How Much Transparency Do We Want in Healthcare Pricing?
Friday, May 14, 2010
Instead of trying to figure out how to make prices in healthcare markets transparent, as a Democratic bill aims to do, let the market decide.
The Health Subcommittee of the House Energy and Commerce Committee held hearings last week on three different bills—two from Republicans, one from a Democrat—all designed to make prices in healthcare markets more transparent. A Wall Street Journal blog nicely summarizes the hearings and a few leading points in the long-running debate over price transparency, and an article by Julian Pecquet of The Hill adds useful details.
The two Republican bills are quite narrow. The one from Texas Congressman Michael Burgess applies only to what hospitals charge their customers. The bill sponsored by Joe Barton, who is also from Texas and is the ranking member on the Energy and Commerce Committee, is similar but applies to surgical centers which serve patients who are not hospitalized. Both bills have some Democratic support and are relatively non-controversial.
The motivating idea is that if we shed enough light on all these prices, we will energize competition and improve choices by doctors, insurance firms, and many others including, of course, patients.
The Democrats’ bill is a different kettle of fish. Introduced by Wisconsin Congressman Steve Kagen (who’s an MD but not a member of the subcommittee), this bill would apply to almost every part of the healthcare system and—most important—to all the prices amongst those various parts (what we usually call “wholesale” prices). Most of those prices exist in a sort of black box whose contents are largely invisible except to direct participants, i.e., buyers and sellers of everything from gall bladder surgery and robotic surgery tools to cancer chemotherapy drugs, hospital supplies, and computer equipment. The motivating idea is that if we shed enough light on all these prices, we will energize competition and improve choices by doctors, insurance firms, and many others including, of course, patients. It would be rather like menus posted at restaurant entrances in Paris and gasoline prices at service stations in the United States.
Economists tend not to like all this transparency. In most markets, manufacturers have a menu of “list prices” and so do wholesalers. But secret price-cutting is rampant, so that actual prices (“transaction prices” is the term of art) typically end up somewhere below, perhaps far below, those list prices. Every seller’s dream is to get rid of all this under-the-table dealing so that list prices will stick. That’s easier to do if everyone knows everyone else’s price. “Sorry, but if I give you a discount, I have to give everyone else the same discount.” This point is not lost upon our representatives in Congress. The Democratic chair of the subcommittee (Frank Pallone Jr. of New Jersey) took pains to let everyone know that a 2008 CBO brief—which was amplified in oral remarks by then-Congressional Budget Office Director Peter Orszag at a Senate committee healthcare summit—warned that too much transparency would mean higher prices.
We know that Wal-Mart and Best Buy and Nordstrom all get good deals from suppliers, but the details are irrelevant; all we need to see are the results in the retail marketplace.
The price transparency legislation is not moving quickly—there are no Senate sponsors yet—but it won’t die, either. Let’s hope Congress focuses on the right thing. Right now, the debate is over exactly where to impose transparency and how much to impose. The fact is that no one can know the answers to those questions. We know that Wal-Mart and Best Buy and Nordstrom all get good deals from suppliers, but the details are irrelevant; all we need to see are the results in the retail marketplace.
To be sure, the healthcare market is different. Not only is it hideously complicated, it is mainly driven by factors other than consumer price-consciousness. Nonetheless, we know that buyers and sellers can usually negotiate their own degree of transparency. A good example is pharmacy benefit managers (PBMs, such as Express Scripts), whose clients are employers and insurance firms. PBMs play a crucial role in reining in healthcare costs by negotiating drug price discounts with manufacturers. They usually keep their price deals strictly confidential, but not always. Some PBM clients want to know the details about wholesale drug price cuts, but most clients only care about how much they end up paying for the drugs they use (see my recent House testimony). As a general rule, instead of trying to figure out what to make transparent and what to leave alone, we should let the market decide.
The exception is when the market is rigged against transparency, and that should be the focus of legislation, if any.
The exception is when the market is rigged against transparency, and that should be the focus of legislation, if any. Retail prices for specialists, clinics, and especially hospitals seem to be unnecessarily obscure as a by-product of a deep bias in favor of employer-based group insurance. That bias is fostered by the fact that insurance premiums paid by employers are excluded from employees’ taxable income. One solution is to require retail prices—those paid by patients—be fully transparent in order to encourage shopping around and the like. But that is what economists call a second-best solution. If we fixed the tax code to remove the bias toward employer-based group coverage, we would free up a big part of the healthcare market, generating new regions of price transparency without a host of unintended adverse consequences. That would be much better than forcing transparency and then hoping for the best.
John E. Calfee is a resident scholar at the American Enterprise Institute.
FURTHER READING: Calfee recently discussed “Something Old, Something New: Biotech’s Enormous Potential,” and explained “What Do Vitamins and Fish Oil Tell Us about Drug Research?” He and Elizabeth DuPré explored “How to Think about Patenting Genes.” He details “Pricing Out Private Insurance” by implementing ObamaCare and “Obama’s Misleading Assault on the Insurance Industry.”
Image by Rob Green/Bergman Group.