In most markets, buyers know the price of goods or services before they purchase them. In the U.S. health care market, prices are generally opaque to consumers and not often known to them before they receive care. This is partially due to the fact that the U.S. health care system is complex, with multiple payers paying different prices for similar services and negotiated rates between commercial insurers and providers that are not publicly disclosed. A further complication is that consumers do not usually pay the full price of their care; instead, they typically pay a flat fee (copay) or a portion of the price (coinsurance), based on their health insurance coverage.
In June 2019, President Donald Trump issued an executive order called Improving Price and Quality Transparency in American Healthcare to Put Patients First with the intention of promoting consumer price and quality transparency initiatives in health care to facilitate better-informed consumer decisionmaking. As part of this effort, the administration sought to inform policymakers and the public about how prices are currently set in health care markets, how the government and private payers can aid or limit price and quality transparency, and the extent to which providers can use advertising to promote price and quality information.
To that end, the Office of the Assistant Secretary for Planning and Evaluation asked the RAND Corporation to conduct an environmental scan to synthesize existing knowledge on these topics.
How Are Health Care Prices Set?
Physicians and Hospitals
Public payers, such as Medicare and Medicaid, typically set prices for physicians and hospitals prospectively; providers have little direct bargaining leverage other than deciding not to serve these patient populations. The majority of care provided to veterans covered by the Veterans Health Administration is provided in Veterans Health Administration facilities, which are federally funded and employ salaried health care providers. Commercial health plans, in contrast, negotiate with physicians and hospitals to determine prices, including prices for their Medicare Advantage or Medicaid managed care plans. Some research has shown substantial variation in negotiated prices, while other research suggests more moderate variation in some markets. Insured consumers rarely pay the full negotiated price of their care, typically paying a smaller copayment or coinsurance amount. Although the government does not directly affect prices paid by commercial health plans, commercial prices tend to be positively correlated with Medicare fee-for-service prices.
In the case of pharmaceuticals, Medicaid receives mandated rebates from drug manufacturers for dispensed prescriptions, and the Veterans Health Administration negotiates prices in exchange for including a manufacturer's drug on a limited formulary. Commercial health plans, including those that cover Medicare Part D enrollees, negotiate both the prices paid to pharmacies and any discounts and rebates received directly from drug manufacturers. Self-pay prices faced by consumers in pharmacies (either because of uninsurance or because of full prices on a high-deductible plan) are set by individual pharmacies. Big-box stores (e.g., Walmart, Target) and pharmacy chains (e.g., CVS, Walgreens) can use heavily discounted prices of certain generic drugs to drive traffic to their stores.
Most medical devices are not purchased directly by Medicare, Medicaid, or private insurers. Rather, these items (ranging from latex gloves to expensive imaging equipment) are purchased by providers and considered in the price of bundled or fee-for-service payments. For durable medical equipment, such as crutches or blood sugar monitors that are generally used by patients at home, Medicare uses a competitive bidding process to determine prices.
Price and Quality Transparency Initiatives
Recent federal consumer transparency efforts have focused primarily on hospital price transparency. A 2018 federal rule requires that hospitals release their chargemaster data for all items and services in a machine-readable format, and a 2019 final federal rule requires hospitals to disclose payer-specific negotiated rates for all items and services and to disclose payer-specific negotiated rates in a consumer-friendly manner for “shoppable” services, which are those that can be scheduled in advance by a consumer. The government also issued a final rule in 2020 that requires commercial insurers to provide online price transparency tools to their members and to disclose negotiated prices for all covered services. The federal government also promotes quality transparency by providing quality information about physicians and hospitals to consumers via the Care Compare online tool (previously known as Physician Compare and Hospital Compare).
State governments have also pursued various consumer price transparency efforts. In particular, a number of states have established or are in the process of establishing all-payer claims databases (ACPDs). These databases form the basis for various price transparency tools intended for consumer use. One standout example is the state of New Hampshire, which has used its ACPD data to create an extensive online price transparency tool that provides provider-specific pricing to consumers, taking into account their insurance status.
Most commercial insurers have also rolled out price transparency tools for their members to help estimate the costs of various services. However, these tools could be of limited value, as they can be difficult to navigate and do not always provide accurate pricing.
Barriers to Price and Quality Transparency
A key limitation of recent government consumer price transparency initiatives aimed at hospitals is that they have focused on charges and negotiated prices. Charges are the “list” price of care, and they are generally not related in any systematic way to the actual amounts paid by public or private insurers. Negotiated prices, in contrast, are much more relevant and represent the actual price of care paid by the insurer to the hospital. In price transparency efforts aimed at consumers of health care, the out-of-pocket (OOP) price paid by the consumer is probably the most relevant.
