On June 24, 2019, the president issued an executive order on health care cost transparency. The overall aim was to “enhance the ability of patients to choose healthcare that is best for them.” Since the initial executive order, additional guidance has been released (CMS-1717-P) that requires hospitals to post their contracted rates with commercial payers for targeted “shoppable” services. The intent is to improve transparency for the consumer to help them make informed choices about how they spend their health care dollars. However, the effectiveness in doing so is uncertain.
The stated intention of the executive order is to publicize commercial rates for “shoppable” procedures. According to the executive order, these rates are estimated to be 73% of the highest cost inpatient services and 90% of highest cost outpatient services. However, The Economist estimated a figure closer to 30–40% of all costs.1 Details are sparse as to what constitutes “shoppable” and what specific results are publicized, which are critical pieces to making this executive order meaningful for consumers. Today, it is not clear how this will be operationalized or whether it will make it easier for consumers to shop.
This executive order is not the first move to transparency. It continues a six-year journey of transparency initiatives, beginning with CMS releasing the top 100 inpatient DRGs in 2013, and Part B physician costs in 2014. In January 2019 hospitals were required to disclose “standard charges” (i.e., charge-masters), which resulted in tens of thousands of indecipherable short-script codes and itemized costs. This was not meaningful for helping consumers make choices. Also, this initiative relied on “charges” — akin to the MSRP in industries outside health care. These charges do not reflect insurer discounts contracted with providers. Nor do they reflect the price consumers would be expected to pay out of pocket, with or without insurance. In short, this wave of regulation did little to help the consumer.
Perhaps in response to this outcome, this latest executive order and recent proposed rules (CMS-1717-P) published in July take direct aim at the “actual cost” or contracted rates. Together they attempt to promote competition between insurer and provider. Specific requirements of the executive order include:
- Disclosure of shoppable contracted rates in consumer-friendly, machine-readable formats
- Providers and payers to facilitate patient access to estimated expected out-of-pocket costs before receiving care
- A report to be researched and issued by HHS stating where the federal government and private sector are impeding price and quality transparency with a goal to “eliminate these impediments in a way that promotes competition”
The executive order includes a number of other measures to improve the transparency environment. These measures are likely to be less controversial in nature. They include increased data availability, changes to health savings accounts and roadmaps to quality improvement.
How might this executive order affect critical stakeholders in the health care landscape?
Key considerations for providers: Hospitals and physicians
- Self-awareness. While providers know their own rates and anecdotally perceive their position relative to other providers, they do not know it with certainty. Being self-aware can help providers understand (and plan for) where they might be at risk for volume loss (or gain) in competitive markets for price-sensitive procedures and services.
- Risk of margin compression. Historically, commercial rates have played a role in buoying provider financials. As these rates become public and bring scrutiny, there may be more downward pressure on providers. This compression will inevitably bring even greater pressure to lower costs and will result in constricted margins.
- Squeezing the balloon. As providers squeeze to lower prices for the publicized shoppable services, there will be pressure to inflate rates on non-publicized (non-shoppable) services to keep providers whole.
- Maintaining brand. Publicized rates have the potential to highlight a mismatch between brand and prices. This may require providers to defend their pricing with their brand’s promise. If patients do not perceive added value that corresponds to a higher price point, they will vote with their wallets.
- Burdensome administrative cost and compliance risk. Amassing, maintaining compliance, and communicating cost information in an easy-to-read format is no small task. Smaller organizations may be even more vulnerable to additional costs and compliance risk, putting strain on already challenged institutions.
Key considerations for payers: Commercial insurers and self-funded employers
- Redefining narrow networks. Narrow-network products rely on information asymmetries and a degree of competitiveness by excluding higher cost providers. These products may see reform as pricing information becomes more available. Beyond price, areas of quality, access, and willingness to take all lines of business from a payer will likely become part of building network design.
- Acceleration to value-based care models. If leverage on price starts to whither, payers will look to more risk instead of lower prices. A market defined by price transparency has the potential to accelerate the move to risk-bearing entities (RBEs) and other innovative risk-sharing models. Payers may look to contract directly with hospital systems to take on more risk on the chance that hospitals can net more revenue.
