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Research Questions

  1. How are health care prices set?
  2. What influences the level of consumer price and quality transparency in health care markets?
  3. What is the relationship between price, quality, and advertising in health care markets?

Consumers of health care in the United States often lack information on the actual prices of the care they receive and can also lack access to information about the quality of their care. RAND researchers gathered information on how health care prices are set, price variation in health care markets, barriers to price and quality transparency for consumers, and the extent to which price and quality information is used in marketing efforts.

Public payers typically set prices for physicians and hospitals prospectively, and commercial health plans negotiate with physicians and hospitals to determine prices. Some research has shown substantial variation in negotiated prices, while other research suggests more moderate variation in some markets. 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.

Medicaid receives mandated rebates from drug manufacturers for dispensed prescriptions. Commercial health plans 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 are set by individual pharmacies.

The barriers to consumer price and quality transparency identified through this work generally represented limitations of existing tools. Consumer price transparency is being pursued by federal and state governments. Most commercial insurers have created price transparency tools to help members estimate the costs of various services. However, these tools can be difficult to navigate and do not always provide accurate pricing.

Key Findings

Public payers, such as Medicare and Medicaid, typically set prices for physicians and hospitals prospectively

  • Commercial health plans negotiate with physicians and hospitals to determine prices, including prices for Medicare Advantage and Medicaid managed care plans.
  • Insured consumers rarely pay the full negotiated price of their care, typically paying a smaller copayment or coinsurance amount.

Recent federal consumer transparency efforts have focused on hospital price transparency

  • Hospitals now must release chargemaster data and payer-specific negotiated rates for all items and services.
  • A 2020 final federal rule requires commercial insurers to provide online price transparency tools to members and to disclose negotiated prices for all covered services.
  • A number of states have established or are in the process of establishing all-payer claims databases (APCDs). These databases form the basis for various price transparency tools intended for consumer use.

A key limitation of federal consumer price transparency initiatives aimed at hospitals is that they focus on charges and negotiated prices

  • Charges are the list price of care, and they are generally not related to the actual amounts paid by public or private insurers.
  • Negotiated prices represent the actual price of care paid by the insurer to the hospital.
  • In price transparency efforts aimed at consumers, the out-of-pocket (OOP) price paid by the consumer is probably the most relevant.

Hospitals, physicians, and pharmaceutical companies do not typically include pricing and quality information in their advertisements

  • Pharmaceutical advertisements sometimes offer discounts or coupons.
  • Some recent advertising has directed consumers to online pricing information.

Recommendations

  • Policymakers could consider initiatives aimed at OOP price transparency given the focus of federal price transparency initiatives on consumers.
  • Existing tools that promote quality transparency, such as the Centers for Medicare & Medicaid Services' Care Compare website, could be improved upon to allow meaningful comparisons between providers.
  • 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.
  • 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. This data could be made public to consumers to allow for more informed decisionmaking.
  • States could work together with federal agencies, such as the Department of Labor (DOL), to address the issue of Employee Retirement Income Security Act preemption undermining state APCDs. The DOL could require the collection of APCD data from self-funded health plans.
  • States can work to improve price transparency and quality transparency via APCDs and online tools.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Methods

  • Chapter Three

    Health Care Professionals

  • Chapter Four

    Hospitals

  • Chapter Five

    Pharmaceuticals

  • Chapter Six

    Medical Devices

  • Chapter Seven

    Discussion and Conclusions

  • Appendix

    Search Terms for the Targeted Literature Review

Research conducted by

This research was funded by the Office of the Assistant Secretary for Planning and Evaluation and carried out within the Payment, Cost, and Coverage Program in RAND Health Care.

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