New Research Paper Indicates Price Transparency May Not Equate to Lower Prices

Last June, President Donald Trump signed an Executive Order on Improving Price and Quality Transparency in American Healthcare to Put Patients First. Former Vice President and Democratic presidential nominee, Joe Biden, has also called for greater transparency in healthcare pricing and the issue is even included in the Democratic party platform. With such bipartisan agreement, it is likely that the issue of healthcare transparency is here to stay and may resume center stage once COVID-19 is behind us. There seems to be bipartisan agreement that price transparency in healthcare would result in lower costs to end-consumers. A recent paper by Senior Research Fellow at the Mercatus Center, Robert Graboyes, PhD, however, indicates that may not be the case.

Dr. Graboyes makes the case that price transparency mandates should be applied with care and only in those markets where they would actually be likely to result in lower prices. While Dr. Graboyes acknowledges that “knowing more about your spending is usually a good thing,” he goes on to say, “in the healthcare market, only very specific policies tailored toward insurer-level prices will likely help consumers.” In fact, he notes, “under perfect competition, prices are universally known and vary little across buyers and sellers.” However, those conditions are “absent in many or most American healthcare markets.”

Collusion Among Providers

One issue with price transparency is the potential of sellers to collude (or act as if they are colluding) under certain conditions. For example, in many healthcare markets, the number of sellers is small and the barriers to entry for new sellers are high. It is in those situations where mutual knowledge of prices among competitors can lead to strategic behavior among competitors where they individually restrict their supply and raise their own prices. Such tacit collusion does not require any coordination with other sellers.

Patients Do Not Always Price Compare

In addition to tacit collusion, there are bound to be situations where consumers/patients do not price shop. For example, Dr. Graboyes cites the situation of hiring an ambulance provider during an emergency – patients are not likely to shop around for the best price on an ambulance following a car accident. Dr. Graboyes also believes patients are not likely to shop for a cheaper MRI provider to save themselves $10.

Additionally, price isn’t the only thing that matters in healthcare. As Graboyes indicates, consumers would probably rather spend a bit more money on a doctor they like, or on a hospital that is closer, than less money on a lower-quality doctor or farther-away hospital.

Dr. Graboyes also notes that many of the price transparency policies target hospital-set charges, but the out-of-pocket price most customers pay gets filtered through their insurance company. Therefore, it is likely that any price information that helps the individual consumer will come from their own insurance plan, not directly from their hospital or physician.

To that end, Dr. Graboyes notes that generally speaking, “price information helps consumers only when they have the ability and incentive to use that information: They must be able to shop around for the goods in question and must have enough ‘skin in the game’ to make shopping worth their effort.”

Conclusion

In conclusion, Graboyes notes that price transparency mandates should be given with care and only when they are likely to yield lower prices for patients. Where consumers are indifferent to price, transparency mandates will not have much of an impact. As mentioned above, in markets ripe for tacit collusion, price transparency may have the opposite affect and actually result in higher prices for consumers/patients.