Authors: Daniel I. Levin, CFA, Nicholas J. Janiga, ASA and Luis A. Argueso
On June 24, 2019, President Trump issued an executive order with the goal of improving price transparency in the healthcare sector. The order directs the department of Health and Human Services to propose a policy requiring hospitals to publicly list prices and directs providers and insurers to provide information to patients and members about expected out-of-pocket expenses before a procedure is performed. The stated goal of the order is to enable Americans to make more informed decisions that will lead to lower healthcare costs.
Aside from uncertainty surrounding the details of how this executive order is translated into policy, there are structural market issues related to price elasticity that will determine if the order is effective and how the benefits are distributed. As is well documented in the literature concerning price elasticities in healthcare, certain services, particularly emergency services and services provided following an emergent event, are extremely inelastic. In addition, patients living in rural sections of the country with limited access to healthcare are less able to easily switch to a lower cost provider given the shortage of physicians and healthcare facilities in many of these markets. This suggests making list prices available will have little impact on demand for these services. Some have argued that prices for these services could increase as hospitals match their competitors knowing that it will have minimal impact on purchase decisions.
Other healthcare services demonstrate greater price elasticity, suggesting that price transparency could improve consumers’ ability to shop around. Given the price disparities between certain procedures performed in an inpatient or outpatient setting, this could have a material impact on the price paid in certain situations. As one example, MRIs performed in a hospital are often thousands of dollars more expensive than MRIs performed in an outpatient imaging facility, and studies suggest that price transparency impacts patient decision making for these procedures. The table below presents the most elastic and least elastic healthcare services based on a recent study.
Mental Health/Substance Abuse
Rather than dramatically reshape the healthcare landscape, price transparency may accelerate certain trends that have already started in the marketplace. For example, payors have been directing members to obtain MRIs and other radiology procedures in outpatient facilities, and in some cases will not reimburse for non-emergent procedures performed in a hospital site of service. More broadly, the shift from inpatient to outpatient care settings for a variety of surgical and medical procedures could accelerate by providing patients better, more accessible information on cost savings. Based on the studies referenced above, it is less clear that price transparency would have an impact on balance billing or emergency room costs in general, although the Trump Administration has pledged to take steps to reduce or eliminate balance billing. In addition, 5 percent of the population, mostly comprised of elderly and chronically ill individuals, are responsible for approximately 50 percent of all healthcare expenditures. These individuals may be less price sensitive since they are either covered by Medicare or meet their plan deductibles early in the year. Conversely, in marketplaces with patients covered by high-deductible plans, price transparency may have a material impact on provider selection. With the average deductible increasing by over 39 percent from 2013 to 2018, an increasing share of providers may find themselves losing patients to competition offering more favorable prices.
Should pricing transparency impact the behavior of healthcare consumers, providers may have to adapt to retain patients. As occurred after the passage of the Affordable Care Act, hospitals and physicians may pursue alignment strategies in order to mitigate the negative consequences of price competition. For example, given the elasticity associated with specialty visits, physicians may see benefits from affiliating with well-known and respected health systems to retain their current pricing. Whatever form such alignment may take, any compensation between healthcare facilities and physicians in a position to refer patients to such facilities must be both commercially reasonable and consistent with fair market value. HealthCare Appraisers employs a substantial pool of qualified valuators able to assess any form of alignment.