Transparency in Health Care Pricing: Using Subway’s $5 Dollar Foot Long Combinations

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Although the health care overhaul included some pricing transparency, the provision was not enough transparency for Representative Steve Kagen (D-WI), a physician who introduceH.R. 4700.  The “Transparency in All Health Care Pricing Act of 2010” would require all health care providers — from hospitals to insurance companies — to disclose publicly all prices on a continual basis. 

The disclosure would be required at the point of purchase, in print, and on the Internet, and would include all wholesale, retail, subsidized, discounted, or other such prices. The legislation would also “peel back the curtain on internal negotiations, such as those between a dentist and a dental device maker or a physician and a pharmaceutical company,” according to Politico.  

Those who support the bill (including 54 co-sponsors) assert that “consumer prices would be lower if companies had to disclose them publicly.” But a Congressional Budget Office (CBO) report in 2008 noted that “in small markets, if vendors know their competitors’ prices, they’ll simply match them, making negotiations obsolete.”

Other groups, such as PhRMA are concerned with HR 4700 because it’s an “overly broad proposal” that “could have a negative impact on patients.” As PhRMA spokesman Ken Johnson pointed out, patients and prescribes already have access to publicly available information about a medicine’s price, giving them formulary coverage and cost-sharing requirements would be problematic, according to. This information “has had a significant influence on patient and prescribers’ behavior, so that today the vast majority of prescriptions filled are for medicines with the lowest out-of-pocket costs.” In fact, over 75% of medicines prescribed today are generics.  

Accordingly, HR 4700 and two similar, but narrower, bills introduced by Republicans were discussed last week at hearing held by the Energy and Commerce Subcommittee on Health. HR 2249, the Health Care Price Transparency Promotion Act of 2009, introduced by Rep. Michael Burgess (R-TX), would require hospitals to disclose prices and provide estimated out-of-pocket costs. The bill is similar to an amendment that passed the House Energy and Commerce Committee during the health care overhaul debate but didn’t make it into the legislation signed into law. HR 4803, the Patients’ Right to Know Act Second, introduced by Rep. Joe Barton, (R-TX), would require hospital pricing transparency and that insurers release cost-sharing information.

A Briefing Memo summarized each piece of legislation at the hearing, and then the committee heard testimony from:

  • The Honorable Steve Kagen, Member of Congress
  • Steven J. Summer, President and Chief Executive Officer, Colorado Hospital Association, on behalf of the American Hospital Association
  • Regina Herzlinger, Ph.D., Professor of Business Administration, Harvard Business School
  • Mike Cowie, Partner, Howrey, LLP
  • Walter Rugland, Chairman of the Board, ThedaCare, Inc.
  • Christopher Holden, President, Chief Executive Officer, and Director, AmSurg
  • Terry Gardiner, National Policy Director, Small Business Majority

Steve Kagen

Dr. Kagen’s testimony offered support for his own bill, HR 4700, and the need to create a transparent medical marketplace to foster competition between caregivers, pharmaceutical manufacturers and health insurers. He asserted that competition is a good and an essential element of capitalism that can drive quality up and prices down.

Yet Dr. Kagen acknowledged that a hospital cannot always know in advance what to charge for taking a bad gall bladder, because there may be complications, and that no two patients are exactly the same. Despite this fact, he used an interesting example for why hospitals should be able to handle “complex prices” transparently.

He told members of the committee that if Sub-Way can figure out how to make money by “lumping” their prices together at $5 on 2 to the 23rd power combinations of choices, no matter what you decide to put into it, American hospitals should be able to as well. In other words, Dr. Kagen believed that highly complex procedures, and complicated differences between all patients could be lumped together for one charge.

Supporting Dr. Kagen’s testimony was Wisconsin native Walter Rugland, a hospital chairman, who emphasized that exposure drives efficiency and thoughtful cultural change that produces better outcomes. He gave examples of quality of care improvements and methods his hospitals in Wisconsin used to implement transparency and measurement guidelines for pricing.

 

Steven J. Summer

 

As president and chief executive officer of the Colorado Hospital Association (CHA), and on behalf of the AHA, Summer’s testimony supported the transparency in health care bills based on his own transparency experience in Colorado. Mr. Summer too admitted that “a relatively simple operation for one patient may be fraught with unforeseen complications for another, making meaningful ‘upfront’ pricing difficult and, perhaps, confusing for patients.” To resolve this confusion, he discussed AHAs four parts to price transparency.

