relative to their competitors in terms of pricing. A number of firms — including one owned by United Healthcare, the nation’s largest insurer — already gather and analyze pricing data and sell it to both hospitals and insurers. The only parties who are really in the dark are the consumers and employers who ultimately pay the bills.
The second flaw in the “transparency raises prices” theory is that it focuses on only half of the story. For if it is true that transparency will lead the lowest-price hospitals to raise their bids, then logically it should be also true that it will lead the insurers now paying the highest prices to demand better deals. Given that the market for health insurance is now as consolidated as the market for hospital services, the possibility of collusion is high on both sides.
Indeed, if transparency has any effect on prices, the most likely outcome is to eliminate the outliers at both the top and bottom of the price range, reducing the enormous variations in prices. And to the degree that transparency causes average prices to move in any direction, the more likely direction is down, not up. The highest-priced hospitals — many of them supposedly nonprofit — would be susceptible to public shaming by employers, patients and the media that accuses them of price gouging, potentially drawing scrutiny from regulators and politicians. And a more quiet if equally powerful pressure is likely to be felt by insurers who are revealed to get the biggest discounts from hospitals and doctors but fail to share those savings with their premium-paying customers.
Such a positive outcome is suggested from experience in New Hampshire, the first state to establish a website listing how much customers of different insurance plans would be charged at different hospitals and labs for medical imaging such as X-rays, CT scans and MRIs. Zach Brown, an economist at the University of Michigan, found that the cost of imaging declined by an average of 4 percent for insurers and 5 percent for consumers, rising to 11 percent after five years.
The effects were greatest in those parts of the state with fewer competitors and higher prices. While most of the savings resulted from consumers shifting to lower-cost providers, there was also a modest reduction in negotiated prices. Statewide, the range between the highest and lowest negotiated prices shrunk by 15 percent.
Brown cautions that the results he found for imaging — standardized services that can be easily shopped around by price-conscious consumers — cannot be easily extrapolated to all medical services, particularly those for which deductibles are not as much of a factor and differences in quality may be more important to patients than differences in price.
“Is price transparency a magic bullet? Probably not,” said Brown. “But over time it does have some potential for reducing prices, particularly if it is complemented with increased competition.”
In fact, the lack of transparency and the lack of competition may be of a piece, with each reinforcing the other.
In today’s highly consolidated health-care markets, the goal for hospitals and insurers isn’t so much to lower costs as to shift costs onto someone else. When dominant insurers use their market power to extract lower prices from hospitals, the hospitals’ natural response is to try to extract higher payments from smaller insurers to cover their costs and meet their profit targets. And in a similar fashion, when dominant hospital chains use their market power to extract higher prices from insurers, insurers are forced to push for bigger discounts from smaller hospitals to keep their premiums competitive.
As this cost-shifting plays itself out, small insurers and small hospitals find themselves squeezed as they are forced to pay more and charge less. Eventually they are driven out of the market, or forced to sell out, making the dominant firms even more dominant.
The dirty little secret is that neither side in these hospital-insurer negotiations really wants to drive down prices. What matters to either side is not what price they pay or receive in an absolute sense — in general, both hospitals and insurers profit more when prices and premiums are high. The thing they really care about is whether they are getting a better price than their competitors
The reason insurers and hospitals are prepared to use whatever legal muscle they have to fight price transparency is the same reason pharmaceutical companies and pharmacy benefit managers fought a similar proposal by the Trump administration on drug pricing — because it would expose this con game.
Given the anti-regulatory tilt of the federal courts, the inevitable legal challenge is likely to succeed. Which means the only way Americans are likely to get genuine price competition in health care is if transparency rules are written into law by a Congress not captured by business interests and free-market ideology.
Some Democrats, of course, prefer to skirt the issue entirely by having the government simply dictate drug and medical prices as part of Medicare-for-all. But for moderates who prefer to build on Obamacare and make the private insurance system fairer and cheaper, price transparency needs to be at the center of their proposals. This is one issue where the Trump administration may have actually got it right.