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Seeing the Bill

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Seeing the Bill

Will greater price transparency make hospital care cheaper? July 14, 2020
Health Care

Hospital billing arrangements in the United States often seem designed to cause the maximum possible confusion, frustration, and irritation. Prices get negotiated secretly between hospitals and insurers and vary enormously and unpredictably; patients typically have little sense of what procedures will cost until long afterward. The Trump administration recently proposed a regulation to shake up this arrangement, requiring hospitals to publish negotiated prices for all services. Such requirements won’t tell consumers what portion of these costs they will be responsible for paying, but they may help identify overpriced elements of America’s health-care system.

The New York Times recently reported the story of two friends in Texas who received tests for the coronavirus. One paid $199 in cash; the other, whose insurer was charged $1,128, wound up on the hook for $928 in out-of-pocket costs. This is an extreme example, though it’s not uncharacteristic of hospital billing in America, where prices are treated as trade secrets that patients can discover only after they receive care. As deductibles associated with employer-sponsored health insurance have increased from an average of $303 in 2006 to $1,396 in 2019, so individuals are increasingly exposed to costs that they have little ability to avoid.

Section 2718 of the Affordable Care Act required hospitals to publish their “standard charges.” In line with initial regulatory guidance by the Obama administration, this led hospitals to post their “chargemaster” prices for each service, from which insurers usually receive substantial discounts. The Trump administration revised this arrangement, requiring hospitals also to disclose rates negotiated with insurers. Last month, a federal judge upheld this rule, declaring that “chargemaster rates are not the amounts paid on behalf of 90 percent of hospitals’ patients” and approximate “2.5 times what most health insurers pay.” The American Hospital Association plans to appeal, but the rule is due to go into effect in 2021.

In its proposed reform, the Trump administration argued that “there is a direct connection between transparency in hospital standard charge information and having more affordable healthcare and lower healthcare coverage costs.” Secretary of Health and Human Services Alex Azar has suggested that “it’s not an exaggeration to say that just about every hospital bill in America today is a surprise bill.” Azar asserted, “I believe you ought to have the right to know what a procedure is going to cost, and what it’s going to cost you, out of pocket—before you get it.”

Emergency care accounts for less than 7 percent of hospital spending, so most procedures could to some extent benefit from scrutiny of prices and comparison shopping. But prices for hospital care are not as straightforward as those for, say, airline travel, a product that is highly standardized. Hospital procedures may involve a complex jumble of separate charges for facility costs, practice expenses, lab tests, physician-administered drugs, anesthesiologist fees, and post-acute care. The cost and complexity of surgery is often not known with great precision in advance—and may balloon in the event of complications.

Nor are standard charges particularly useful information for patients. What matters are the prices negotiated by their own insurers, not fees charged to those enrolled in other insurance plans. The costs individuals face also depend on which hospitals are in their insurers’ network, their insurance plan’s cost-sharing structure, and the extent to which their personal health-care expenses approach deductibles or out-of-pocket maximums.

It is not clear that mandating price disclosures would do much to change the market. While 98 percent of health-insurance plans already offer transparency tools, only 2 percent of enrollees use them. A study of employer-sponsored plans found no reduction in cost associated with the introduction of price-transparency tools. In fact, a recent study found that patients bypassed an average of six lower-priced treatment locations on their way to receive an MRI scan. In many cases, patients simply follow physician referrals without looking into differently priced options.

In well-functioning markets, price transparency tends to be a consequence of price competition, not the cause of it. Producers with low prices are eager to advertise them. For hospital care, though, most patients have little incentive to shop around. In 2018, less than 3 percent of the costs of hospital care was borne out of pocket. Out-of-pocket costs for individuals purchasing plans on the individual market are capped by law at $8,150—thus, cost will not influence a patient to seek treatment from a hospital charging, say, $10,000 when another (which may have better equipment or amenities) may charge the insurer $20,000 for the same procedure. Indeed, under such circumstances, competition among hospitals has tended to increase costs incurred in the delivery of care through a medical arms race.

Price-transparency tools will be most useful when designed by insurers to align with their own specific network, pricing, and cost-sharing arrangements. But enrollees will use them only to the extent that insurers give them an incentive to do so, by requiring patients to bear the additional expense associated with receiving care from costlier sites of service. Since patients won’t want to be more exposed to costs associated with treatment, insurers are likely to remain responsible for the bulk of hospital costs, and the challenge of reducing prices for hospital care will therefore remain largely one of increasing the leverage that insurers have over providers when negotiating network inclusion.

Yet, the hospital industry’s efforts to block the administration’s proposed regulatory changes in the courts suggest that it may nonetheless do something to reduce prices. Even if the publication of negotiated rates tells consumers nothing about the prices they themselves will pay, the transparency could help scholars identify which facilities are the most overpriced. And this, in turn, may generate the political pressure necessary for reforms that would reduce the most inflated costs.

Photo: jittawit.21/iStock

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