Clarifying Costs: Can Increased Price Transparency Reduce Healthcare Spending?

Abstract

As healthcare expenditures continue to climb, politicians, business leaders, and patients avidly search for new methods to reduce healthcare costs. In an eleven-point plan released this summer, a group of the nation’s top healthcare experts listed “full transparency of prices” as one potential solution to reduce healthcare costs. The experts, some of whom helped write the Patient Protection and Affordable Care Act, argued that price transparency would allow consumers to compare prices before choosing a provider or hospital and, consequently, better anticipate their overall costs. In turn, they argued that making price information publicly accessible would also reduce excess healthcare spending by encouraging providers to offer more competitive pricing. Other health services research, however, suggests that legislative and regulatory efforts to promote price transparency may result in increased healthcare costs depending on the market conditions and the various stakeholders targeted. Consequently, any price transparency initiative must not only make prices transparent, but also account for the differences between markets, either by reducing the economic inefficiencies that keep price transparency from being effective or by targeting only the specific regions where the market would support such an initiative. This article analyzes whether price transparency initiatives can be effectively used to reduce healthcare costs, and if so, what conditions must be met for them to do so. The features of a well-designed price transparency initiative will vary depending upon the targeted population (patients, employers, providers, or insurers) and the particular features of the target market. We argue that the most effective solutions will mandate disclosure of price and quality information at the appropriate stakeholder levels and, simultaneously, break down provider market leverage where it prevents price transparency from helping consumers. Together, these two elements have the potential to lower healthcare costs. Finally, we present four possible price transparency initiatives that represent a range of possible avenues to promoting effective price transparency including litigation, legislation, regulation, and consumer driven initiatives.