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Time to Experiment with Price Transparency in Health care

Summary:
For ten years, Vanderbilt students have heard about two airport gas stations who refuse to post prices.  When travelers stop to fill up, they see a price on the pump that is /gallon higher than in the rest of Orlando.  Because few travelers will risk missing a flight to shop for a better deal, there is no pressure on the stations to reduce their outrageous prices. Our students are amused by the story until they try to complete their first assignment, “find the price for any health care service.”  The assignment is among the most difficult of the semester.  Students learn just how hard it is to shop in an industry that accounts for 18% of the economy.  And just like the gas stations in Orlando, when there is no shopping, there is no competition.  Ironically, health plans are now

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For ten years, Vanderbilt students have heard about two airport gas stations who refuse to post prices.  When travelers stop to fill up, they see a price on the pump that is $2/gallon higher than in the rest of Orlando.  Because few travelers will risk missing a flight to shop for a better deal, there is no pressure on the stations to reduce their outrageous prices.

Our students are amused by the story until they try to complete their first assignment, “find the price for any health care service.”  The assignment is among the most difficult of the semester.  Students learn just how hard it is to shop in an industry that accounts for 18% of the economy.  And just like the gas stations in Orlando, when there is no shopping, there is no competition. 


Ironically, health plans are now giving consumers an incentive to shop.  The average healthcare deductible for the employed population has risen 300% since 2006 to $1573.  On the public exchanges, deductibles are roughly twice that amount.  Now that consumers finally have the incentive to shop, let’s give them the ability. 


Mandating price transparency would make shopping easier, and the resulting price competition could save us billions.  Within the same market, for the exact same service, like a chest x-ray, it is not uncommon for real prices—not the fictitious “charges” that no one pays—to vary by over 400%.  If shopping created enough competition to drive prices down to the lowest of these, we would be able to realize the promise of expanded care through lower prices.   


But there is a tradeoff:  forcing price disclosure could reduce competition between providers to get into payer (insurance company) networks.  The intuition (it is not precise enough to call it a theory) is that if a provider can keep its prices secret, it is more likely to offer discounts to payers. 


Admittedly, losing these discounts is a risk, but even if it happened, the effects of losing payer-provider competition (10-20% from estimated merger price effects) are an order of magnitude smaller than observed price variation within a market.  The potential gain from increasing competition for consumers seems likely to outweigh any potential loss in competition among providers to get into payer networks. 

It's time to experiment.   


  • On the final rule covering hospitals, facilities will have two obligations. First, they will have to provide insurer-specific negotiated rates in a computer-readable file.
  • Second, hospitals will have to post negotiated charges online for 300 specific services that patients typically shop around for. Seventy of those services, including vaginal birth, colonoscopy, and joint-replacement surgery, are stipulated in the rule, according to senior administration officials. Hospitals can select the other 230 services they post online.
UPDATE:  Paper on Transparency and Negotiated Prices
...information on purchasing by peer hospitals leads to reductions in the prices hospitals negotiate for supplies. ...Within coronary stents, reductions are concentrated among hospitals previously paying relatively high prices and for brands purchased in large volumes, and are consistent with resolving asymmetric information problems.

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