Will Price Transparency in Health Care Lower Costs or Backfire?

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Wharton’s Matthew Grennan and Atul Gupta discuss the Trump administration’s executive order concerning greater price and quality transparency in health care.

The Trump administration’s move last week towards creating greater transparency in “price and quality information” in the health care industry has been received largely with skepticism in several quarters. The policy hopes that consumers, armed with pricing information, would be able to compare certain services or items it considers “shoppable,” which may include routine blood or MRI tests, for example. But insurers and hospital groups warn that the move could have unintended effects like pushing up prices. Meanwhile, consumer advocacy groups worry about lawsuits that could derail the move, and also question the administration’s commitment to lowering health care costs.

According to Matthew Grennan, Wharton professor of health care management, it is too early to predict if the Trump order would backfire in the form of some hospitals raising prices. Insurers have raised fears that with the new transparency in pricing structures, hospitals would be able to see opportunities to increase their prices to levels approaching those of their higher-priced competitors. “Before you think about how it might backfire, [you have to see] if it will fire or could fire in the first place,” he said. While it seems that patients could benefit from having more information on what hospitals charge, it seems “to help less than what we might expect,” he added, referring to studies that have tracked transparency in pricing.

Many state-level regulations already require transparency in health care charges and many employers provide such information, but consumers are not exactly eager to use it, according to Atul Gupta, who is also a professor of health care management at Wharton. “Most of the evidence that we have from peer reviewed studies on transparency shows that people actually don’t use [this information] as much as we think,” he said. “There is a lot of chatter about ‘Oh, if I knew about the price I would actually price-shop.’ The evidence suggests that a very small fraction of people who have that tool available to them actually use it.”

Even those who use such price information “do not change their behavior that much,” Gupta continued. Consumers may be less price-sensitive than one might imagine “because insurance tends to be generous … people don’t face the brunt unless they are on a high-deductible plan,” he noted. Added Grennan: “If something terrible happened to you [like] a heart attack, you’re going to go through that deductible even if you’re in a high-deductible plan.” In such situations, patients don’t have an incentive to do price-shopping, he said; instead, they would try and get the best care.

Grennan and Gupta discussed the Trump administration’s order on health care transparency and ways to make it more effective on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

Why the Push for Transparency?

The move for transparency in health care pricing is based on the recommendations of a report the Trump administration issued last December titled “Reforming America’s Healthcare System Through Choice and Competition.” The executive order states that “[making] meaningful price and quality information more broadly available to more Americans will protect patients and increase competition, innovation, and value in the healthcare system.” The order gives the department of health and human services 60 days to require hospitals to publicly post price information for “shoppable items and services” in an “easy-to-understand and consumer-friendly” format.

“There’s a lot of evidence which suggests that we have some ridiculous amount of variation in prices within the same market, and within the same hospital across insurers.” –Atul Gupta

“There’s a lot of evidence which suggests that we have some ridiculous amount of variation in prices within the same market, and within the same hospital across insurers,” Gupta said regarding the motivation behind the executive order. Those variations are not always linked to the underlying costs, and may be on account of factors like “market power,” where some hospitals are dominant in certain markets, he added. While price transparency alone may not resolve those disparities, “it is certainly a step in that direction,” he said.

The experts identified several reasons why such transparency has not exactly driven a discernible shift in consumers using price information to make more considered choices on where they get their care. That may be because insurance plans are generous enough for some people to not be forced to look too closely at hospital charges, or because they tend to follow what their physician advises, or because they are not savvy enough to make enough sense of that transparency to guide decisions on which hospitals they patronize.

However, some new evidence shows that some consumers have been doing “a little bit of price-shopping for so-called homogenous things like tests and imaging,” Gupta said. “People do end up reducing costs, but not by much – on the order of 3% to 5%.”

Pushback from Providers

Rick Pollack, president and CEO of The American Hospital Association (AHA), said his organization appreciates the administration’s efforts to promote health care transparency on price and quality, and noted that hospitals already provide consumers with pricing information. However, making that information public is not a good idea, he suggested. “Publicly posting privately negotiated rates could, in fact, undermine the competitive forces of private market dynamics, and result in increased prices,” he warned.

Matt Eyles, president and CEO of America’s Health Insurance Plans (AHIP), a trade group of insurance companies, said in a statement that the Trump order will end up hurting consumers. He agreed that patients need accurate and real-time information about the costs of their care. “But publicly disclosing competitively negotiated, proprietary rates will reduce competition and push prices higher – not lower – for consumers, patients, and taxpayers,” he added. He explained that “disclosing privately negotiated rates will reduce incentives to offer lower rates, creating a floor – not a ceiling – for the prices that hospitals would be willing to accept.”

Other critics of the Trump order point to a 2015 blog post by the Federal Trade Commission which said too much transparency could be counterproductive, according to a report in Politico magazine. “Transparency is not universally good,” the blog said. “When it goes too far, it can actually harm competition and consumers. Some types of information are not particularly useful to consumers, but are of great interest to competitors. We are especially concerned when information disclosures allow competitors to figure out what their rivals are charging, which dampens each competitor’s incentive to offer a low price, or increases the likelihood that they can coordinate on higher prices.”

