Early Perspective on Health Care Price Transparency’s Effects

 By James C. Capretta, 

Senior Fellow and Milton Friedman Chair, American Enterprise Institute

Turquoise Health, an industry leader in the collection and analysis of health care pricing data, has recently produced a preliminary examination of the effects of the government’s transparency rules on market results. The findings are interesting and mostly encouraging.

The push for greater price transparency in the health sector is still in its early phase as the norms from decades of financial opacity have only started to give way, albeit slowly. The continued foot-dragging by some key players indicates that policymakers were right to impose the disclosure requirements.

The current suite of rules is the product of multiple statutory authorities and regulatory actions dating back to the Affordable Care Act (ACA) and the second term of the Obama administration, with new specifications coming online at regular intervals over the past decade. This pattern of continued rule refinement seems likely to continue in future years. As an example, starting in July of this year and then again in January 2025, the Centers for Medicare and Medicaid Services (CMS) will begin enforcing tighter restrictions on both the content and formatting of disclosures.

In general terms, hospitals must now post online all relevant pricing data (including negotiated rates with payers) for both inpatient and outpatient services in formats that allow for ready capture and assessment by data technology companies. Further, insurers must do likewise for the rates they have agreed to pay to all providers of services. Finally, consumers paying cash for services have the right to an advance estimate of their expected charges. In theory, these rules are expansive enough to bring pricing data into the market that affects the entirety of most patient bills.

The pace of rule adjustments might even accelerate starting next year. The original Trump administration was bullish on transparency and a return to its aggressive posture is to be expected when the second Trump administration begins in January.

The author of the Turquoise report examined pricing trends from December 2021 through June 2024 for 37 hospital billing codes across 234 facilities located in the 10 largest US metropolitan areas. The prices were pulled from the posted rates negotiated by the facilities with commercial payers and were tied to codes from both the outpatient and inpatient sides of the industry. The total number of pricing observations in the study was over 390,000. Among the services analyzed were MRI scans of the brain with and without contrast (billing code 70553), allergy testing (86003), and inpatient room and board stays (various codes).  

The main finding was that in most markets, there was convergence between high and low pricing over time even as the overall trends were modestly downward. In other words, there was a tendency for the highest priced providers to moderate their pricing and move closer to the median, and the lowest-priced providers to move in the opposite direction. After adjusting for inflation, the highest-priced providers (those above the 75th percentile in absolute price levels) posted negotiated charges that declined in real terms (after adjusting for inflation) at an average annual rate of 6.3 percent. At the same time, the lowest-priced facilities (below the 25th percentile) pushed their inflation-adjusted prices up at an average annual rate of 3.4 percent. The middle of the market (above the 25th percentile and below the 75th) reduced their prices for these services modestly, at an average annual rate of 1.1 percent.

These results are encouraging but should be interpreted cautiously because they do not reflect any movement in market-shares among the competing facilities. Further study is needed to determine the overall effect on total costs paid by insurers and patients.

The Turquoise study also highlights other interesting details:

• In some markets (about 17 percent of the examined service categories), the pricing did not converge over time. In these cases, the collected data show pricing drops across all examined facilities.
  
• Pricing converged more for outpatient than for inpatient services, with 88 percent of outpatient billing codes trending toward convergence and 63 percent of those pulled from the inpatient side following this pattern.

Overall, the study validates the policy decision to force greater transparency on the market as there is a clear indication that price disclosure can help bring more discipline and balance to an unruly and still very arbitrary market.

It also points to what should be the focus going forward, which is helping consumers reduce what they pay for care. Employers sponsoring health coverage will not lead the transformation the market needs because they are too risk-averse. Individual patients, however, may be more willing to break free from past practice and migrate to providers willing to charge much less for their services. It is time to give them the tools to bring this kind of disruption to a still grossly overpriced market.

https://www.aei.org/economics/an-early-perspective-on-health-care-price-transparencys-effects/