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Price Transparency’s Consequences

By March 16, 2011Commentary

There is substantial variation in what various providers charge different payers, particularly hospitals.  Consumers often have no idea what medical services cost, partly because “list” prices bear little relation to actual charges, partly because they have no idea what their insurer or other payers are being charged for a service and partly because if they are insured, all they really see directly is what their copayment amounts to.  One of the primary reform measures in the states and federal government, particularly when greater consumer involvement in managing health care is sought, is to help consumers be more aware of what health care costs.  A perspective in the New England Journal of Medicine suggests that this movement toward greater price transparency may have unintended consequences.   (NEJM Perspective)

The authors point out that when hospitals have to disclose all prices to all payers, the effect may be to disclose low prices to some payers, out of concern that those prices will have to be offered to all.  The effect is analogized to that of most-favored-nations clauses, which ensure that a party to a contract gets no worse terms than any other similar party.  Both payers and hospitals are known to use these clauses, which tend to raise overall prices.  The inhibition of offering low prices also hurts competition by limiting the opportunity for new players to enter a market.

Research on the topic of price transparency is limited, but that hasn’t stopped about 34 states from requiring that hospitals disclose prices and several others from encouraging it voluntarily.  The authors suggest that disclosure of average prices, which some states require, may be less harmful, but doesn’t help consumers.  They recommend disclosure of all copay amounts for various payers instead, since that is what consumers really care about.  And it would be helpful if quality information is always released with price data.  One advantage of releasing all price information, however, is that it shows just what kinds of behavior hospitals have been engaging in and allows a determination of whether local market forces are insufficient to ensure that hospitals have every incentive to be efficient and price-sensitive.

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