In 2019, the U.S. spent $3.8 trillion or $11,582 per capita on healthcare, about 18% of the gross domestic product. The affordability of hospital care, which accounts for the largest share of healthcare spending (31% or $1.2 trillion), has significant public interest implications. The lack of hospital price transparency has been considered to be an important factor that compromises hospital care price competition and care affordability.
To improve price transparency, CMS implemented the Hospital Price Transparency final rule, effective January 1 of this year. The rule requires that hospitals in the U.S. post a machine-readable file with the commercial payer-specific negotiated price for all services, and display the same price information for 70 CMS-specified and 230 hospital-selected shoppable services. Still, many hospitals have yet to offer up this information.
The Hospital Price Transparency Rule in Practice
To understand the implementation of the Hospital Price Transparency final rule, we conducted a national analysis of the colonoscopy prices disclosed by hospitals. Colonoscopy, one of the 70 CMS-specified shoppable services, is the standard for colorectal cancer screening — Americans are recommended to begin screening colonoscopy at age 45. Because colonoscopy is routinely performed in non-urgent situations, patients and payers can have the flexibility to compare prices before scheduling the service.
Based on data from Turquoise Health, we found that as of July 27, roughly 7 months after the Hospital Price Transparency rule went into effect, only 1,225 general acute care hospitals (28% of all such hospitals) disclosed the commercial negotiated prices for colonoscopy. The disclosure rate is likely to be even lower for hospital services not included in the list of 70 specified by CMS.
In our analysis, the commercial negotiated prices for colonoscopy for the 1,225 disclosing hospitals are all over the place. We calculated the median negotiated colonoscopy price across all commercial insurance plans for each hospital and found that among 60% of hospitals, the median prices were below $1,500. The top 10% of the disclosing hospitals had median prices of at least $3,677, almost five times the national average Medicare reimbursement rate of $793.
These top 10% high-price hospitals are located in 36 states, with half concentrated in seven states: Illinois, California, Ohio, Kentucky, Virginia, Indiana, and South Dakota. Our results probably underestimated the level and range of the commercial negotiated colonoscopy price in the nation due to the self-selection of disclosing hospitals.
The Disclosure Problem
Hospitals strategically make decisions whether to disclose commercial prices to maximize their payoff. The low compliance rate we found has two potential explanations. First, some hospitals might have limited financial resources and personnel expertise to manage the compliance cost. Second, some hospitals might be concerned about price disclosure’s potential negative impact on their revenue from commercial payers, who may mount pressure to demand more favorable prices.
Recognizing that many hospitals have been noncompliant, the White House issued an executive order on July 9 to support the Hospital Price Transparency rule. On July 19, CMS published a proposed rule to substantially increase the penalty for noncompliant hospitals. This proposal, if implemented, would potentially push more hospitals to disclose their commercial negotiated prices for a wide range of services by imposing a higher cost of noncompliance.
The Benefits of Price Transparency
While it may take more time and effort to ensure all hospitals are disclosing the mandated price information, it’s an important factor in moving toward more fair pricing for consumers.
The disclosure of pricing information provides an opportunity to shop for low-price hospital care for self-insured employers, which are exposed to the financial consequences of their workers’ healthcare spending and are motivated to seek affordable options. Also, self-insured health plans, facing less stringent regulatory constraints, have more flexibility in managing their health benefit.
Knowing hospitals’ pricing information, self-insured employers can improve their network design, create incentives, and build beneficiary support systems to steer patients away from high-price hospitals and navigate them to low-price, high-quality alternatives. For example, some large employers have been funding their workers’ interstate travels for elective surgery services.
In areas where high-price hospitals have substantial market power, self-insured employers should seek locally structured risk pools instead of relying on their own geographically dispersed risk pools. For example, employers can form local purchasing alliances to enhance their negotiating power; employers can adopt the capitation contracting method with third-party administrators that can manage the risk locally; employers can also migrate toward health reimbursement arrangements, which would allow employers to reimburse the premiums for workers’ self-chosen health plans on the local market.
Hospital price transparency may also invite new market entries by providers with efficient cost structures, such as physician-owned hospitals, ambulatory surgical centers, and other types of outpatient providers. New entrants can promote both price and quality competition in the local markets and create value for consumers.
Price transparency alone won’t be the panacea for all hospital pricing ailments on the commercial market. Still, it can be the catalyst if other roadblocks hindering competition and restricting consumers’ bargaining power can also be addressed. These roadblocks include certificate-of-need laws, some network adequacy laws, and various structural issues on the individual markets that limit the attractiveness of the plans being offered.
Competition is the most effective way to create value for consumers in every market. Healthcare markets are no exception. Both the Trump and the Biden administrations have taken important steps to rely on competition and empowered consumers to address hospital pricing on the commercial market. However, more changes are needed to promote competition and enable efficient purchases of healthcare services.
Ge Bai, PhD, is a professor at the Johns Hopkins University Carey Business School and Bloomberg School of Public Health. John (Xuefeng) Jiang, PhD, is the Plante Moran Faculty Fellow, professor of accounting and information systems, professor of finance (by courtesy), and law school faculty affiliate at Michigan State University. Marty Makary, MD, MPH, is Editor-in-Chief of MedPage Today and a professor at the Johns Hopkins University School of Medicine and Carey Business School. He is author of The Price We Pay.
Last Updated August 12, 2021