Episode 8: Healthcare Price Transparency
Today, the Centers for Medicare & Medicaid Services (CMS) is releasing the latest episode of our podcast, CMS: Beyond the Policy. Today’s edition is titled “Healthcare Price Transparency.” Administrator Seema Verma is joined by Dr. Larry Van Horn of Vanderbilt University to discuss transparent pricing in health care and how CMS is delivering on the President’s executive order on price and quality transparency to empower patients and increase competition among providers.
Show Intro: Welcome to CMS Beyond the Policy.
Welcome to CMS Beyond the Policy. Today's edition of the podcast will focus on healthcare price transparency, including how CMS is delivering on the President's executive order on price and quality transparency to empower patients and increase competition among providers. This week, Administrator Verma is joined by Dr. Larry Van Horn, an associate professor of management and economics at Vanderbilt University who specializes in healthcare management and economics. He's the Executive Director of Health Affairs at the Owen School of Business and Founder/Director of the Center of Healthcare Market Innovation at Vanderbilt as well as the co-director of the Nashville Healthcare Council Fellows Program.
Well, welcome, Dr. Van Horn and thank you for being here with me today to talk about healthcare price transparency.
R. Lawrence Van Horn:
It is a pleasure to be with you, Administrator Verma. Thanks for having me.
Well, as you know, back in June President Trump issued a transformative executive order directing federal agencies like CMS to improve price and quality transparency. And the order is laser focused on empowering patients with the information that they need to make informed healthcare decisions. And this really fits into our overall focus on addressing America's rising healthcare costs. So, to this end, we have released two historic rules, one final applying to hospitals, and one proposed applying to insurance companies. And these rules work together to give millions of people access to meaningful information on the cost of healthcare services. So, taken together, all Americans should feel the benefits of President Trump's efforts because now whether you have insurance or whether you're at the hospital or planning a routine checkup, you're going to have all the information that you need about how much your services are going to cost. The final rule focuses on allowing patients to see the price of hospital services up front. So, hospitals across the country will have to post their prices online in a couple of different ways.
Today, they just put out their standard charges. But going forward, starting in 2021, they're going to have to post all of their payer specific negotiated rates. So, what that means, it's by each insurance company and the discounted cash price, which is the rate that a hospital is willing to accept from a patient for all of their services. Then the other thing they're going to have to do is post a more consumer friendly tool that shows the prices of 300 shoppable services, which are the types of services that can be scheduled in advance like an X-ray or a lab test or a C-section. So, in practical terms, that means if you need knee surgery and you lived near two different hospitals, you can go online and find information about the differences in cost for these services.
The other issue though that we've heard is that if you have insurance, it's not just -- it's not enough to just know the hospital's charges and what they've negotiated with your insurance company because you may have a deductible. So, you need to know where you are in your specific deductible and you need to know what your plan actually offers and pays for. And so that's why we've actually proposed a second rule that applies to all insurance companies. And this proposal requires that group health plans and issuers in the individual and group markets make available a tool that would give you personalized, out-of-pocket cost estimate for all healthcare items and services. So, again, you can know exactly the price that you're going to have to pay and you can plan accordingly.
If the rule is finalized, patients could get information on regular checkups and doctors' visits and drugs in a format that shows them the personalized information about how much they would need to spend. And so, the other part of this rule is that issuers and plans would have to make public a regularly updated data file that provides these negotiated rates between payers and providers for all items and services. So, it's not just giving the patient personalized information, but then posting all of their rates publicly as well. So, as a result, price transparency would be extended essentially to every healthcare item and service that is covered by a health plan.
So, most people would agree that consumers deserve to know what something costs before they buy it. But right now, healthcare prices are hidden, leaving most Americans with no idea what healthcare services are going to cost before they get it. So, you know, from our perspective, this is giving patients the right information at the right time. And the healthcare system has a duty to ensure that patients know the cost of their care before they receive it. So, that's an overview of the rules and sort of the intent behind it. But Dr. Van Horn, you've been studying the impact of hidden healthcare prices for a long time now. So, tell me, how did we end up here and what does your research say about how this impacts consumers?
R. Lawrence Van Horn:
Well, thank you, Administrator. This is an exciting time. This is really a first move back to allowing markets to operate in healthcare. And at the risk of sounding like a historian, I want to spin the time back a little bit, probably to when you and I were younger, in the '70s -- '60s and '70s, 40 percent of all healthcare was paid out of an individual's wallet. You went to a physician and you bought those services directly and you paid cash -- prescription drugs, you name it. Most healthcare services transactions day in, day out were in a market context and we had employer sponsored health insurance. But it was called major medical. It was traditional indemnity coverage and you would go to a hospital and have a baby delivered and then you would pay that and then you would submit it to your insurer, and you got reimbursed 80 percent typically. In all that space, we cared about prices. Americans were making decisions based on prices.
