Price Transparency: A Gift To Americans In The New Year

The New Year is starting off with a healthcare victory for American patients.

On January 1, a new rule from the Centers for Medicare and Medicaid Services went into effect requiring hospitals to publish the prices they negotiate with insurers for various medical procedures. Previously, those prices had been secret.

This rule will inject some sorely needed transparency into the U.S. healthcare system—and thereby result in lower costs and better quality care for consumers.

Prices are crucial to the functioning of markets, including the healthcare market. Rising prices are signals for producers to increase supply, or for consumers to moderate their consumption. Declining prices do just the opposite.

In much of the healthcare system, neither producers nor consumers have any idea what the price of a given service or procedure is.

Amazingly, hospitals argued that prices for some services were “unknowable” in a case challenging the CMS rule before the D.C. Circuit Court of Appeals. (The court ruled against them Dec. 29.)

Patients, meanwhile, are generally ignorant of their healthcare bills. They may have to deal with a copay or coinsurance. But their insurance company typically covers most of the cost of their care, according to some negotiated rate schedule that often bears little resemblance to a provider’s list prices, or what other insurers pay for the same service.

Indeed, the highest and lowest sticker prices nationwide for healthcare services differ by almost 300%, on average.

Countless patients have discovered nonsensical price discrepancies between providers only after they’ve received a bill. NPR reported on the experience of one man in Florida who got two abdominal CT scans at different locations near Fort Myers. His first scan cost almost $300. The second was more than 33 times that figure—nearly $9,000. After his insurance covered its share, he still faced a bill for $3,394.

New parents in the San Francisco area can expect to pay anywhere from around $11,000 to over $23,000 for a vaginal birth and between roughly $15,000 and $40,000 for a Cesarean section, according to research from the Health Care Cost Institute.

Texas patients who need joint surgeries encounter similar cost disparities. In Austin, a patient can pay anywhere from $30,000 to $93,000 for a hip replacement, including pre-and post-operative care, according to a report from Blue Cross Blue Shield.

Even blood tests can cost wildly different amounts depending on the location—ranging from as low as $13 to as high as $952.

The new CMS rule will help put an end to this kind of pricing insanity. Hospitals will have to offer an easy-to-read list of 300 shoppable services, such as knee-replacements or x-rays, along with projected minimum and maximum costs. That information must be presented in a “manner that is consumer-friendly” and updated each year for accuracy.

Hospitals must also provide these prices and estimates upfront, so patients will have the chance to shop around for the best value.

Transparent pricing will also allow researchers to analyze data from across metropolitan areas and states to tease out which providers are delivering high-quality care at affordable prices—and which may need to be named and shamed.

Critics of relying on price transparency to cut costs and improve quality often claim that patients don’t have time to compare multiple providers against one another when they’re dealing with a health problem. But shoppable services accounted for up to 43% of out-of-pocket healthcare spending in 2017, according to the Health Care Cost Institute.

There are also concerns that price transparency will cause patients to make suboptimal decisions—like choosing the lowest-cost provider when one that’s slightly more expensive may yield a better outcome.

But people make complicated and costly decisions all the time. Consider the process for buying a home. No one argues that American consumers lack the intellectual acumen to purchase a home on their own, even when they’re committing to taking on hundreds of thousands or millions of dollars in debt. In fact, they can make those decisions precisely because they have good information about the price of a home, the value of other homes in the neighborhood, and readily accessible data on how home prices have fared historically.

When armed with the appropriate information, people will generally choose the option that best suits their needs—whether they’re paying for an iPhone or a knee replacement.

It’s about time patients knew the price of health care. CMS’s new price transparency rule is long overdue.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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