Capital Ideas

EXCERPTED FROM CAPITAL IDEAS

Price Transparency in Health Care

More widely available price information could help reduce hospital charges, according to research by professors Hans B. Christensen and Mark G. Maffett

 

Internet access has ushered in an era of price transparency, where shoppers wielding smartphones check prices before deciding where to buy items such as washing machines and flat-screen televisions. Could making price information readily available contribute to a reduction in certain health-care costs, too? Research suggests so.

To date, while some may suspect that price-transparency initiatives would reduce health-care costs, there has been little published evidence to support the supposition. Part of the difficulty is that patients don't respond to health-care prices as they do to the prices of other consumer goods. Patients with health insurance are mostly insulated from actual care costs, so they have little incentive to choose care based on price. Patients may also believe, sometimes wrongly, that the more expensive the health care, the better the quality.

Nonetheless, some transparency advocates argue that making costs available would allow consumers to better compare prices before choosing a provider or hospital, and ultimately force providers to offer more competitive pricing.

Hans B. Christensen, associate professor of accounting, Mark G. Maffett, assistant professor of accounting and Neubauer Family Faculty Fellow, and PhD student Eric Floydchristensen maffettexamine the effects of price transparency on costs associated with hip-replacement surgery in a working paper, "The Effects of Price Transparency on Prices in the Healthcare Industry." The procedure is relatively standardized, produces similar outcomes, and is often obtained on an elective basis, allowing the patient flexibility and sufficient time to shop for an orthopedic surgeon and site prior to receiving the operation.

The variation in price tags for hip-replacement procedures illustrates the need for greater transparency: despite the seeming homogeneity of the operation, the researchers document total charges ranging from $16,269 to $93,805. Would a consumer, cognizant of this variation, seek out the less expensive services?

Relying only on data obtained from states with price-transparency regulations, Christensen, Maffett, and Floyd find evidence that implementing price-transparency regulations reduced the prices charged for elective, uncomplicated hip replacements by an average of about 7 percent.

Controlling for a variety of other determinants of hospital pricing, such as insurance, patient, and hospital characteristics, the researchers document that in states that adopted price-transparency websites, the prices charged for a hip replacement decreased by an average of $2,800. Moreover, their results indicate that the impact of price declines was sharply concentrated around the date on which prices became publicly available online, not simply in the year when state legislators passed the regulations.

Further evidence indicates that pricing sensitivity was greatest where competition was most intense, as the highest-priced providers dropped their prices to be more competitive.

For the 80 percent of health-care consumers who are insured, what matters are the negotiated rates between insurance companies and hospitals. The researchers find that for patients with at least a 10 percent coinsurance, disclosing prices was associated with up to a 14.4 percent reduction in payments.

Such an analysis holds important implications for the future of health care in the United States. In a February 2012 report, the US Congressional Budget Office estimated that total health-care expenditures would rise from some 18 percent ($2.7 trillion) of US gross domestic product to more than 25 percent by 2037. (The report didn't consider the Affordable Care Act.) Finding means to slow and better manage the magnitude of this spending is critical to the future financial stability of the country.

The results suggest the magnitude of the charge price decline remains relatively constant over time, suggesting the 34 states that have already enacted price-transparency regulations will continue to see lower prices in the years to come.–David J. Phillips

Photo of Christensen (left) by Chris Lake; photo of Maffett (right) by Dan Dry

Last Updated 4/23/14