Families USA, a nonprofit that works to advance the interests of health care consumers, welcomed the move, but it also had reservations. It pointed to other actions of the Trump administration as working against the interests of health care consumers, and had concerns over “how aggressively” the department of health and human services would work to implement the order. It also questioned the constitutional validity of the president’s move. “Executive orders can be challenged in court, which is almost a certainty given the outcry from providers and insurers about releasing pricing information,” Families USA said.

“We don’t see any evidence of this hypothesis that insurers have put forward where the people who are getting the lowest prices see those increase.” –Matthew Grennan

Will Hospitals Raise Prices?

In practice, hospitals haven’t exactly used pricing information about their competitors to jack up their own prices, research by Grennan and his colleague, Ashley Swanson, has shown. “We don’t see any evidence of this hypothesis that insurers have put forward where the people who are getting the lowest prices see those increase,” Grennan said.

Hospitals have seen some — but not significant — savings after getting access to information on what their competitors charge, the same research study found. “[Reductions in prices] are concentrated among hospitals previously paying relatively high prices for brands purchased in large volumes,” the paper stated. The contract terms hospitals have with their suppliers also limit the size of the savings they can extract, it added.

The research found that with price transparency, hospitals were able to achieve savings averaging 3.9% for high-priced “physician preference items” such as prosthetic hips, and only 1.6% for commodities such as surgical gloves. The study covered 775 facilities in the U.S. that shared purchasing data (three-quarters of which were hospitals or health systems), over five years between 2009 and 2014.

The big caveat to those findings is that hospitals displayed low “adoption” of such price transparency, said Grennan. “We really don’t have a world in which all of a sudden everybody knows everything.” Given that, forecasting the impact of the Trump order is difficult, he added.

Gupta argued that if hospitals — firms that want to maximize profit — do not seem to show much interest in the information generated by price transparency, “it is difficult to imagine that consumers, with all their flaws and all their lack of information, would respond to this.” In any event, such information is already available at hospitals for patients who want it, he said. Therefore, they don’t need the transparency tools that the Trump order seeks to provide in order to bargain with insurers, he added.

How Consumers Could Benefit

Gupta and Brennan discussed how price and quality transparency could be achieved to benefit consumers. For starters, consumers need to know the “total negotiated price” that hospitals or other health care facilities strike with providers for supplies or services, said Gupta. They also need to be given information on what types of insurance physicians will accept, because that will determine their co-payments or cost-sharing component, he added.

Beyond that, Gupta called for a “quality rating or ranking” of the facilities that patients could use to make their choices. He noted that the Centers for Medicare and Medicaid Services (CMS) has had “a lot of success” with rating health care facilities such as hospitals and nursing homes. (In August 2018, the CMS had announced a rule that allows patients greater access to hospital price information and their own health information, among other reforms.)

If the CMS could rate health care facilities, “it’s probably possible [to do that] for physicians, too,” said Gupta. “The biggest hurdle in this is to agree on the quality metrics because that’s where the medical community and the administration would tend not to agree. But once you can agree on the idea and you could have some expert commission develop [those metrics], the mechanics of calculating and making those public is not that difficult.”

Even if consumers have the relevant information, they tend to make choices on the basis of long-held perceptions, Grennan suggested. He highlighted how consumers make different choices in the medications they buy than those made by physicians and pharmacists. He recalled a research paper a few years that posed that question with respect to pain medication. “It’s somewhat common knowledge that generic ibuprofen and branded ibuprofen may be similar if not exactly the same,” he noted. However, the study found that consumers prefer to pay more and buy the branded version. “The only people who consistently buy the generic ibuprofen over the branded [product] are pharmacists and doctors,” Grennan said.

“The evidence suggests that a very small fraction of people who have the [price transparency] tool available to them actually use it.” — Atul Gupta

Price transparency has produced discernible positive effects in some cases. Gupta pointed to a study of the effects of a price transparency tool in New Hampshire, which found that over time, “dispersion in prices went down,” especially for commodity services like an X-Ray or an MRI test. New Hampshire’s dozen years of experience with price transparency suggests what it may—and may not—accomplish, noted a Wall Street Journal article that examined its impact.

Adoption rates could al so be higher among digitally savvy millennials, as compared to those in the baby boomer generation, Grennan said. However, even they may prefer convenience over lower price in choosing their health care provider, Gupta added.

Room for Savings

Gupta pointed out that “health care is an expert service.” That said, the quality of all such services may not be equal across all providers, and some hospitals have a better reputation than others, he said. Patients usually go by their doctor’s advice, he added.

Grennan noted that some studies have put “the amount of shoppable services” in health care spending at about 40%. In the most optimistic scenario, the Trump administration may be able to see a jump in adoption to the transparency tools among “marginal consumers” who could be persuaded to buy at specific price points.

The absence of price transparency in some markets is not necessarily the reason for higher costs of health care, according to Grennan. New technologies in medical care come with higher costs, for example. The trend of consolidation within the health care industry over the past two decades has also limited competition and increased the concentration of market power in the hands of fewer hospitals, he noted. Gupta added that some recent research has shown that concentration of market power with hospitals buying physician groups has also driven up the health care prices.

Physicians and other health care providers, too, would benefit from increased price transparency, and it could also have salutary effects on the quality of care, said Grennan. “I would imagine that many physicians have no idea what are the relative prices for various [types of care],” he said. “A rosy scenario would be one where not only consumers, but also the providers, start to understand the economics of the situation better, and maybe that influences how they provide care and the efficiency of that.”

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