How to Make Health Care Prices Transparent

How to Make Health Care Prices Transparent

Alex Azar, the Secretary of Health and Human Services (HHS), has made price transparency for medical services one of his top priorities. It’s an important goal because meaningful price information is essential for a functioning marketplace.

Price transparency does not exist today because medical care isn’t bought and sold in a typical market. Because hospitals and physicians get so little of their revenue directly from consumers, they have no need to compete on price, and thus no need to make meaningful prices publicly available. Patients paid directly for only 11 percent of the services provided to them in 2016. Most of hospitals’ and physicians’ revenue comes from Medicare, Medicaid, and private insurance plans. When patients pay directly for care, it is often in the form of a copayment or a deductible that is unrelated to the total bill.

As Azar understands, the problem of opaque pricing will not fix itself. Current government policies created today’s system of third-party public and private insurance payments; consequently, the federal government will need to take the lead in countering the effects of these policies, including by bringing transparent prices into the marketplace.

Standardization is critical for meaningful pricing in the medical care market. Consumers will only be able to compare pricing among competing options for their care if what they are buying is generally consistent, from a clinical perspective, from provider to provider. The goal should be to create understandable, standardized packages of medical care covering the most common problems and diagnoses. This kind of standardization will intensify competition among those providing services to patients because price differentials for essentially the same medical care will become visible to consumers.

The Medicare program is currently conducting a multi-year test of bundled payments. Hospital systems, physician groups, and other provider organizations can voluntarily elect to get paid a bundled, “all-in” fee by the program for a particular procedure or intervention in lieu of the separate payments that would normally be made to the multiple clinicians involved in caring for the patient. The latest version of this initiative identifies thirty-two bundles eligible for this alternative payment program, including an inpatient stay to correct gastrointestinal obstruction and surgery for insertion of a pacemaker. Another initiative is testing bundled payments for joint replacement surgery. For a single bundled fee, providers are expected to do whatever is called for clinically to successfully complete the care process for the patient.

Currently, the Medicare program calculates the standard payment for each bundle based on average costs using the government’s payment regulations for inpatient services, physician care, and other providers. Under the latest bundled payment initiative, the government will take a 3 percent discount off of this historical payment rate. The providers participating in the initiative are allowed to keep whatever savings they can achieve within the other 97 percent.

HHS can use this initiative to begin populating the market with meaningful prices that consumers could understand. The key is to turn the pricing table around. Instead of the government setting the prices based on current payment regulations, participating providers should be asked to set their own prices for treating patients who need care covered by the various bundles. This is the critical first step in bringing intense price competition to the market. Providers would be forced to do the hard work of figuring out what price they want to charge, and how to lower it by removing unnecessary costs.

Medicare could then use the price information submitted by participating providers to establish the government’s maximum payment rate in the relevant markets (perhaps at the average price, or at some weighted version of the average). Actual payments would be risk adjusted based on the characteristics of individual patients, as is the case under the current initiative. To encourage low prices, and to bring consumers into the equation, the government could share some of the savings with the Medicare beneficiaries who select providers with lower-than-average prices. The stated prices of all providers would be posted and publicly available, but those with prices above the maximum would only get paid the maximum rate (and no more than would be paid under current regulations).

Converting the bundling effort into one that draws out market prices from those providing services to patients would help bring more discipline to Medicare. But it could also serve as the starting point for populating the market with meaningful prices for all consumers and for many medical interventions beyond the existing bundles.

This pricing information would be especially useful to the 21 million consumers enrolled in Health Savings Accounts (HSAs). Currently, the Medicare program allows beneficiaries to enroll in HSA-like accounts, but the option is not well promoted or utilized. HHS could help expand enrollment in this option, and also help those working-age Americans with HSAs, by populating the marketplace with pricing for standardized clinical packages that could be purchased by anyone enrolled in high-deductible insurance combined with an HSA, regardless of their eligibility for Medicare. The pricing for the standardized bundles would need to be age-adjusted to reflect the different needs and risks of patients who are under age 65 as compared to those eligible for Medicare.

HHS could start this effort by using the same standardized bundles now being tested in Medicare and then expand the list by adding standardized primary care packages. These packages could be priced as regular monthly fees covering specified services and contingencies. HHS could also standardize packages for the care needed to keep chronic conditions stable, including for diabetic and heart disease patients.

Azar says he is willing to be as disruptive as necessary to bring more consumer-driven discipline to the provision of medical services. Nothing would be more disruptive to today’s inefficient market than meaningful and understandable price information that consumers, and private insurers too, could use to find high-value, low-cost care. The bundling initiatives now underway in HHS can be used as the starting point for taking the important first steps in an effort that will almost certainly require a sustained commitment by the federal government over many years.

James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.

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