Do Choice and Pricing Transparency Lead to Better Healthcare?
In November 2019, the Centers for Medicare and Medicaid Services (CMS) published Price Transparency Requirements for Hospitals to Make Standard Charges Public Final Rule (the Final Rule, effective January 1, 2021). According to CMS, the current lack of transparency in healthcare pricing contributes to the increasing costs of healthcare services. CMS hopes that encouraging transparency in pricing will promote choice and competition that will lead to more affordable healthcare.1 Providing clear, accessible pricing information allows consumers to make apples-to-apples comparisons of payer-specific negotiated charges across healthcare settings.2
The Final Rule requires hospitals to publish standard charges for all items and services—including service bundles—delivered to a patient during an inpatient admission or outpatient visit. Standard charges include:
- 1. Gross charges (the charges that appear on the hospital’s chargemaster, without any discounts)
- 2. Payer-specific negotiated charges
- 3. Discounted cash prices
- 4. De-identified minimum and maximum charges (the lowest and highest charges a hospital has negotiated with third-party payers)
The Transparency Final Rule states that these charges must be published for at least 300 “shoppable services” (that can be scheduled by a patient in advance), including 70 such services specified by CMS and an additional 230 selected by each hospital. Standard charges must be reported for (1) each item or service appearing on the hospital’s chargemaster (such as charges for supplies, procedures, room and board and facility fees) and (2) services performed by hospital-employed physician and non-physician practitioners (but not services performed by independent practitioners who bill separately for their services). Hospitals that don’t comply with the rule and fail to take corrective action after a warning from CMS may have to pay penalties of up to $300 per day.
Reactions to the Final Rule from the healthcare industry have been negative. In a joint statement, the American Hospital Association (AHA), Association of American Medical Colleges (AAMC), Children’s Hospital Association (CHA), and Federation of American Hospitals (FAH) called the Final Rule “a setback in efforts to provide patients with the most relevant information they need to make informed decisions about their care. Instead of helping patients know their out-of-pocket costs, this rule will introduce widespread confusion, accelerate anticompetitive behavior among health insurers, and stymie innovations in value-based care delivery.”3
Health systems, providers, and insurers don’t reveal specific prices paid for medical services, and contracts are bound by confidentiality agreements. Because pricing agreements between insurers and providers are protected by contract confidentiality clauses, the pricing transparency rule would necessarily affect existing contracts. Requiring health systems to disclose pricing arrangements would take the control of pricing away from the healthcare industry and give the decision-making power to patients and employers.4 Furthermore, insurers say revealing negotiated rates will set a floor for hospitals’ prices and encourage providers who are paid less than their colleagues to demand higher reimbursement.5
Publishing health system pricing “would reveal the degree of variation in price that different payers pay—a variation that is far more likely to be explained by market leverage than any other factor.”6 Few healthcare organizations are able to show demonstrable differences in quality, patient experience, and access that justify the variation. Organizations that can’t provide defensible explanations for pricing variations will be under pressure to accept lower prices (even trending toward Medicare prices). Alternatively, more price transparency might cause prices to spike if lower-priced organizations demand higher rates from payers to match those of their market’s larger systems.
CMS acknowledges that “the impact resulting from the release of negotiated rates is largely unknown.” Would consumers actually use this pricing information to shop for healthcare services? How might providers and plans use information about competitor pricing in contract negotiations? To what extent would the media and employers use such information to put pressure on plans or providers?
The legality of the Final Rule is already being challenged. In December 2019 the AHA, AAMC, CHA, and FHA filed a lawsuit to block the implementation of the Final Rule, claiming it violates the First Amendment by “mandating speech that fails to directly advance a substantial government interest.” Health systems and hospitals should pay close attention to the developments regarding this lawsuit and be prepared to publish pricing information if the Final Rule is upheld by the courts.1
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