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Published 1/1/2015
David B. Bumpass, MD; Julie Balch Samora, MD, PhD, MPH

Price Transparency in Health Care: The Other Half of the Value Equation

Healthcare reform is increasingly centered on value, defined as quality delivered per unit cost. Since passage of the Patient Protection & Affordable Care Act (ACA) in 2010, the quality reporting landscape has been dramatically altered and expanded in both the public and private sectors. The goal of these efforts has been to increase the volume of accurate quality and outcomes data, making it available to patients, insurers, and health providers in a usable form. A similar information revolution for the denominator of the value equation, cost, is also becoming an increasingly important focus point nationwide.

Price transparency is defined as accessible information on how much a health service will cost a consumer. Ideally, this pricing information is specific to the region and healthcare providers in question, and available to both the patient and any third-party payers in a clear and usable format prior to purchasing the healthcare service.

In today’s Internet marketplace, consumers are increasingly adept at searching for maximum value for goods and services. Policy experts argue that one key to controlling spiraling healthcare costs is to empower patients to make value-driven choices about their health provider. With higher deductibles for many employer-provided health insurance plans, employees would theoretically be motivated to maximize value. To do this, however, they must have accurate information on both quality and cost. Given the extraordinary complexity of healthcare economics, this goal is much easier proposed than achieved. However, pilot research programs have demonstrated that consumers will select high-value health care if given adequate quality and price information.

Shopping for services
Noted healthcare economist Uwe Reinhardt recently wrote that, in the current marketplace, patients’ ability to shop for health service value is akin to “blindfolding shoppers entering a department store.” Finding accurate information on the exact cost of a medical service is exceptionally difficult for several reasons.

For example, insurers negotiate varying reimbursements for different providers, even within the same geographic region. Also, hospitals often will quote patients a charge that is “full-ticket” and does not reflect the negotiated insurance contribution; thus the patient cannot easily determine how much of an out-of-pocket expense would be incurred.

In a 2013 study, researchers called 102 randomly selected hospitals (two in each state and Washington, D.C.) as well as the top 20 orthopaedic hospitals as determined by U.S. News & World Report. They posed as patients requesting the total price to obtain a primary total hip arthroplasty, including hospital and physician fees. Only about 60 percent of the hospitals were able to provide pricing information, even after five phone calls. Price estimates ranged from $11,000 to nearly $126,000.

Over the past two decades, the Dartmouth Atlas has documented wide discrepancies in Medicare costs per patient across the country. In 2011, average annual expenditure per beneficiary ranged from $6,260 to $15,580, even after controlling for age, race, and geographic cost variations. Accelerated consolidation of health systems across the United States in recent years has given large hospital systems and provider networks more leverage to negotiate higher prices with insurance companies, compounding these regional variations in costs.

Price transparency data
Currently, three primary sources for price transparency data exist: insurance companies, the Centers for Medicare & Medicaid Services (CMS), and state-run websites that publish all-payer claims databases (APCDs) and hospital pricing data. Many large insurers are providing online decision-making tools that incorporate price and quality data for their covered insureds. Considerable variability exists among these different instruments, and precision in pricing is typically lacking. Moreover, only patients who are covered by a particular company can typically access that insurer’s data.

The Medicare Provider Charge Database provides information on charges submitted to Medicare and payments made to hospitals for inpatient and outpatient care, as well as to physicians for services. In an analysis of total joint arthroplasty payments, top-ranked high-volume arthroplasty hospitals received higher reimbursements from Medicare. Although these hospitals seemed to be more expensive, in reality the payments were higher due to subsidies for greater case complexity and residency teaching programs. The study’s conclusion was that the current Medicare data were largely unusable for the purposes of helping patients identify the lowest-cost hospitals, at least in the context of common orthopaedic procedures.

