Price Transparency: What To Do And What Not To Do

I’ve written about sky-high hospital prices in this blog, especially for uninsured patients who present at emergency rooms. A related issue is price transparency. In most normal transactions, it is not hard to discover the price you will pay for a good or service. Indeed, for most ordinary items, prices are posted and we do not even spend much time negotiating.

For much of health care, this is untrue. It is usually very difficult to learn the price of a service from a doctors’ office or a hospital before receiving treatment. Doctors and hospital managers will often reply that they don’t know what the right prices are either, because charges are subject to adjudication by insurers.

When uninsured (and, increasingly, insured) patients are shocked by bills they receive after treatment, they often balk at paying inflated charges. This results in bad accounts receivable for hospitals, which I have argued is a necessary pain to cause hospitals to change.

While everyone outside the health sector agrees that more price transparency would be beneficial, others often propose solutions that increase government regulation. One example is a recent report written by the Pacific Business Group on Health (PBGH), a group of large employers in Northern California.

While the recommendations sound reasonable on their face, they invite more government intrusion in health care, with unintended consequences. Let’s examine the major proposals:

  • Prohibit gag clauses. “Gag clause” is a loaded term that PBGH uses to describe contract details between insurers and providers, such as physician groups and hospital systems. The “gag clauses” (which, by definition, no outsider sees) supposedly prevent the parties to the contract from disclosing the negotiated fees. However, it is not a feature of contract law that the government can disclose fees negotiated between private parties. When we buy a car, we don’t care how much the automaker paid its suppliers for parts. Those prices are not publicly disclosed, nor even disclosed to retail buyers. Prohibiting “gag clauses” distracts us from the fundamental problem of our health system: The patient and the paying customer are different parties.
  • Mandate All Payer Claims Databases (APCDs). This would force insurers to disgorge their claims data to entities established and maintained by state governments. This, PBGH asserts, would allow its members to easily understand the entire cost structure of the health system they are trying to negotiate. But why should taxpayers or insurers pay for this? If Safeway, for example, wants to estimate how much its competitors pay for groceries and sundries they stock, it hires a consultant. It doesn’t demand that the government establish a public database collecting cost data on the thousands of items supermarkets stock.
  • Assert employers’ “rights” to access their own claims data. Insurers do not generally share claims data with employers. To be sure, this is valuable information. There is nothing preventing employers from demanding such data when they contract with insurers. Indeed, large employers do not even contract with insurers to bear risk. They hire them only to process claims that are paid by the employer. PBGH claims that “market imbalance” prevents them from demanding this concession from insurers. If so, that simply demonstrates that employers might not always be the best place for individuals to acquire their health insurance. Access to claims data cannot be an employers’ “right”. If claims are the natural property of anyone other than the insurer, they belong to the patient, not her employer. After all, do you want your boss to know your detailed medical claims?

When it comes to health benefits, PBGH protests too much. It asserts that employees value health benefits (which we clearly do), but also lobbies for government to tilt the playing field even more in employers’ favor — implicitly admitting that employers don not necessarily have comparative advantage in providing health benefits.

Price transparency will surely lower prices and increase quality in health care. But it will come about by allowing patients more control over how we spend our health dollars, not by giving more power to our employers to make medical decisions for us.

Comments (25)

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  1. Jordan B. says:

    I don’t know which of the three proposals is worse.

    The one referring to gag clauses is something that helps the insurance companies remain competitive. Each company is in charge of reaching an agreement with the different hospitals and healthcare centers. If that information is public available, insurance companies would team up to pay the same price, removing competition from the industry.

    The second, referring to the proposal to establish a large database to collect all information is not only naïve but dangerous as well. Today, is a “hackers dream” because the security is minimal. Enrollees are in danger of losing their personal information. Imagine if there was one place, with the imaginable same security, to store all data about the procedures made to every individual?

    Finally, informing the employer about all of the claims data of their employees violates the rights of the employees. There is patient-doctor confidentiality that would be violated with this proposal.

    In general the proposals are naïve and misinformed.

  2. Kevin says:

    “we do not even spend much time negotiating.”

    If at all.

  3. Luke R. says:

    One way to reach price transparency is by setting up a flat rate. Everything has an establish price and that would allow patients to get a rough estimate on how much the procedure would cost. That is how the system in England works. Everyone is charged the same regardless of who they are.

    • Frank H. says:

      If you set up a flat rate and hospitals receive the same for the same procedure you would kill research and progress. Why do some health centers charge more for their services? Mainly because those institutions are the ones leading the innovation, seeking for cure to harmful diseases, and probably have the best doctors of their fields. Is the same as asking for a flat rate to college education…

    • Val says:

      Providers and insurance companies have already set their agreed upon rates, and providers are required to charge the same rate to all. What entities pay is a different case. For a $100 bill, the insurance company will pay, for example, $50 where the uninsured will pay $100. The problem is that those who self-pay are not getting the “real” prices.

