The Role of Price Transparency in Healthcare Reform

A new report, released jointly by Catalyst for Payment Reform and the Heath Care Incentives Improvement Institute, suggests that the lack of price transparency in American healthcare is a serious and widespread problem. Their Report Card on State Price Transparency Laws gives 29 states an “F” and seven more states a “D” on the issue, with only Massachusetts and New Hampshire receiving an “A” grade.

Price transparency is a vital issue in health care reform, since putting a lid on escalating costs ultimately depends on getting consumers to make cost-conscious choices between competing providers. One important move in this direction is already happening—as the Report Card’s foreword points out, “close to two-thirds of all large employers offer a high deductible/high co-insurance health plan and… close to 20 percent of all commercially insured health plan members are enrolled in such plans.”

Such consumer-driven health plans force both patients and providers to think about prices and choose treatments accordingly. This is in stark contrast to the traditional, third-party payment scenario in which both patient and provider have an incentive to maximize care, regardless of cost—the patient, because they have paid their up-front premium and want to extract as much value from it as possible; the provider, because they want to earn as much as they can. Ultimately, it is this dynamic that really drives health care inflation the world over, irrespective of whether insurance is funded by taxpayers, employers, or individuals.

Yet consumer driven health plans are of limited use if patients have no way of knowing how much a given treatment from a given provider is going to cost. This goes for routine doctor appointments—surprisingly few offices advertise their prices online—to more significant surgical procedures. As Russ Mitchell reports for Kaiser Health News, “prices for knee replacement surgery in the same California market can range from $15,000 to more than $100,000, depending on the hospital, with no discernible difference in quality.” Such variation is extraordinary and could surely not exist in a properly functioning marketplace.

Admittedly, there is an obvious libertarian objection to state laws enforcing price transparency—shouldn’t it be left to consumers to demand it, if they really want it? But this argument is not persuasive: the lack of information health care consumers have at their fingertips today not a market phenomenon; it is the result of decades of government intervention that has consistently attempted to insulate consumers from any consideration of market prices—first by encouraging employers to pay for insurance, then by regulating insurance companies, and then by subsidizing premiums.   

In this context, governments can usefully redress the balance in favor of consumers—and competition, and cost control—by requiring providers to list their prices openly and transparently. It is by no means the only thing that matters, but it is an important precondition for the success of other market-oriented reforms.    

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