How Will Transparency Systems for Healthcare Costs Affect Prices?

More than 30 states are now either pursuing or contemplating legislation that will increase healthcare cost transparencies, and three bills relating to cost transparencies were introduced in Congress in 2010. Unfortunately, research on the effects of price transparency on healthcare systems is in its infancy, and little information is available for states to make these important legislative decisions.

Two perspectives published in the March 10, 2011 edition of the New England Journal of Medicine (NEJM) discuss the mechanisms for making medical costs more transparent in the United States. 

Could full price transparency cause a rise in healthcare costs?
Professors David Cutler (Applied Economics, Harvard) and Leemore Dafny (Associate Professor of Management & Strategy, Kellogg School of Management) have published a perspective in the NEJM (N Engl J Med 2011; 364:894-895) hypothesizing that full price transparency will not necessarily lead to better-off healthcare consumers. In a system that has disparities for many services and treatments as well as increasing escalating costs, openness, in theory, should lead to more consistent pricing. The authors state that price disclosure may actually cause healthcare prices to rise, assuming that the insurer or buyer has market power. Their example is the lower price that an insurer pays to a hospital as an incentive to funnel patients to that hospital. Upon full disclosure, other insurers would pressure the hospital to lower their prices, creating an incentive for the hospital to raise prices overall. According to the authors, insurer leverage is quite common at both a state and local hospital level. 

Professors Cutler and Leemore compare the effect of price transparency to a “most-favored nation” contractual agreement, which generally limits competition and deters newcomers into the market. They cite the recently filed suit against Blue Cross Blue Shield of Michigan, which allegedly paid hospitals higher prices so that tthey could charge their competitors even higher ones. The authors suggest that price transparency should be at the level of patient copayments to aid in improving customer decision-making.

The mechanism of choosing healthcare is unlike that of other consumer goods
In an accompanying perspective from Anna D. Sinaiko and Meredith B. Rosenthal  (Department of Health Policy and Management, Harvard School of Public Policy) (N Engl J Med 2011; 364:891-894), the authors provide reasons why transparency for healthcare costs may have a different effect on patients than transparency for other consumer goods, which allows buyers to chose a product based on price information. A major reason for this is that insured consumers actually pay very little for their healthcare, and this reduces their incentive to select the lowest-cost provider.  Additionally, timely and reliable information is not always available to do a true quality comparative analysis since patients are concerned less with the quality of their care than with its cost; and independent information about quality of care is lacking because most patients rely on their physician for advice and referrals. Lastly, medical costs are not rigidly mapped out, but rather change over time, making it difficult to predict costs in advance.
 
Which prices to disclose and how to provide unbiased and accurate quality of care information are the two major challenges facing both payers and policymakers. According to the authors, it is too early to predict the outcome of trial transparency systems or how long payers and policymakers are willing to experiment with such systems.