Healthcare / Politics

Price Transparency: An Exacerbation or Solution to the Mounting Cost of Health Care?

On Wednesday, June 27, the U.S. Senate Committee on Health, Education, Labor and Pensions (HELP) held a hearing to discuss the rising cost of health care in the U.S. Several panelists mentioned increasing price transparency as a potential solution to the growing issue. The disclosure of health care prices is by no means a new proposal. Several states including California and Nevada have already begun enacting legislation intended to make prices more transparent to consumers. Despite the actions states have taken, the panelists stressed the importance of improving price transparency on a larger scale to address the problem at hand.

Price transparency appears to make a lot of sense, especially to consumers. It seems almost impossible for patients in today’s complex health care system to find straightforward information on the cost of care. In a market where prices vary widely for any form of care or treatment, the rationale behind price transparency becomes even clearer. For example, in 2006 and 2007 the median hospital cost for a spinal MRI in Massachusetts varied by 1,225 dollars. Complete availability of prices would make consumers more cost-conscious of their options, and in theory reduce health care spending. Granting consumers the agency to choose more cost-effective care would incentivize other providers to lower their prices in order to stay competitive in the market. Many aspects of price transparency seem to be promising in the efforts to lower health care spending, yet many questions must first be addressed if any effective policy is to come to fruition.

Although price transparency is frequently discussed as a means to reduce spending, there does not appear to be a standard definition of what transparency actually means or would look like in practice. For example, it is unclear whether the list price or the negotiated price would be revealed to consumers. With the majority of Americans on some form of insurance, the list price would not be particularly helpful since most patients ultimately pay much less. However, making the negotiated prices transparent undermines the negotiations between insurers and providers. Revealing negotiated prices could lead to the cost of care leveling out to higher prices once insurers become aware of other companies’ negotiations. With prices linked to both insurers and providers, the question also remains regarding who would provide the information to consumers.

Proponents of price transparency argue that consumers can shop prices in almost all markets except for healthcare. One explanation for this discrepancy may be the perceived relationship between cost and quality. Patients could misinterpret high cost as an indicator of better quality. This could lead to an increase in consumer spending and in turn an increase in prices when providers of lower-cost services realize that individuals are willing to pay higher prices for care. Price transparency thus calls for a metric of quality of care—a source of information that isn’t widely accessible.

Another caveat to price transparency is the inherent need for market competition. The panelists at the Senate HELP Committee hearing called attention to the importance of competition, but the current trend of mergers and consolidation is causing the health care market to become less and less competitive. Transparent prices in a non-competitive market would not create productive change; monopolies can set prices as high as they want when their patients have no ability to seek care elsewhere. Without increased competition in the current market, the benefits of price transparency might not be worth the legislative effort.