Now we get to the '80s and the advent of the HMOs and a momentous time in that we separated price from the purchase decision by creating a co-pay -- five dollar, $10, $20 co-pays, which were completely unrelated to the underlying price that was paid by a third party after the fact. And we lost, for an entire generation going forward, we basically said, "You don't need to worry about the price." And we established and built up an entire insurance apparatus as a result and brings us forward to 2006 where in 2006 only four percent of Americans had any meaningful out-of-pocket expenditures associated with their care. But we fast-forward 12 years and by 2018, you have 30 percent of Americans have a high deductible health plan where they're going to have to actually spend that first two-, four-, six-, or $8,000 out of their deductible. And the apparatus that we've built up over time in no way, shape, or form supports them making those pricing decisions, those purchase decisions, because we've stripped out all the price information. So, the return of high-deductibles and the fact that people are having to make these purchase decisions now where they're price sensitive really drives this need for some measure of price transparency and brings the market back into healthcare.
So, I'm very hopeful about where we can go with this. Prices are the way we allocate goods and service in a market-based economy. And, you know, the first conversation I had in the White House earlier this year -- you know, I just made this simple observation that we have 18 percent of the U.S. economy approximately where people are making purchase decisions every day without any idea what the price is and that's un-American. So, I applaud your efforts. I applaud the efforts of HHS and the White House to push this forward. And it couldn't come soon enough.
Thank you. Well, so, let's talk about hidden cost, right? So, hidden costs drive up prices and as healthcare costs continue to rise, we need something to put some downward pressure on costs that really only comes from empowering patients as consumers and giving them more access to price transparent options. But, can you talk a little bit more about the price variation in healthcare and how the transparent pricing could affect costs?
R. Lawrence Van Horn:
I've spent, you know, the last couple years examining commercial price levels and price variation in markets. And nobody really has to worry about shopping for gasoline. When I drive into work, I know that the price that is reflected on the pump is not going to differ significantly from the price one mile away or two miles away and it's the result of people making tradeoffs in those purchase decisions, disciplining the market such that the price variation is quite narrow. That's not the case in healthcare. So, when I look at the amount of price variation within a region for the same services across payers and across providers, there can be a 300 to 400 percent price variation for the exact same thing. And to me, price variation is consumer risk. If there was no price variation, the price could be high, but the benefits of shopping aren't that significant and the costs of not shopping are not that painful. But when you have a spread of 400 percent in the lowest price to the highest price, you're really penalized by not shopping.
And unfortunately, that's the case in many, many services in U.S. healthcare. And that price variation is rampant across markets, across payers, and across services. And as an economist, that price variation within market, I view, as a measure of market failure. So, it's more than just the level, it's the variation. And when you compare it to cash markets -- that's something I've done, comparing what the price variation what insurers pay compared to the cash prices that are in the market that providers offer, there's very modest price variation in the cash market. On average, a ban of around 20 percent around the average, whereas around the average for an insurer, it could be 200-300 percent. So, with price transparency and getting this information up front, there's going to be a compression in the variation around price and that really is going to benefit consumers.
Yeah, that's great. Well, you know, as head of America's largest insurer, I'm very focused on what do we need to do to make healthcare cost less, right? So, if the cost is less, premiums go down, we're paying less. So, we're focusing a lot of energy on tackling skyrocketing costs across the board, whether it's in drug pricing or just price transparency globally. But as you know, it's not a simple solution. And we don't believe that government has all the solutions. And it's not always easy to know whether the government should step in. But, in this case, involving price transparency, I think there's a very clear role for the government to step in, set fair ground rules to establish a more competitive and flourishing healthcare marketplace which we don't have today. I mean, right now in healthcare, the rules are against the patients as a consumer. And that's kind of what we're focused on. That's what the President wants to change because he believes, as I do, that as American consumers -- American consumers deserve to be able to shop around for healthcare just like they're doing for everything else. They need to know the price of services in advance so that they can make better decisions and they can plan accordingly.
But one of the things that we're hearing as we've embarked on this effort around price transparency, is that the feedback that we get from some people is they're saying, "Prices are going to go up." You know, "You shouldn't go forward with these rules because prices will actually go up." What do you think about that, Dr. Van Horn? And how would you respond to that?
