Price transparency in the health care market is an essential component of a competitive environment. And in most markets, competition reduces prices, and improves quality and access.
But health care is not most markets. Its system of pricing is extremely complicated. This is true for private markets, as well as government markets such as Medicaid and Medicare. One primary reason for this complexity is the presence of third-party payers for routine care.
In most market transactions, payment is made from the person or entity receiving the good or service to the entity providing the good or service. In those instances, consumers typically shop around for the best product/service at the best price.
If health care operated in a free market environment, this would translate into the patient paying the health care provider. But some form of health insurance (either private or government-provided) has become the middle man in nearly all health care services today. Since patients only receive the service but most do not directly pay for the service (instead paying for an insurance premium, a co-pay or a deductible), they have much less incentive to shop for the best service at the best price.
So while transparent pricing for health care services is important, this alone will not have a significant effect on the market as long as third-party payers are involved. We have evidence of this from initiatives which occurred in other states. To truly make a difference in our third-party-payer market, three key elements must be included in any health care price transparency effort.
First is that in order for patients to be able to make true price comparisons, they must know what their own insurance plan pays for the service. California implemented a Payers’ Bill of Rights years ago which required disclosure of chargemaster rates, but later studies found “little to no observable effect” on pricing. Listing the undiscounted price or even an out-of-pocket estimate is not sufficient to give consumers the information they need to make a wise choice.
The second element is an incentive. If only their insurance company stands to gain from a patient choosing a lower cost provider, most will not do the extra footwork to shop around. However, if they get a cut of the savings, patient engagement with transparency tools has been shown to increase eleven fold. So some kind of “shared savings” program is a vital component of any transparency initiative.
The final element is loosening restrictive “in network” requirements. If patients are only encouraged or incentivized to shop around within the network, then network providers may keep costs higher, knowing that they have a captive audience. Patients should be allowed to use a lower-priced service outside the network if they so choose.