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August 8, 2019

A Two-Step Plan for Price Transparency in Health Care

By James C. Capretta
RealClearPolicy Contributor
August 08, 2019

The Trump administration recently issued a second hospital price transparency rule that builds upon the rule released last year requiring hospitals to post their “chargemaster” rates, or list prices, online. The new proposed rule, if finalized, would go a step further by requiring hospitals, beginning in 2020, to disclose the rates they have negotiated directly with insurance plans. Today, these private-payer rates are considered confidential and proprietary by both the hospital and insurance industries and are not made available to the public.

The rule requiring disclosure of chargemaster rates, which went into effect in January, is making it easier to find list prices for thousands of hospital billing codes, but this information is not terribly useful for most consumers. Hospitals offer discounts off of their list prices to insurance plans, and most patients have insurance. Hospitals sometimes use chargemaster rates when billing patients without insurance, but that is rare. Even many uninsured patients end up getting discounts when they settle their bills.

Tying price data to insurance billing codes also makes the information less relevant for consumers because the terminology used is not intended for a lay audience. Moreover, it is not possible for a consumer to find the “all in” prices for services that involve multiple billing codes. For instance, when a patient needs a hip replacement, there will be fees for the surgery, the anesthesia, the operating room, the lab tests, imaging services, and follow-up care. The current regulation requires hospitals to disclose pricing for the component parts but not for the full package, which is what would be relevant for consumers.

The administration’s new regulation would force the disclosure of the discounted rates paid by insurers and also would promote more consumer-friendly price data for a list of 300 “shoppable services.” Hospitals would be required to identify services that are more amendable to consumer discretion (because they can be scheduled) by using accessible descriptions and identifying prices for ancillary services that usually accompany a primary charge.

While this is a step in the right direction, it does not go far enough. Promoting a stronger consumer role will require far more disruption of the status quo. In particular, two steps are necessary: a required pricing list established by the federal government of strictly standardized services, and universal reference-based payments by insurance plans for services on the required pricing list.

The administration’s new regulation introduces the concept of a required pricing list but only tentatively. Consumers will only price shop if they can make, with minimal effort, apples-to-apples comparisons among competing suppliers. The federal government can facilitate consumer price shopping by establishing a required pricing list comprised of standardized services and discrete clinical interventions that are amendable to comparison shopping. The prices posted by providers for services on the list would be considered walk-up prices available to all consumers, regardless of their insurance status.

The prices posted also would be “all in” rates. Consumers would get all relevant services associated with an intervention at the stated price. There should be no surprise bills. For services that involve multiple parties (such as those involving a hospital and more than one physician), providers should be required to participate in coordinated pricing, so that consumers only have one bill covering the full episode of care. This may require providers to establish contractual relationships with each other that otherwise might not exist.

The second step is a system of universal reference-based payments by insurance plans.

Reference-based payments are a proven cost control strategy. In a typical design, the insurer examines the prices charged by competing providers for a standardized intervention, such as hip replacement surgery, and sets the amount of insurance reimbursement based on those posted prices. The plan payment is fixed at the reference price and does not change based on the price charged by the patient’s selected provider. Patients thus have strong incentives to select lower-cost providers; otherwise, they must pay out of pocket for any price differential above the reference amounts.

Congress should pass legislation requiring insurers to establish reference-based payments for all services on the required pricing list. The reference amounts should be based on the average amounts paid by insurers when supplied by in-network providers. Consumers using out-of-network suppliers of services would get a reference-based payment from their insurers. If the payment from an insurer is less the price of the service, the consumer would pay the difference out of his or her pocket. If the payment exceeded the price of a service, the patient would get to keep 100 percent of the excess payment.

A system of reference-based payments is critical to price transparency because it makes consumers price-sensitive across a wide array of services. Hospitals and doctors will only assign competitive prices to their services if consumers have incentives to select lower-priced care.

The combination of a required pricing list and reference-based payments would pave the way for vigorous price competition in the medical services market. An entrepreneurial provider could capture market share by offering walk-up prices that are lower than the prices negotiated by competitors participating in insurance-driven networks. The prices offered by such entrepreneurs would be publicly available and easily compared to prices offered by their competitors because of the standardization of what is being priced.

Further, insurers would be obligated to make payments to these entrepreneurial providers at their prevailing in-network rates, which would also be publicly available information. Consumers would thus be armed with easily obtainable information that would allow them to pocket 100 percent of the savings from any provider able to offer pricing below the prevailing in-network rates paid by insurers.

If insurers, through their negotiation with providers, are today securing the lowest possible prices for the services patients need, then this initiative would not produce meaningful savings relative to the status quo. But there is no reason to believe that is the case. There is wide agreement that the provision of medical care in the US is inefficient and wasteful, and certainly much of that waste is occurring within the boundaries of insurance-negotiated in-network rates. A new initiative built on standardized pricing and reference-based payments would make it financially rewarding for providers of medical care to cut out unnecessary costs and reduce their prices accordingly.

Not all medical services are amenable to consumer price shopping, but a significant portion could be, under the right circumstances.

The government could support a more active role for consumers by forcing those providing medical care to patients to disclose pricing for all care that might reasonably be amenable to comparison shopping. Those prices, for standardized services, could then be incorporated into insurance plan design to give patients strong incentives to seek out low-cost, high-quality providers and thus reduce their out-of-pocket costs. Over time, the combination of clear pricing for standardized services and the use of those prices in a universal system of reference-based payments would finally allow consumers to become a powerful force for higher-value care.

James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute. This article draws from “Toward Meaningful Price Transparency in Health Care,” published recently by AEI.