R. Lawrence Van Horn:
Well, I do -- I've thought about it a little bit because I've been presented with that argument as well. I will say that I think about the world differently. And for prices to go up, you have to have a set of assumptions about the behavior of providers and the behavior of consumers to support prices going up. One of which, is that demand for medical care has got to be relatively inelastic and that people will not shop for medical care and they won't change their purchase decisions based on prices. I don't buy into that proposition. Two, is I have a lot of confidence in the providers in the United States. They don't need to raise their prices. Your community hospital, in the presence of seeing price information does not have to voluntarily choose to raise their prices. They can be stewards for the community and bring the prices down.
So, I -- while I understand there's concerns about that -- and there was a wonderful, early on in June, critique of this saying "prices will go up," based on the Danish cement industry, which I think there's a lot of difference between the U.S. healthcare industry and the Danish cement industry. I believe that this is going to drive towards lower prices. And that's going to translate into Americans having more money in their wallets and their paychecks to buy all other goods and services. At the end of the day, healthcare premium and healthcare prices, it all falls on labor. It all falls on us as employed individuals. Our employers are just paying money on our behalf and taking it out of our paycheck. It's our money. And as healthcare premiums adjust, as healthcare prices adjust, people -- employees will have more money to go out and purchase all of the other goods and services they need. So -- and I know you've been working to put out policies and aim to make these healthcare prices transparent. And I think that this administration, your efforts are really moving things in the right direction.
Well, one of the things that's inspired me is looking at some of the early pioneers in this space. So, there's been hospitals that have already gone forward with price transparency. They have their own tools. The state of New Hampshire, for example, they've had price transparency across their entire state. Have you taken a look at those, what I'd say, early adopters and what the experience has been? I mean, our understanding is that like in New Hampshire, for example, that that's actually lowered pricing. And some of these other hospitals we hear that when they're putting out their prices, it actually increases customer satisfaction because people have a better understanding of what they're going to pay, and they actually tend to pay those bills.
R. Lawrence Van Horn:
I think that's a really important point. When somebody goes and consumes emergency department visit, for example, they're going to get a bill from the facility and a bill from the professional services after the fact and they have no idea what those bills will look like. And if you think about the median household income being $60,000 a year, these bills are significant for the 30 percent of the population that has a high deductible and they have to change their lives. The risk and the uncertainty and the fear of will I be able to manage these bills results in I can't take a vacation. I can't buy this for my kids. All worrying about what the bills were going to be after the fact.
And so, I think the satisfaction is a huge part of this. You know, I've been working -- there are a number of pioneering organizations that are on the forefront of price transparency and putting information out in the public domain. And I've been working in analyzing their data and seeing the changing behavior of providers by -- excuse me -- by patients when they are paying their own cash prices. Patients will travel a lot farther. They will change where they would normally have purchased medical care, whether they choose an image or a baby delivery. The market becomes much broader when patients are paying their own bills. And another final point that you raised there is I believe that this is going to be better for providers than the current world. One of the challenges that all of the providers currently face is getting paid by patients. And behind your massive organization representing Medicare and Medicaid, for many hospitals combined across their commercial payers the patient obligation is the next largest block of revenue that they need to receive. It's generated a tremendous amount of collection cost, revenue cycle management. All of these issues have created a significant cost to providers to recognize revenue and get paid. By putting the prices up front, making them reasonable, I believe the net income, the net recovery from these cash prices from the patient obligation up front will improve to the point that it will make them the cash business one of the best payers for facilities.
Well, you know, one of the criticisms that we also get is that this price information is proprietary. And I've had a hard time understanding that because, you know, they provide this -- the insurance companies provide this information on your explanation of benefits, the EOBs, the forms that we get after the services have been provided. In that document it actually provides this information. Why do you think there's so much fear from the industry around price transparency? Why are they fighting this?
R. Lawrence Van Horn:
Well, I think a couple things. And I've had conversations with both payers and providers. I think payers view part of their value creation proposition for their insureds is negotiating low prices. I don't know that that's really what I need my insurer to do. My provider can produce and provide low prices to start with if we stripped out a lot of that complexity. And my research has shown that the cash prices that are being offered by providers are significantly less than what are being negotiated by the insurers to start with. So, I think they fear the loss of value creation associated with negotiating prices. And it would necessitate them working in a different direction to solve my problem as an insured.
