Among all the proffered panaceas for reducing America's high healthcare costs, price transparency is the least likely to make a major dent in the problem.
Transparency proponents say giving consumers accurate information about the price and quality of care will allow patients to shop among competing alternatives. That will eventually drive down prices—as happens in other competitive markets.
The idea is gaining traction in Congress and a number of states. The CMS this year required hospitals to post the thousands of prices contained in their so-called chargemasters, which are the equivalents of hotel rack rates. Chargemaster rates serve as the starting point for negotiations with private insurers.
Price transparency is largely irrelevant for Medicare patients, since the CMS pays the same to every provider, adjusted for local conditions. For out-of-pocket costs, 90% of Medicare beneficiaries carry supplemental coverage, which eliminates most of their exposure to high prices. State Medicaid agencies also pay common rates and set strict limits in how much their impoverished clientele will pay out-of-pocket.
The only place where provider price transparency might be useful, then, is among the 160 million Americans who have employer-based plans or buy their own plans. While it matters a lot to the 30 million people who are uninsured, their rack rate bills usually get written off as charitable or uncompensated care.
How might price transparency work for the privately insured? Imagine three privately insured patients in a decent-sized city seeking a total knee replacement, which is among the 30% of hospital services that can be scheduled and therefore could be subject to price competition.
The average hospital charge for the operation nationwide is about $59,000. Actual prices range anywhere from the Medicare price (about $14,000) to twice the national average.
In our hypothetical example, one patient has Cadillac coverage with a $100 deductible. One has an employer plan with a $1,000 deductible. And the third bought a bronze plan on the individual exchange with a $5,000 deductible. Let's also assume every hospital or every insurer in this city has an easy-to-use tool on its website allowing prospective patients to find out what their insurer pays and what they, the patient, will have to pay out-of-pocket given their plan.
After 10 minutes on the web, our prospective patients learn there are six hospitals performing total knee replacements and each received four or five quality stars from Medicare. They also learn their prices ranged from $12,000 to $60,000.
While this looks like a textbook case for price transparency, there's not much incentive for any of these patients to switch to a lower-priced provider. Their out-of-pocket expenses won't change since each will pay the same deductible at each hospital. The cost of the operation everywhere is well above their out-of-pocket limits, even in the high-deductible plan. This helps explain why only 10% of prospective patients use price comparison tools when they are available.
The six competing hospitals in our hypothetical urban area is also a rarity. About 90% of metro areas in the U.S. are considered “highly concentrated” for hospital services. That level of concentration is not conducive to vigorous price competition.
But the single biggest roadblock to price competition in most services is the complexity and timing of the care process. Purchasing healthcare isn't like buying a car. Most care episodes—about 70%—are unplanned. The diagnosis, course of treatment and patient response are initially unknown. Medical decisions are largely directed by physicians, not by patients concerned about costs.
Despite its limited value for consumers, government officials should continue pushing providers and insurers for full price and quality transparency. It will expose institutions that are outliers on both.
Forget Economics 101. If the behavioral economists are correct, full transparency will nudge providers and insurers toward better performance.