Price transparency: Will it really reduce healthcare costs?

July 8, 2016 / By Steve Delaronde

The inability for consumers to know the price of healthcare services prior to receiving care has been identified as an impediment to reducing healthcare costs.  Patients equipped with pricing information should theoretically be more inclined to select lower cost services if given the opportunity.  However, there is recent information that would suggest this is not necessarily the case.

As Americans assume greater responsibility for the cost of health care, there would seem to be a greater incentive to select services based on price.  According to a 2015 Kaiser Family Foundation survey of employers, the proportion of American workers with health insurance plans that have a general annual deductible of $1,000 or more for single coverage increased from 26 percent in 2010 to 46 percent in 2015.  During this time enrollment in high deductible health plans also increased from 13 percent of covered workers in 2010 to 24 percent in 2015.

Regardless of the rise in web-based price comparison tools, pricing transparency for healthcare services is only useful in specific circumstances.  Namely, a healthcare service can be considered “shoppable” when it meets the following three criteria.

  1. An elective service that can be researched in advance (e.g., emergency appendectomies and putting casts on broken bones do not qualify).
  2. Multiple providers must offer the service in the same market.
  3. The savings incurred from selecting a lower priced service should directly benefit the consumer (i.e., reduce out-of-pocket expense).

Unfortunately, these circumstances do not always apply in the healthcare marketplace.

  1. Most healthcare services are not shoppable

A 2014 report from the National Institute of Health Care Reform estimated that shoppable healthcare services account for only one-third of total healthcare spending.  Elective procedures, such as hip and knee replacement, are often the first ones targeted for reference pricing and bundled payment programs, since they are discrete, routine services with a repeatable process and outcome.  Other services, such as chemotherapy regimens for cancer or tailored treatment for persons with rare diseases, may be more difficult to standardize.

  1. There is insufficient competition for many services

Nearly 20 percent of Americans live in rural areas.  In those areas, there is often one hospital that dominates and a very sparse selection of specialists.  Additionally, hospital consolidation and physician practice acquisition by hospitals leads to higher prices.  While vertical integration may lead to improved care coordination and continuity of care, horizontal integration often leaves the healthcare consumer with fewer options and higher prices.

  1. Savings incurred from lower priced services may not benefit the consumer

A recent study published in JAMA in May 2016 indicates that the availability of a price transparency tool is not associated with lower healthcare spending.  In fact, those who used the tool were likely to see their healthcare costs increase compared to those that did not use the tool.  More than half of the searches were for services that had total price estimates higher than $1,250, such as obstetric deliveries and colonoscopies.  This amount exceeds the deductible for many plans, meaning that there is limited incentive to select a lower priced service.  Since many consumers incorrectly associate higher prices with higher quality, there could actually be a perverse incentive to select a higher priced service if the cost of that service exceeds the deductible.

Price conscious healthcare consumers are concerned about reducing their out-of-pocket expenses.  A March 2016 issue brief from the Healthcare Cost Institute estimates that out-of-pocket costs represent only 15 percent of the total spent on health care for commercially insured persons, and less than half of that was spent on shoppable services.  Persons with chronic conditions and/or a single expensive procedure often meet their deductible and lose their incentive to price shop.  Co-insurance may be a better method of aligning incentives between the payer and patient on price.

Price transparency is only one objective in the pursuit of the Triple Aim.  The others are quality and a positive patient experience.  Price would not be expected to vary if quality and service are held constant.  Unfortunately, even when a patient has perfect knowledge related to the price of care, the ability to compare a provider on outcome is often lacking.  Increased transparency and improved measurement across price, quality, and patient satisfaction is necessary for the healthcare consumer to meaningfully drive some, but not all, of their healthcare decisions.

Steve Delaronde is director of consulting for populations and payment solutions at 3M Health Information Systems.