Providers, I think, are concerned that if prices go down or if prices are transparent, what will be the market response. Will other payers try to come negotiate lower prices with my organization because they see another payer getting a lower rate, as an example? The flip side is they've also argued that everybody's going to raise their prices to the highest price in the market. I think all of that is thinking in a very anachronistic way. It's thinking about, I get a -- I capture a percent of my charges in revenue or a percent of my price in revenue is what I net. I think what I would hope is that the organizations that providers can think about it differently. If I actually bring my prices down and make them present up front, I can actually increase my net collections. They need to change their mindset around how they've historically thought about pricing and collections. So, I think there is a silver lining in here and I think the win in here is going to be good for both providers and patients by streamlining the collection and the revenue cycle side of the business.
The other thing that I hear is that, you know, patients won't use this information. So, at CMS, sort of our mentality here is always patients first. We want to empower patients with what they need to make informed decisions. Some of that's price transparency. It's quality transparency and it's also having access to their medical records. And with our final and proposed rules, we're going to be unleashing a lot of data. Our hope is that we'll see employers and researchers and developers use this information to develop more tools that will help empower our patients and ultimately drive down costs and improve quality. But tell me, what's already out there in terms of tools and how are those being used by consumers today?
R. Lawrence Van Horn:
Well, there are a number of sites out there right now that package up medical care into bundles and allow you to go online and purchase with a swipe of a card a colonoscopy, a baby delivery, an MRI without contrast, you name it. And you swipe your credit card, the provider gets paid by the third party, and you get to walk out the door knowing up front what that price is, and you've been able to shop it. There are companies that are putting that information in the market on a broad scale combining it with quality to support employers, employed populations making those tradeoffs. There's even a company that is now moving to an auction platform. Think about eBay for medical care. So, I'm a patient and I can say I want to buy a physician office visit tomorrow between 2:00 and 4:00 pm and providers in that market can bid on it based on their available capacity.
We're entering a new world whereas Americans we are collectively more financially responsible. We have greater financial ownership for our healthcare purchase decisions. We are going to seek out all different kinds of solutions. And they'll be lots of different business models that will step in to solve it. You know, people will say that the financial services industry is complex and that we move from defined benefit pension plans to defined contribution IRAs where individuals are responsible for their own investment decisions for retirement. That's a very complicated space. But what it did is it created a whole new industry. It created Fidelity, Vanguard, T. Rowe Price, Morning Star, all helping solve the problem of communicating to me, what are my tradeoffs and how might I make those decisions for my financial best interests. I think unleashing the information, putting that information out there, empowers a whole sector to come in and solve that problem and communicate it to me. So, I think it creates tremendous opportunities.
Well, and it's a relatively small investment for providers and insurance companies. So, when we put out these rules, we looked at a bunch of different external sources and the estimate was that it's going to cost hospitals about $12,000 to develop these files and tools, which is really about less than a tenth of a percent of their hospital revenue. So, very, very small cost. But it can have a very large transformational change. So, collectively, these rules are going to impact every American across the country that's seeking healthcare. We're excited about putting this in place and the hospital rule is final, but the insurer rule is still a proposed rule. So, we're seeking public comment. We want to hear from folks about what the impacts could be and what the concerns are. And those comments are due on January 14th. Before we wrap up, Larry, is there anything else that you'd like to add?
R. Lawrence Van Horn:
Well, I think on a personal level, I would encourage every American out there, everybody who might be listening to this podcast, before you go and purchase medical care, ask what the price is. Ask from your provider what the price is. That's something I've assigned to my graduate students here at Vanderbilt for 10 years. And the more people are asking for the information, the more that our providers are going to be in a position to say, "Hey, we've got to solve this problem. It's something that our patients need." Similarly, I would ask that the providers out there think about what the prices are before they order services and send their patients along their merry way. Because whether it's a chest x-ray, lab results, those prices vary significantly. And being mindful that an increasing portion of Americans are having to pay the entirety of that bill inside their deductible. So, those are two things that I would ask people to think about on a go forward.
Well, and add to that, I mean from our perspective, we -- you know, we talked about empowering patients and trying to make the market work better. And we see it as making sure patients not only have the pricing information but quality information in important too. And one of the things that we're going in this rule is asking for more feedback around what type of quality data would also be important to patients as they're navigating the healthcare system. So, price is a component. But quality is going to become important as well. And the other piece that the Agency is working on is making sure that patients have access to their medical records so that as they travel and navigate across the system, that they're looking for those high value providers that are providing high quality care at the best price. That they have their medical record and that can travel around with them. So, really appreciate your time today. I think you've given us some valuable information. I would encourage all of those people that are listening to this to give us your comments on the rule. We're still in rule making for the health insurance rule and look forward to public comments. So, thank you.
R. Lawrence Van Horn:
It's been a pleasure being with you, Administrator Verma. Thank you for having me today.
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