Price Transparency: What To Do and What Not To Do

I’ve written about sky-high hospital prices in this blog, especially for uninsured patients who present at emergency rooms. A related issue is price transparency. In most normal transactions, it is not hard to discover the price you will pay for a good or service. Indeed, for most ordinary items, prices are posted and we do not even spend much time negotiating.

For much of health care, this is untrue. It is usually very difficult to learn the price of a service from a doctor’s office or a hospital before receiving treatment. Doctors and hospital managers will often reply that they don’t know what the right prices are either, because charges are subject to adjudication by insurers.

When uninsured (and, increasingly, insured) patients are shocked by bills they receive after treatment, they often balk at paying inflated charges. This results in bad accounts receivable for hospitals, which I have argued is a necessary pain to cause hospitals to change.

While everyone outside the health sector agrees that more price transparency would be beneficial, others often propose solutions that increase government regulation. One example is a recent report written by the Pacific Business Group on Health, a group of large employers in Northern California.

The report re-iterates a number of longstanding proposals that employer groups frequently put forward. Let’s examine the major proposals:

  • Prohibit gag clauses. “Gag clause” is a loaded term that employer groups use to describe contract details between insurers and providers, such as physician groups and hospital systems. The “gag clauses” (which, by definition, no outsider sees) supposedly prevent the parties to the contract from disclosing the negotiated fees. However, it is not a feature of contract law that the government can disclose fees negotiated between private parties. When we buy a car, we don’t care how much the automaker paid its suppliers for parts. Those prices are not publicly disclosed, nor even disclosed to retail buyers. Prohibiting “gag clauses” distracts us from the fundamental problem of our health system: The patient and the paying customer are different parties.
  • Mandate All-Payer Claims Databases (APCDs). This would force insurers to disgorge their claims data to entities established and maintained by state governments. This, employers assert, would allow employers to easily understand the entire cost structure of the health system they are trying to negotiate. But why should taxpayers or insurers pay for this? If Safeway, for example, wants to estimate how much its competitors pay for groceries and sundries they stock, it hires a consultant. It doesn’t demand that the government establish a public database collecting cost data on the thousands of items supermarkets stock.
  • Assert employers’ “rights” to access their own claims data. Insurers do not generally share claims data with employers. To be sure, this is valuable information. There is nothing preventing employers from demanding such data when they contract with insurers. Indeed, large employers do not even contract with insurers to bear risk; they hire them only to process claims that are paid by the employer. Employers claim that “market imbalance” prevents them from demanding this concession from insurers. If so, that simply demonstrates that employers are poor agents of their employees for buying health services. Access to claims data cannot be an employers’ “right”. If claims are the natural property of anyone other than the insurer, they belong to the patient, not her employer. After all, do you want your boss to know your detailed medical claims?

When it comes to health benefits, large-employer groups sometimes talk out of both sides of their mouths. They assert that employees value health benefits, but also lobby for government to tilt the playing field even more in their favor — implicitly admitting that they do not have comparative advantage in providing health benefits.

Price transparency will surely lower prices and increase quality in health care. But it will come about by allowing patients more control over how we spend our health dollars, not by giving more power to our employers to make medical decisions for us.

John R. Graham is a former Senior Fellow at the Independent Institute.
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