State APCDs typically require all insurers in the state to submit cost data on claims, and make those data available to the public on websites. Currently, 12 states have APCDs, three states have voluntary reporting systems, and six more states are implementing APCDs (Table 1). Hospitals are also increasingly subject to state price transparency regulations; 35 states now require hospitals to report on their charges and/or payments. The regulations range from publishing chargemaster data for common services to reporting pricing on all inpatient services.

However, a detailed joint report by the Catalyst for Payment Reform and Health Care Incentives Improvement Institute has given only five states (Colorado, Maine, Massachusetts, Vermont, and Virginia) passing grades for completeness and usability of their price transparency legislation and websites. Moreover, a 2013 study of state healthcare price websites found that more than 80 percent of cited prices were billed charges that did not reflect negotiated insurance payments. Only 10 percent of prices took into account a patient’s insurance status. Services involving both facility and physician fees listed both price components in only 34 percent of cases. Perhaps most concerning was that corresponding quality data were linked to prices only 13 percent of the time.

The impact of pricing data
One example of how price transparency can achieve cost savings in orthopaedic care is provided by the reference pricing pilot program conducted by the California Public Employees’ Retirement System (CalPERS). Due to a five-fold variation in cost with no significant difference in quality among hospitals providing hip and knee replacements, CalPERS set a threshold of $30,000 per arthroplasty procedure and identified 41 hospitals with good quality outcomes that would accept this price. Patients were then given the option of selecting one of these hospitals, or choosing another hospital and paying any costs above $30,000 out-of-pocket. In 1 year, CalPERS saved approximately $3 million, and the number of CalPERS patients undergoing arthroplasty at high-cost hospitals dropped more than 30 percent.

Growing demand for price transparency data is fueling an increase in companies that provide healthcare pricing analysis tools. One example is Healthcare Blue Book, which offers both free and premium web-based search tools that provide benchmark prices for numerous common healthcare services. Patients or employers can easily access region-specific pricing information.

Castlight Health is another major player in this industry; Cast­light is a for-profit venture that contracts with employers to provide detailed healthcare pricing information using a cloud-based software product. Customers are often self-insured and include Microsoft, Walmart, and CVS; employees of these companies use Castlight to find information on lower-cost, higher quality healthcare providers.

Major roadblocks do exist to achieving greater price transparency in the American healthcare marketplace. The complexity and quantity of contracts involved in the current health insurance industry makes creating up-to-date, easily interpreted databases difficult and expensive to maintain. Lack of insurance competition in many regions diminishes incentive for insurers to reveal pricing data. Also, insurers have traditionally been very proprietary about pricing data; transparency may have the unintended consequence of actually creating higher prices in some markets, if insurers were to find that their competitors successfully charge higher prices for certain services.

For the American healthcare system to truly maximize value in health care, reliable and current data on both quality and pricing must be available so that consumers can make informed decisions. In the absence of quality data, research has shown consumers sometimes mistakenly assume that higher cost is a proxy for higher quality, which is frequently not true. Further legislative efforts, as well as collaborations between insurers, employers, healthcare providers, and nongovernmental healthcare quality stakeholders are critical to move forward.

David B. Bumpass, MD, and Julie Balch Samora, MD, PhD, MPH, are Washington Health Policy Fellows. Drs. Bumpass and Samora report no potential conflicts of interest.

Bottom Line

  • Price transparency is defined as accessible information on how much a health service will cost a consumer.
  • Finding accurate information on the exact cost of a medical service is exceptionally difficult due to the number of negotiated contracts and variations across regions and providers.
  • Although CMS, several states, and some hospitals have price transparency websites, few websites accurately reflect pricing or link quality data to pricing.
  • Growing demand for price transparency data is fueling an increase in companies that provide healthcare pricing analysis tools.
  • Roadblocks to achieving greater price transparency include the complexity and quantity of contracts involved, the lack of incentives for insurers to reveal pricing data, and the difficulty and expense in creating and maintaining up-to-date, easily interpreted databases.

Editor’s Note: Policy Timeout is a series on advocacy issues written by the AAOS Washington Health Policy Fellows.


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