Health care is unique compared to other sectors of the economy. In typical consumer markets prices are transparent and suppliers compete for the patronage of consumers by competing on price, quality, service, and other amenities. In health care prices are opaque and providers do not compete for patients in the traditional sense. In health care there is not one price but many prices, a different price for each payer. About 90% of medical goods and services are paid for by an entity other than the patient. Historically large health plans and insurers used their market power to negotiate discounts off list prices larger than what individuals could expect to receive. Indeed, historically cash prices were often the highest prices and that is what uninsured patients are often asked to pay.
The business model of most hospitals is to maximize reimbursement against third party reimbursement formulas. Thus, the conventional wisdom is that paying cash does not command prices as low as what health plans enjoy. Yet, some providers are beginning to offer cash discounts or at least cash prices that are lower than in years past. I’ve often told people there is more than one cash price, depending on the circumstances. There is the high cash price after the service has already been performed. That cash price is often the list price. Then there is the cash price if negotiated prior to the service. That cash price is sometimes among the lowest prices available.
Johns Hopkins professor Ge Bai has studied cash prices in health care, and the trends are encouraging:
Growing evidence demonstrates a counterintuitive phenomenon in healthcare: the cash price is often cheaper than insurance prices for the same service or product. Cash prices are unilaterally determined by a provider, while insurance prices are bilaterally negotiated between a provider and an insurance company. Don’t insurance companies presumably possess more bargaining power than individual patients?
The favorable cash prices are appearing mainly for shoppable services. Things like laboratory tests, diagnostic imaging and joint replacement. For certain shoppable services, about half of hospitals now set cash prices equal to the median prices charged to insurance companies. About one-in-five hospitals set cash prices roughly equal or even lower than the lowest prices charged to insurers. Professor Bai also found some cash prices lower for services that are not possible to shop. An anecdote from Arkansas has to do with the emergency room:
In Arkansas, median cash prices and insurance prices are $2,030 vs. $2,477 for level I trauma activation (18% cheaper paying cash), $1,152 vs. $2,011 for level II (43% cheaper), $1,149 vs $1,900 for Level III (40% cheaper) and $764 vs. $1,420 for level IV (46% cheaper).
Why would the environment change from the way business was done for decades? There are a variety of reasons. Collecting cash upfront is easy, billing insurance companies requires a higher degree of complexity and bureaucracy. Insurers also have perverse incentives where the more of their clients’ money they spend on health care, the higher the administrative fees they earn. By contrast, individuals spending their own money are more price sensitive, often willing to look for a bargain.
From providers’ perspective, serving cash-pay patients costs less than dealing with insurance. Administrative burdens and the time and energy spent on insurance compliance disappears.
Importantly, patients who spend their own money are sensitive to prices and, by having full agency, actively shape the provider’s reputation, just like consumers typically do in cash-pay markets. Providers understand this and set cash prices accordingly: they are more likely to be cheaper than insurance prices in low-income communities.