It took many years of economic interventions, political blunders, and crony regulations to bring the U.S. health care system to almost a breaking point. The present-day system has very little remaining of a free market as numerous intermediaries have a vested financial interest in perpetual cost increases. The most blatant economic distortion in the market today could easily be the lack of price transparency. Restoring transparent market prices for medical services may be the best strategy to lower the costs of health care, and the lack of transparency is the glue that holds the quasi-monopolies of hospitals and insurance carriers together to the detriment of patients and their relationship with their doctors.
On Monday, President Trump signed an executive order that could send shock waves through the health care industry. It has the potential to restore some necessary market competition to lower the cost of health care in the U.S. The president certainly deserves credit for finally shifting the narrative to the actual “cost” of health care and away from the same old debates over “coverage” both political parties have historically engaged in over the past few decades.
The order directs agencies like Health and Human Services to write rules requiring hospitals and insurers to make their negotiated prices public. They would also have to give patients estimates on out-of-pocket costs before nonemergency procedures.
Hospital and insurance executives are predictably upset about this. Some are even trying to make the case that requiring transparency in “negotiated discount rates” may increase costs. But this logic assumes that a “discounted price” is a competitive “product” when in fact it is simply the mechanism to create many different prices for different payers. There is ultimately only one price in a free market exchange, and that is the cash price a seller is willing to receive from a willing buyer who is paying 100% of the cost. The government and other third-party payers distort the market price, creating incentives for hospitals and an entire industry of middlemen (basically “discount” dealers) to hide the market price so they can be compensated or subsidized based on a discount no one but the hospital and insurance carrier is supposed to know about. Of course the “discounted price” is still often three to five times the price of a fully transparent cash provider in the free market. Thus hospitals can operate as a “nonprofit” institution in large part by accounting for their “losses” based on these negotiated discounts.
Many politicians and industry insiders claim market prices are irrelevant because patients only care about “out-of-pocket” costs. Therefore, one possible “solution” to conform to this executive order will be simply to do a better job estimating what the patient will pay. Hospitals and insurance companies rely on the disconnect in consumers’ minds between “out-of-pocket” and the actual cost of health care. This disconnect leads individuals, particularly those in self-funded employer health plans, to not shop for the best price. Consequently, the patient may actually pay much more out-of-pocket with their “coverage” than they would have with a market-based cash provider. Employers that incentivize their employees to be aware of actual cost of care are frequently able to pay 100% of medical procedures due to the wide range of prices between facilities for the same procedures. Real and effective price transparency includes actual cost, not just “out-of-pocket” estimates.
The current system has been so distorted that even doctors often do not know what their services cost. The Surgery Center of Oklahoma introduced true price transparency for out-patient surgery when they started posting all-inclusive bundled cash prices online more than 15 years ago. Dr. Keith Smith, Co-founder and Medical Director said, “The first step in posting our online surgical pricing was to ask the surgeons what fee they thought was appropriate for their professional service. No one had any idea, as pricing for physician services has been imposed on our profession for the majority if not entirety of our careers. The time has come for doctors to declare their worth and fees and let market competition do the rest.”
Larry Van Horn, a health care economist at Vanderbilt University, said this executive order will “put healthcare information in the hands of the American consumer.” He has also done extensive research in the economics of health care where there is a market of cash-paying consumers. “My analysis suggests that when cash prices are transparent, up-front, in the market, on average they’re 39% cheaper than the amounts that third-party payers pay for like services. Even when insurance covers the cost, there is on average a 300% price variation within a market for the exact same services”, Van Horn said.
The market of cash payers has grown as more patients and employers feel the “sticker shock” of health care costs through high deductible plans being forced on them by Obamacare and the increasing cost of “coverage” in traditional health plans. Perhaps one of the better outcomes from Trump’s executive order will be more options for Health Savings Accounts and Health Reimbursement Accounts which will put more dollars and financial decisions directly into the hands of consumers. This could benefit both individuals as well as smaller employers who provide health plans for their employees.
A growing number of self-funded employers may also see the “negotiated discounts” they have been sold by their brokers are not the “value” they thought. Cash prices and direct contracts with Direct Primary Care doctors and facilities like the Surgery Center of Oklahoma (surgerycenterok.com) can actually save employers thousands of dollars in their self-funded plans when advised by an independent third-party administrator or an independent broker who is paid to save the employer money instead of receiving bonus from carriers as costs increase. The Free Market Medical Association has members post cash prices for thousands of procedures and services online at ShopHealth.org for individuals and employers to find the best price from free market providers.
One executive order will not reverse 50+ years of government intervention and cronyism in American health care. It will certainly not restore a “free market” in health care in the near future. The laws of economics have been suspended by regulations, price controls, and crony privileges handed out to one of the most powerful lobbying groups in Washington. But a competitive free market is advancing as a result of the growing movement of independent physicians, direct primary care practices, surgery centers, imaging centers, independent third-party administrators, and brokers who are genuinely offering transparent pricing models that facilitate a more direct relationship between buyers and sellers of health care services. Patients and self-funded employers are already benefitting from this consumer-driven model.
Americans need hospitals and insurers to restore real transparency in their pricing. If they do, they will begin pricing their services like every other business that must compete on consumer value. With transparent cash pricing as the starting point, costs will go down through genuine competition and entrepreneurship.