There are also some regulatory barriers to price transparency. First, in Gobeille v. Liberty Mutual Insurance Company, 2016, the Supreme Court determined that the Employee Retirement Income Security Act of 1974 (ERISA) preempts state ACPD reporting requirements for self-insured employers. This undermines many state price transparency initiatives that rely on ACPD data. Second, Statement 6 from the Federal Trade Commission and Department of Justice's 1996 Statements of Antitrust Enforcement Policy in Health Care is intended to limit the sharing of price data for anticompetitive reasons, but it could be cited by those opposed to current price transparency initiatives to note that sharing price data could have anticompetitive effects in some markets. Finally, the Health Insurance Portability and Accountability Act protects patients’ rights to privacy over their medical information, but it makes the sharing and disclosure of health data (for transparency or other reasons) more cumbersome.
On the part of insurers and providers, a potential barrier to price transparency is contract language that prohibits the disclosure of negotiated prices. However, there are efforts in Congress to pass legislation that would disallow or limit the effect of such clauses in contracts. State and federal governments have also passed legislation to prohibit the use of “gag clauses” that prevent pharmacists from telling patients about lower-cost drug options.
Finally, consumer information on the Centers for Medicare & Medicaid Services (CMS) Care Compare website has some important limitations. Price and quality data are not explicitly linked, so consumers might assume that a higher price means higher quality. Price data on hospitals are very limited and are not included for physicians, and both price and quality data might not include enough variation to enable meaningful comparisons between providers.
Advertising Price and Quality Information
Our literature search identified only a handful of articles that addressed advertising price and quality information. The available literature suggests that hospitals and physicians do not typically include pricing and quality information in their advertisements. Data on the amount that hospitals and physicians spend on advertising are lacking, as is information about the substance of advertising. One barrier to advertising price information could be clauses in provider-insurer contracts that prohibit the disclosure of negotiated prices. Furthermore, providers might be concerned that publicizing price data could lead to a “race to the bottom” on prices, in which all insurers demand the lowest prices offered by a provider.
Pharmaceutical companies conduct a substantial amount of direct-to-consumer advertising, but they have historically not advertised price or quality information. However, pharmaceutical advertisements do sometimes offer discounts or coupons, and, more recently, some advertising has directed consumers to pricing information via a web link.
The literature search did not identify any articles that addressed advertising by device manufacturers.
Conclusions and Recommendations
In an effort to help consumers make better-informed health care choices, federal policymakers sought to identify potential barriers to price and quality transparency. Findings of this environmental scan show that consumer price transparency is being pursued by federal and state governments, as well as by commercial insurance companies. The findings also highlight potential barriers to meaningful transparency that could be addressed:
- First, policymakers could consider initiatives aimed at OOP price transparency given the focus of federal price transparency initiatives on consumers. For example, policymakers can continue to pursue initiatives such as a 2020 federal rule that requires insurers to provide online price transparency tools to their members that would display OOP prices. Such efforts would also address shortcomings of existing insurer price transparency tools, which are offered by most private plans but do not always offer accurate pricing information.
- Second, existing tools that promote quality transparency, such as Care Compare, could be improved upon to allow meaningful comparisons between providers. In particular, CMS could consider the following:
- presenting detailed, provider-specific pricing information for a wide range of services
- presenting the full variation in quality scores rather than limiting information to differences from the national mean
- explicitly linking detailed quality and price data by presenting both pieces of information together.
- Third, policymakers can continue to pursue legislation that would limit or prohibit clauses in provider-insurer contracts that do not allow for the disclosure of negotiated prices. Such contract language presents a key barrier to price transparency. Similar clauses in contracts between private insurers and pharmacies that prohibited pharmacists from informing patients when paying for a drug out of pocket would be less expensive than paying the copay through their insurance are no longer permitted following 2018 legislation.
- Fourth, the federal government could consider regulations that would require drug manufacturers to submit cost effectiveness or comparative effectiveness data on their drugs in order for those drugs to be covered by Medicare, similar to requirements in other countries. This data could be made public to consumers to allow for more informed decisionmaking.
- Fifth, states could work together with federal agencies, such as the Department of Labor (DOL), to address the issue of ERISA preemption undermining state ACPDs. The DOL could require the collection of ACPD data from self-funded health plans. This would be a significant undertaking, however, as the DOL currently does not collect any data similar to ACPDs.
- Finally, states can work to improve price transparency and quality transparency:
- States that have not yet established ACPDs could do so.
- States that do have ACPDs but do not have online price transparency tools for consumers can create them.
- States that do have ACPDs and online price transparency tools can work to improve the breadth and quality of the data provided.
- States can provide consumers with detailed quality information on providers in conjunction with online transparency tools.
The barriers to consumer price and quality transparency identified through this work generally represented limitations of existing tools. Efforts to achieve price and quality transparency have the potential to allow consumers to make better-informed decisions about their health care, particularly if the challenges and barriers outlined in this study are addressed.