The latest issue of Health Care News features a commentary, “Price Transparency Is a Fraud in a Fake Market.” This argument is somewhat surprising because conservative policy wonks love to expound on the benefits of price transparency. The logic goes that if only doctors, hospitals and drug makers were forced to reveal prices consumers would shop and force down prices, like occurs in competitive markets. The words, competitive market, are important. Here is what the writer says about health care:
Making prices transparent in the disconnected health care market will not save money because the usual free market forces are absent. Price variability is a signal that balances supply and demand. In health care, the price is fixed arbitrarily by the payer.
Publishing fixed prices cannot function as a signal that balances supply and demand. It will also give the public a grossly inflated picture of what providers are paid.
The physician writer has some valuable insights, although I would explain it another way. In health care prices are not transparent because health care providers do not compete on the basis of price. In competitive markets suppliers of goods and services don’t have to be compelled to reveal prices. Transparent prices are the natural result of price competition.
Consider the following thought experiment: let’s say your local Kroger grocer removes all the prices from shelves. When you ask a store employee how much that can of green beans costs, she tells you she doesn’t have that information, because the price varies depending on who the customer works for, whether they qualify for government assistance and even their age. When you demand to know the price, she says the list price is $10, but your price may be lower. You won’t know your price or your cost-sharing until you buy the can of green beans and the store sends a bill to your employer, who determines your share of the cost and pays its share. Also, before leaving with the can of green beans you must sign a contract agreeing to pay whatever your share is later decided to be. Furthermore, you must leave your credit card number so it can be charged. The agreement you’re required to sign to get your can of green beans also requires agreeing to pay the delivery driver, the workers who stock shelves and potentially others who are free to charge pretty much whatever they want.
When the anecdote involves a can of green beans it is laughable but loses its comic effect once you realize this is precisely how health care works. The consumer is not the payer. The payer is not the consumer. The supplier is providing the service for someone besides the payer. This scenario eliminates the feedback loop between consumer and seller, when consumers signal that prices are too high by taking their business elsewhere. Indeed, the writer argues price transparency will increase spending rather than reduce it. His theory is that the regulatory cost of promulgating and enforcing transparency will increase federal spending on enforcement. That is not my primary concern.
I have always wondered why contract law, requiring mutual assent or a meeting of the minds, could not be used to enforce price transparency. A meeting of the minds is generally required to enforce a contract. How can there be a meeting of the minds (mutual assent) if one party never told me the price? Congress and state legislatures could boost transparency by passing laws asserting blanket forms signed at check-in do not constitute mutual assent.
Price transparency will only boost competition if patients are willing and able to use prices to their benefit. By contrast, if my doctors force me to use their hospital employers for expensive blood tests and other services I cannot refuse, then transparency will have done no good. In the absence of the ability and incentive to use prices to comparison shop, price transparency could serve as an easy way to fix prices at levels higher than they otherwise would be. In years past some trade associations collected price data and shared it among competing members. Nowadays this is generally considered a clandestine form of illegal price fixing.
Price transparency is an important step, but it is only the first step. Next consumers need to be able to use prices to change their buying behavior, which will in turn change sellers’ behavior.