Will Transparency Force Hospitals to Cut Prices?

Starting January 1, U.S. hospitals and health systems must begin making information on their “standard charges”—including their negotiated charges to specific health insurers–available to the public. The Centers for Medicare and Medicaid Services (CMS) is requiring providers to do this in hopes that it will prompt consumers to price shop, which it expects will bring down health costs.

Meanwhile CMS recently finalized another transparency rule that will require health insurers to disclose cost-sharing estimates to enrollees and release their negotiated rates with health care providers. 

Based on a body of research going back decades, there is reason to doubt that many consumers will actually use comparative cost data to choose a hospital. However, hospitals don’t know how much impact this information might have on their business, partly because they haven’t had to reveal their negotiated prices before. That’s why the American Hospital Association brought an unsuccessful suit to block the CMS regulation from going into effect.

In the midst of a worsening pandemic, this issue might not be high on hospitals’ priority lists. Nevertheless, as the new vaccines help moderate the COVID-19 crisis, hospitals will undoubtedly ponder how price transparency will affect their bottom lines and what to do about it.

As health plans have argued, publicizing their negotiated prices might have the perverse effect of prompting lower-priced providers to demand higher rates. This might not work for hospitals that have less market share, however, and suddenly jacking up prices might turn off consumers who will be able to see that online.

Some hospital CFOs have said that they’d rather accept the $300 a day penalty for not revealing their actual charges than comply with the rule. But CMS could respond by shaming the noncompliant providers online. Consumers would also be able to see that those providers were not disclosing their prices.

It will be difficult for hospitals to provide consumers with out of pocket costs, which will be more easily obtained from insurers. But that’s what patients really need to know if they want to use the prices to select hospitals.

In January 2019, CMS began requiring hospitals to post their chargemasters online in a consumer-friendly format. Of course, chargemaster prices are nearly meaningless, because they have little relation to what insurers actually pay hospitals. However, many hospitals already had cost estimators that they used to apprise patients of their financial responsibility. When the charge master transparency rule arrived, some facilities started to offer patient-facing versions of their cost estimators, enabling consumers to go online and check out their costs upfront.

Hospitals could use something similar to help patients see what their out of pocket costs will be. That information would be more useful to consumers than simply showing them negotiated charges for 300 common hospital services.

The real question, however, is whether hospitals and health systems will try to meet the competition. Will they compare their actual charges to those of other hospitals and reduce prices for particular services that are considerably above average in their markets?

For hospitals to do this would be like the proverbial leopard changing its spots. It would go against the grain of the business model that has served them well for many years. Moreover, with COVID-19 lowering margins for many institutions, it would be harder for them to go this route than it would have been in past years.

Here’s my prediction: Hospitals will reveal their negotiated prices and then sit tight for a while to see what happens. If they seem to be losing market share to other hospitals, they might consider reducing their charges on services that are clearly over-priced. But if consumers ignore or are unaware of the new price transparency, the hospitals won’t change a thing.

That would be interesting, because it would show once again that, in most markets, competition between hospitals is a mirage.

Ken Terry is a journalist and author who has covered health care for more than 25 years. His latest book, Physician-Led Health Care Reform: A New Approach to Medicare for All, was recently published by the American Association for Physician Leadership.Ò

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