The drive toward mandatory healthcare price transparency is now bipartisan, which could pose problems for consumers. While transparency has virtues, mandates can spawn perverse incentives and unintended consequences—potentially pushing prices up, rather than down.
Four senior members of the House of Representatives’ Energy and Commerce Committee recently sent a letter to Health and Human Services (HHS) Secretary Xavier Becerra, urging him to crack down on hospitals that fail to comply with an executive order by former President Donal Trump. The four were committee Chair Frank Pallone (D-N.J.), Vice-Chair Cathy McMorris Rodgers (R-Wash.), Health Subcommittee Chair Anna Eshoo (D-Calif.), and Vice-Chair Brett Guthrie (R-Ky.). The Biden administration hasn’t said whether it plans to keep this rule.
Trump’s final Hospital Price Transparency rule was issued in November 2019 and went into effect January 1, 2021. It requires hospitals to display a price list for 300 “shoppable” services. Lists must be machine-readable and consumer-friendly, must include a handful of prices, and must report for each service: “gross charges, the discount cash price, the payer-specific negotiated charges, and the de-identified minimum and maximum negotiated charges for all items and services.” The idea is to give patients sufficient information to do comparison shopping.
Representatives expressed concern over non-compliance with the rule. According to their letter, some hospitals haven’t posted prices, have posted data in non-downloadable form, omitted some of the required prices, or added codes on the files to evade internet search engines.
It’s likely that noncompliance is widespread. The letter notes that the federal government can impose penalties of up to $109,500 per hospital per year. As for the effectiveness of such fines, I’ll note that this amount is roughly equivalent to performing one less heart bypass operation per year or hiring one additional nurse. It’s probably not enough for CEOs to lose sleep over.
So, if hospital price transparency enjoys bipartisan support, what could be the problem? For those interested in more details, Jessica McBirney and I wrote a paper last year on the topic—but here’s the short version:
First, patients simply may not be terribly price-sensitive. If my insurance pays the bulk of the charges, I may not care much about the price of treatment. I care about how close the hospital is to my house, whether its reputation is good, whether my own doctor has privileges there. And for that matter, supposedly “consumer-friendly formats” may still present me with a confusing maze of numbers. These other considerations might be so important that I never actually look at the posted prices.
Second, someone actually has to write the rules that define what price transparency is. Rule-making is ostensibly done by government officials—say, at HHS—but those who are regulated (the hospitals, in this case) have considerable sway in how those rules are written. It’s common in such situations for big inside players—larger, well-established hospitals, in this case—to lobby for wording that offers them protection from competitors. For example, the rule might make compliance costs oppressive for the sort of smaller institutions that could push prices downward.
Third, “tacit collusion” is a well-known concept in antitrust law and economics. In markets that have few competitors and high barriers to entry, it only takes one additional ingredient—knowledge of competitors’ prices—to produce a virtual cartel. Many hospital markets already have the first two ingredients, so price transparency may be all that’s necessary to enable hospitals to push prices upward.
And fourth, any significant medical procedure, such as a surgery, is really a bundle of individual services—doctors, nurses, floor space, equipment, technicians, and so forth. To produce consumer-friendly prices, it’s necessary to bundle all of these individual services together to yield, say, a single price for a heart bypass operation. Bundled pricing is often beneficial to consumers. (For example, it’s good that cable TV companies don’t bill you separately for every channel.) But if regulations mandate one-size-fits-all bundling for all providers, this can drive prices upward and quality downward—similar to the condition known in antitrust law as a “tying arrangement.”
Price transparency is intended to increase competition and push prices downward. But in economics, intended effects are often very different from actual outcomes.