Why the flawed hospital price transparency requirements miss the mark

We should all applaud the spirit of the hospital price transparency (HPT) requirements that went into effect in January. We should all also recognize that HPT, at least in its current form, will not drive significant transformation. In fact, it won’t even come close.

The new rules, according to a post published in March, require hospitals to share with the public “a machine-readable file containing a list of all standard charges for all items and services.” The goal was part of the Centers for Medicare & Medicaid Services (CMS)’s drive to empower patients through better health care information. In this case, the information reveals prices for services and fees that hospitals have negotiated with payers.

Legislators assumed consumers would then use the data to seek out the best deals in town, not unlike the way we comparison shop between big box stores, car dealerships or mobile phone networks. The market will determine what the consumer will spend on their health care, thereby reining in prices.

But that is simply not happening.

Let me say here that I am not promoting any kind of anti-transparency agenda. In fact, radical transparency is at the foundation of our health plan. Clients, who are self-funded employers and brokers serving them, can review to the penny our fees and all other charges passed on to them. And members can see well ahead of time our simple, easy-to-understand copay schedule.

So, it’s entirely possible to champion transparency and recognize that the HPT legislation fails.

Here’s why.

1. Current pricing and payment processes lack clarity
2. Very few fully comply with the HTP and have no incentive to do so
3. Transparency in some markets may actually drive prices up, not down
4. About 20% of consumers of health care still account for 80% of the health care spend

Here’s a high-level look at each point.

Current process lacks clarity

Transparency has revealed just how absurd the current contracting process is and has in many ways caused even more confusion and double-talk. In his report on a comparison of two hospital systems in California, a longtime health care reporter tried to compare prices that Kaiser and Sutter charge for 20 common outpatient procedures, such as cataract surgeries, colonoscopies, hernia repair and breast lesion removal. After three months of comparing spreadsheets, trying to make sense of what he was looking at and enduring the attendant frustration, he gave up.

And who could blame him? According to an August 22 report in The New York Times, insurers could be charged a half-dozen prices within the same facility, depending on which plan was selected at open enrollment, and whether it was bought as an individual or through work.

Related: Employers have the power to fix the U.S. health care system

A health care lobbyist admitted to the reporter that he couldn’t make sense of the Byzantine pricing and payment schemes, either. After all, pricing on specific products or services is only one layer of one piece of the puzzle. Most hospital visits require multiple services (an x-ray and casting, a CT scan and stitches). Then there’s administrative gamesmanship with billing codes and little-known incentives for bundling services, just to name a few. The most revealing line in the health reporter’s piece? That very few people understand how the math works, and most of them work for hospitals.

HPT compliance is virtually ignored

HPT compliance is low and incomplete, to put it mildly.

In a study that appears in a March 2021 post on Healthcare Dive, Harvard Medical School researchers sampled 100 hospitals at random, along with the 100 highest-earning hospitals of 2017. Of the randomly selected facilities, 83% failed to comply with at least one of the rule’s requirements.

Top-earning hospitals fared slightly better, with 75% failing to meet at least one requirement. Keep in mind that fines for non-compliance are, at most, $300 per day (though CMS said in July that it plans to increase fines next year to as much as $2 million annually for large hospitals). For some, such fines are worth paying to keep pricing information out of the hands of their competition.

Prices would likely go up, not down

Costs could very likely rise in many markets as systems learn about higher prices being charged by their competitors – the definition of “unintended consequence.” That’s because the legacy of secrecy shrouding negotiated health care pricing means there is little data on the possible effects of pricing transparency in the industry, according to Margot Sanger-Katz’s 2019 piece in the New York Times.

Researchers have had to go beyond both health care and the United States for answers about what might happen. One favorite example is the Danish ready-mix concrete market. To improve competition in the early 1990s, the Danish government required manufacturers of ready-mix concrete to disclose their negotiated prices with their customers. Prices for the product then rose 15% to 20%. Researchers concluded that there were too few manufacturers competing for business. Once they knew competitors’ charges, companies all raised their prices. They colluded without the direct communication that would make such behavior illegal.

The best available evidence about negotiated health care prices, Sanger-Katz wrote, is that they range widely depending on the market, the hospital, and the insurer negotiating the deal. The Health Care Cost Institute found that the highest price for a simple blood test could be 40 times the lowest price for the same test in a given market.

Transparency might have the power to tame those wide ranges and to discourage patients from seeking care at the most expensive places. But even if they had the right tools and a clear understanding of what they were comparing, many patients don’t have high incentives to shop for care, given they generally pay only their cost-share. And of course, in some cases, they literally can’t shop while lying flat on their back in an ambulance. In addition, the vast majority of people trust that their doctors know what’s best for them and do what they recommend – no cost questions asked.

An 80/20 update: a small group still driving health spend

According to the Kaiser Family Foundation, 20% of consumers drive 82% of health care spending – and members of this group reach out-of-pocket maximums quickly. 

Fundamentally, the 80/20 rule says that 80% of health care dollars are spent on 20% of the population. Conversely, the remaining 20% of the dollars are spent on 80% of the population.

Some of the earliest sources of the 80/20 rule were published six to 12 years ago. Health care is in a period of increasingly rapid change, according to a recent report published by Deloitte questioning the enduring validity of the 80/20 rule. Researchers are now seeing new models of value-based care delivery like accountable care organizations, new provider-payer collaborations and newly insured populations under Medicaid expansion and commercial insurance coverage made available through the Affordable Care Act. In addition, new specialty drugs are driving pharmacy spending higher, and changes like high-deductible health plans are shifting costs to consumers.

But in its analysis of recent medical claims in commercial insurance populations, Deloitte found that health care spending remains extremely concentrated. At the upper reaches of the privately insured population, the top 1% consume 30% to 33% of the overall U.S. health care spend.

Deloitte’s team concluded that health care leadership can focus on lowering the top 20% of spending by targeting 1.3% of the individuals in Medicare and just 0.4% of the individuals in commercial insurance – if their past spending predicts current or future needs.

For anyone serious about getting a handle on high costs in our industry, these are the issues that deserve our attention, not requiring hospitals to share data sets that are at best incomplete or at worst indecipherable.

Moving toward real change with real answers

Given the size and complexity of the U.S. health care system, no one should expect price-shopping patients to be the agents of transformative change. The central issue is that price transparency is not the disease plaguing U.S. health care; rather, it is a symptom of a larger, far-reaching affliction: acceptance of the status quo.

Payers continue to tolerate high-cost systems and providers whose high costs do not correlate to better health outcomes. Instead, payers – particularly employers who sponsor self-funded health plans – should retool their pricing and payment practices to reward efficient, cost-conscious health systems and practitioners who provide better care at lower costs.

That is the nexus for transformational change. And the good news is that there are health plan disruptors who are focused on building networks for self-funded employers that directly engage and support leading providers of value-based care.

Alan Cohen is the chief product officer at Centivo.