Secret Prices: Free Market Triumph or Tragedy?

By Frank Pasquale
In Hospitals
December 12, 2011
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fog-300x199Can a market work when buyers are kept in the dark about the prices they’ll pay? That’s an increasingly urgent question for fans of consumer directed health care. In vogue during the administration of Bush fils, CDHC is reemerging as Obamacare’s opponents seek a standard to rally around (other than “laissez mourir“). In theory, consumers could force doctors and hospitals to compete by shopping around for services. But when the rubber hits the road, informed consumption is easier said than done, as Josh Barro describes:

Recently, my employer switched to a high-deductible health insurance plan, which means I’m paying at the margin for most of my health care. As a result, I have become more aware of the true cost of the care I receive—and more aware of how difficult it is to figure out that cost. . . . if you ask doctors how much a service costs, they tend not to know. I once had an argument with my doctor, who did not want to give me a blood test for fear that my insurer would deny the claim for the expensive test. I later found out that this test costs all of $9.48 at my insurer’s negotiated rates, despite a list price of $169. When I got orthotics, my podiatrist told me they would cost nearly $600. But that was the list price; the actual insured price was less than $250. . . .

It doesn’t have to be this way. We could legally obligate hospitals and medical practices to disclose their full price lists—both the inflated list prices and the rates negotiated with each insurer that the practice accepts.

A commenter on Barro’s blog retorts:

I’m a little surprised to see a blogger at the [National Review Online] suggest that the government “require” price disclosure from private market participants. This goes well beyond the market interference that some other odious “mandates” require. Why don’t we mandate that everyone disclose exactly what they pay each employee? . . . If you have an HSA or High-deductible policy, I would suggest it’s incumbent on the insurance provider to help you figure it out. If consumers want it enough the system should respond, right? Why not switch to an HDP that is more transparent?

The problem, of course, is that lots of parties have to agree to provide transparency, and there is a great deal of inertia. If all the other insurers aren’t transparent, there’s little reason for one of them to try to distinguish itself if it already has a steady customer base. And when it stirs itself to do so, it will find a wall of resistance from providers, who say “why should we give all this information to you—no one else is demanding it?” (Moreover, the “prices” don’t really exist except on paper on a “chargemaster,” and they’re practically meaningless (except as opportunities to gouge the unlucky). The real price is the negotiated price, and that’s generated out of iterative interactions.) Moreover, many interventions involve multiple providers, as a reader of Andrew Sullivan’s blog explains:

I am a pediatric subspecialist at a major academic medical center in New York City. Many times, patients call to find out the costs of procedures if we are outside of their network. As ridiculous as it sounds, we are universally unable to tell them. The prices are so opaque that no one at my institution will admit to being able to produce them.

For example, a pulmonary function test (really a group of tests) will involve a physician’s fee and a technical fee. The MD fee is generated from my practice and I have a list of fees that most patients are charged (though their insurances all pay different rates if they have insurance). The hospital owns the technical fee. A colleague of mine once spent three months trying to get an answer to the question of what the price is for a group of tests for a research grant she was planning. No one could or would tell her.

Perhaps the “free market advocate” would like to see a coalition of insurers band together to get enough bargaining power to demand transparency. (Query the point at which that consolidation becomes so great that it approaches monopolization, another enemy of free markets.) But the record of Group Purchasing Organizations in other parts of the health care marketplace is not promising. Such intermediaries are often tempted to put their own profits ahead of the entities they’re ostensibly serving.

It’s a bit like food nutrition labeling, which almost everyone now agrees is a good idea, but could only be catalyzed on a large scale by government intervention. The government may also need to limit the complexity of contracts in the area. As Uwe Reinhardt documented,

Relative to hospitals paid under the much simpler national health insurance schemes in other countries, the contracting and billing departments of U.S. hospitals . . . are huge enterprises, often requiring large cadres of highly skilled workers backed up by sophisticated computer systems that can simulate the revenue implications of the individual contract negotiations.

You’d think that, when US doctors’ administrative costs are four times that of Canada’s, consumers would at least get a clear picture of the financial landscape here. But instead, as with the labyrinth of self-serving complexity that constitutes the over-the-counter derivatives market, the complexity mainly serves to protect insiders. I predict that if CDHC advocates ask hospitals to reveal more, a plaintive chorus will respond that true prices are, in the words of Alan Greenspan, “irredeemably opaque.” For what is market freedom if it doesn’t include the freedom to contract into a dynamically multivariate payment scheme where the present value (or cost) or any given service cannot be calculated because it depends on a hundred other variables?

Doctors and insurers are not the only ones obscuring health care costs. As Steve Pearlstein noted recently, the prescription drug market “is renowned for its lack of transparency. Drug companies not only refuse to reveal their wholesale prices, but in contracting with pharmacy chains and PBMs they insist on contracts that prohibit either party from revealing prices to anyone else.” As Annemarie Bridy shows, a medical device manufacturer has claimed that “the actual prices its hospital customers pay for implantable devices, including cardiac pacemakers and defibrillators, are protectable as trade secrets under the Uniform Trade Secrets Act.” The B2B side of the business is shrouded in secrecy, as Reinhardt shows:

Whatever an insurer’s base for paying hospitals might be, the dollar level of payments is negotiated annually between each insurer and each hospital. Under a DRG system, for example, the item to be negotiated is the monetary conversion factor for the year and, possibly, some of the DRG weights. These actual dollar payments have traditionally been kept as strict, proprietary trade secrets by both the hospitals and the insurers. Recently Aetna announced that it will make public the actual payment rates it has negotiated with physicians in the Cincinnati area. That this small, tentative step toward transparency made national news speaks volumes about the state of price-transparency in U.S. health care. It remains to be seen whether that first step will trigger a larger industrywide move toward removing, at long last, the veil that has been draped for so long over the actual prices paid in the U.S. health system.

Fortunately for advocates of transparency, the Affordable Care Act has some provisions that require transparency. The ultimate solution is all-payer rate setting, which radically simplifies the negotiation games that are the root cause of so much health care opacity. Such rate setting may also pave the way to more integrated delivery systems, already contemplated in the parts of the ACA devoted to Accountable Care Organizations. When primary care doctors, specialists, imagers, etc., are all part of one organization, it’s much easier to estimate costs than when they are all independent actors.

But we should note that the problems here are much broader than health care. I predict a split in free market theory between those who enthusiastically endorse the propertization of prices, and those who see open information about them as a key to real competition.

Image Credit: Frankzed.

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One Response to “Secret Prices: Free Market Triumph or Tragedy?”

  1. […] deserves some autonomy from the normal laws of intellectual property. Popular reaction against secret prices of medical devices and hospital procedures also reflects that […]

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