      One of my young clients took her child in for a well-baby check. Since she has a very high-deductible plan, she wanted to just self-pay. It was $585 on the spot. After it was submitted to the insurance company, it was $320. No one who has insurance can rationally pay the bill before the insurance company gets involved and reveals the “real” price.

  4. Lucas says:

    “In most normal transactions, it is not hard to discover the price you will pay for a good or service. Indeed, for most ordinary items, prices are posted and we do not even spend much time negotiating.”

    In healthcare they’re not, which is why economists hate it. You can’ predict what’s not concrete.

  5. Thomas says:

    “But it will come about by allowing patients more control over how we spend our health dollars, not by giving more power to our employers to make medical decisions for us.”

    That is a scary situation for most powers that be that try to take away as much control as possible for patients.

  6. Jimbino says:

    The healthcare cost problem in the USSA could be simply solved by:

    1. Requiring all healthcare providers to publish all prices (by CPT or ICD-9 code) just as Amazon, eBay and Walmart do (by product code).

    2. Require healthcare providers to charge all patients on a MFN basis, offering discounts only for usual business reasons such as cash payment, etc.

    3. Open the insurance market to interstate and international business.

    4. Require that insurers pay for treatment overseas.

    No gummint control or involvement would be necessary, except to insure that these simple rules were being followed.

  7. Bob Hertz says:

    Massachusetts recently passed a law (#224) which is a step in the right direction.

    The law states that if a patient asks for the price of a treatment, the provider must give the information.

    I think the law is rather toothless on enforcement, though.We could stiffen it up by stating that if the patient is not told the price, then they do not have to pay the bill.

    That would get hospitals and clinics to co-operate in about ninety seconds.

    Why this kind of medical consumer protection has to start so piecemeal in the same few states (MA, CA, IL, MN, etc.), rather than the federal government, is in my view a painful and ugly phenomenon.

  8. Ian Random says:

    I often wondered about exempting unpaid health bills from confidentiality regulations like the bounced checks at my local pizza joint, but it looks like it would punish both parties.

  9. Jake Speed says:

    @Jordon B.

    You hit it spot on. The worst is the idea there should be no contracting for group pricing. That is the gag clause prohibition. It seems some small groups want the same volume discount as the very large groups – without brining anything to the table.

    Hospitals and providers provide medical care to all based on credit! They provide the service in exchange for a promise to pay later. Some promises to pay later are more reliable than others. Seems to me, those with a less reliable promise to pay also want the benefit of those who can pay.

    The Pacific Business Group seems to be attempting to rob the best marketplace players (large groups and large insurers) of their competitive advantage under he guise of transparency.

  10. Bob Hertz says:

    Note to Frank H:

    You say that some hospitals charge more because they are on the front lines research.

    I am not an expert, but I have my own suspicions. I think these hospitals charge more because they have administrators making $800,000 a year, and doctors making $500,000 a year guaranteed, and nurses making $120,000 a year.

    Not to mention gorgeous buildings with large mortgages, and very expensive diagnostic equipment on lease or totally purchased.

    Clayton Christenson says this more politely, but the magic formula for reducing health care costs is a set of buyers (like Walmart) who say, “screw your costs, we are paying $12,000 for angioplasties and if you cannot meet our price you are history.”

  11. Devon Herrick says:


    I share your concern about government interference between private parties who choose to contract with each other. Merely forcing the disclosure of these private contracts will distort the market — and not necessarily in beneficial ways. If transparency is the result of government mandate rather than competition, in all likelihood the prices for various payers will converge — but to a level higher than in a free market.

    I think you’re correct that hospitals experiencing uncollectible bad debts (that result from artificially-high prices and poor transparency) will encourage hospitals explore ways of boosting consumer friendly business practices.

    I do believe insurers and employer health plans can assist patients though. For example, why doesn’t BlueCross or Aetna help me identify an affordable place to get an MRI done? These firms know the prices and know that the prices vary from one provider to the next. It would encourage competition if insurers were able to assist me when I want to shop. If not exact prices, health plans could provide me with a range of providers, say, five firms in an area that have the most competitive prices.

  12. Bob Hertz says:

    According to accounts about Massachusetts and California, some of the top hospitals have insisted on what amounts to a “gag order” in their insurance company contracts.
    The contracts state that the insurer is explicitly not allowed to give patients any information about competing providers.
    My info is a couple of years old, so maybe things are changing.

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