 

First, states need to expand existing efforts to make hospital charge information available to consumers, since only 34 states require it and only seven others have voluntary efforts.

 

Second, states, working with health insurers, should make available in advance of medical visits, information about an enrollee’s expected out-of-pocket costs.

 

Third, more research is needed to better understand what type of pricing information consumers want and would find useful in their health care decision-making.

 

Finally, agreeing on consumer-friendly pricing “language” – common terms, definitions and explanations to help consumers better understand the information provided.

 

Regina Herzlinger

 

Ms. Herzlinger, a Harvard Business professor, used her testimony to assert that “transparency can help foster significant cost and quality improvements and improve access for the uninsured.” She even cited one survey, which showed that the number one thing Americans wanted from the government “was requiring that performance ratings on hospitals and doctors be publically available.”

 

In citing numerous studies, her comments suggested that consumers get better value as transparency increases. She also cited a CBO report, which estimated that sharing peer profile scorecards with physicians would save Medicare $350 million from 2010–2014. Ms. Herzlinger also asserted that if hospitals were required to publically report valid data, infection rates would likely plummet.

 

Other benefits of transparency she cited were that hospitals would improve care with transparency and patients would increase their market share of higher quality providers. Public posting of charges would also enable the uninsured to more readily compare competitive prices.

 

She also noted the need for governmental action because the financial gains to providers from transparency would be dwarfed by the public welfare it creates by increasing the quality of life. For these reasons, Ms. Herzlinger believed that health care transparency will enable consumers to make more informed choice, reduce health care costs, and hold health care insurers and providers accountable for the results achieved.

 

Mike Cowie

 

As a former attorney in the Federal Trade Commission’s (FTC) antitrust division, Mr. Cowie asserted that “wholesale negotiations — such as those between a hospital and device maker — should be kept private to ensure vendors don’t simply match prices.” He added that companies get “better outcomes if they negotiate head to head, privately,” and noted how FTC has opposed regulation requiring public posting of pricing terms.

He emphasized that collusion among companies to raise prices is more likely in industries where pricing terms are known among competitors. For example, if a company knows how its rivals set prices, that company may raise its own prices to meet those of its competitor. Why work to undercut the competition if you know customers will pay a higher price?

Mr. Cowie added that “[t]he availability of comprehensive price information makes it easier for industry to coordinate prices tacitly and to detect and discourage deviation from the consensus price in pharmaceutical pricing. The has even warned that the posting of “precise details of rebate arrangements” would make “tacit collusion . . . more feasible.” And despite Ms. Herzlinger’s testimony, CBO has also recognized that mandatory posting of pricing terms may reduce incentives to discount.

 

In fact, CBO evaluated a transparency policy for a Medicare prescription drug and determined that “manufacturers would probably reduce their largest rebates because of the pressure that disclosure of such large rebates would place on their arrangements with other customers.” The report concluded that this “would tend to increase costs for both the Medicare program and, on average, for enrollees. Further evidence from “economic studies have found that mandatory publication of pricing terms often leads to higher pricing.”

Christopher Holden

Speaking on behalf of Ambulatory Surgery Centers (ASCs), Mr. Holden discussed how there is very little awareness of the significant savings available when patients choose to have their surgical service performed in the ASC setting. For example, under Medicare, there is a 42 percent difference in payment for a service performed in the hospital and the same service performed in the ASC setting. Consequently, ASCs save Medicare about $2 billion a year and the beneficiaries hundreds of millions of dollars in lower copayments. From these numbers, he supported the transparency provisions to help patient’s stretch limited financial resources efficiently.

Terry Gardiner

Speaking on behalf of small business, Ms. Gardiner noted how the No. 1 problem facing small businesses is the cost of healthcare, and how transparency creates a competitive and dynamic market place for both businesses and consumers that can help.

 

Conclusion

 

Hospitals are a critical component to the “fabric and future of our communities,” and providing consumers with accurate information is important for people when making health care-related decisions for themselves and their families. To date, patients and prescribers have access to a wide range of publicly available information including pricing of prescription drugs at retail pharmacies, drug coverage provided by PBMs or health plans, and co-pays or coinsurance. Given the current amount of data, patients and prescribers must understand that despite Mr. Kagen’s idea, not every patient is a “$5 foot-long,” and that meaningful ‘upfront’ pricing can be difficult and confusing for patients.” 

With a busy legislative session coming close to an election season, “it is unclear whether these bills will make it to the House floor” this year but if they do, hopefully Congress will realize that treating patients is a little more important than a five dollar sub.

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