- Increased need for differentiation. As the landscape starts to change, payers will need to differentiate on something other than price (customer services, clinical programming, analytics and reporting, and customer-centric, digital-first capabilities, to name a few).
- Reduced leverage. In markets where there are few providers, payers already have the lower hand. Transparency further erodes any remaining bits of leverage they may have possessed.
- Market expansion. With publicized rates, payers may expand into new markets with greater ease as they have better information to assess the viability (and pricing) of the new market before entering.
Key considerations for consumers: Patients
- Above all else, this order requires that patients (or consumers) have access to estimated expected out-of-pocket costs before receiving care. This is a stated requirement of the executive order, and one most paramount. Assuming estimations are provided meaningfully and accurately, this executive order has the potential to influence consumers directly by facilitating the ability to price-shop and enabling informed decision-making.
- Meaningfulness of the information. We don’t know what these publicized prices will look like — averages, ranges, per services, aggregated? To make informed decisions, consumers will need three pieces of information:
- Treatment options, including service locations
- Provider quality scores
- Personalized out-of-pocket costs
And they’ll need this information in advance of making a care decision. However, information about contract rates will not be a useful part of the equation in making informed decisions.
- Accuracy of the out-of-pocket estimate. Price estimation tools already exist today in some form, often with cost ranges, a broad level of accuracy, and full of caveats. Generating accurate out-of-pocket estimates requires successful integration of the procedure costs with the actual consumer plan design, as well as up-to-date deductible levels. Accurate estimates should enable consumers to make effective decisions about their care. And the consumer’s confidence in the estimate is as vital as the estimate itself.
- Navigation support. Even though prices can be known, it begs the question: who will step up to help patients navigate to the right care setting and ensure their experience is a seamless one? Price is just one piece of the complex puzzle consumers may consider in making important decisions about their care. Will it be providers, payers, consumer advocacy groups or someone else who helps consumers navigate the health system?
- Service differentiation. If we remove price from the equation, consumers may put greater emphasis on access, experience and service (quality is assumed).
Shifting away from these stakeholders’ perspectives, there remains the overarching question: Will this action truly lower prices? A Danish concrete study would suggest otherwise. The issue may come down to whether competition truly exists.
- Concrete health care. Health economists have drawn comparisons to a Danish study, which found prices in concrete rose 10–20% when transparency was required. While the concrete industry is entirely different from health care, the issues around transparency and competitiveness translate. Collusion becomes easier in markets where few providers compete. And hospital consolidation is increasingly scrutinized by state and federal regulators (which may be the case for hospitals).2
- Transparency may raise rates. Matt Eyles, president and CEO of America’s Health Insurance Plans (AHIP) has stated “publicly disclosing competitively negotiated, proprietary rates will reduce competition and push prices higher — not lower — for consumers, patients, and taxpayers.”3
- Hospital concentration presents a risk. A study from 2017 Commonwealth Health found 90% of metro areas have a high concentration of hospitals, which reduces competitiveness. 4
- Federal Trade Commission (FTC) supports guarding rates: The FTC believes too much transparency can lessen competition in any market, including health care. It believes elements should remain guarded, including plan design and contracted rates.
The fear among health consumers is real when it comes to anticipating their own health care expenditures. A 2018 Kaiser study found consumers are more worried about unexpected medical costs (67%) than they are about their mortgage (41%).6 The Economist cited a study that found 61% of consumers would rather have health care costs frozen for five years than receive a 10% raise.7
While the spirit of the executive order and subsequent guidance is reasonable, there are several areas of ambiguity with this executive order. Some outstanding questions may be answered in the prescribed time line. However, the true impact may not be felt for many months or even years. There is clear motivation to bring about change. Yet it may occur in some stumbling steps, both forward and backward, and may not really be in any clear direction favoring the consumer.
Learn more about how Optum Advisory Services can help your organization develop a strong strategic pricing strategy. Download our white paper, which debunks the four most common pricing myths. Or read our latest article about why strategic pricing doesn’t have to be a race to the bottom.
Meet the Authors
David Byron, Optum Advisory Services
Erik Johnson, Optum Advisory Services
Sasha Preble, Optum Advisory Services