President Trump recently signed an executive order that aims to force hospitals, doctors, and insurers to be more transparent about their prices.
Currently, those prices are negotiated and set in secret. Consumers have no idea what their care will cost and so are unable to shop around for the best deal.
But if health care prices become readily available, consumers will be on more equal footing with providers — and will be able to wield market forces to their advantage. Hospitals will have to compete for their business. Such competition will yield lower prices and better value throughout the health care system.
The president's order directs executive agencies to come up with rules within 60 days that would require hospitals to publicly post the prices they negotiate with insurers in an easy-to-read format. That would allow patients to look up how much various procedures cost at a given hospital.
The order also proposes requiring health care providers and insurers to provide patients with an estimate of the out-of-pocket costs they'd face before they receive care. The Departments of Health and Human Services, Treasury, and Labor have 90 days to start the rulemaking process to achieve this goal.
This aspect of the executive order takes transparency a step further. Essentially, patients could receive their bill — or perhaps an "explanation of benefits," in insurance parlance — before ever setting foot in a clinic.
The few health care providers that have embraced price transparency have been unequivocally pro-consumer.
Consider the Surgery Center of Oklahoma, which posts its prices publicly on its website. In 2013, the Surgery Center charged $8,000 for a hysterectomy — compared to more than $37,000 for the same procedure at a nearby hospital run by a more conventional "nonprofit" health care network.
Six years later, the price of a hysterectomy at the Surgery Center is still $8,000. Several of its competitors have followed suit — and started publishing their prices as well.
The lack of pricing information in health care is one reason why costs have risen unchecked.
Price transparency has also helped retail health clinics distinguish themselves from more conventional health care providers — and carve out a sizeable niche in the marketplace. Twenty years ago, there were only a handful of retail clinics. A RAND study estimated that the number at about 2,800 in 2017.
The clinics proliferated by competing for patients' business on price. According to FAIR Health, in 2016 the median charge for a new patient visit in a retail clinic was just $109, compared to $294 in a doctor's office.
Critics of price transparency point out that patients aren't in a position to shop around for care in the event of an emergency. That's true. But we consume an awful lot of care on an elective basis — everything from basic check-ups and regular diagnostic tests to more complex procedures like knee replacements.
This year's Economic Report of the President estimated that 54 percent of health care spending is "shoppable."
An increasing number of large employers, which have the leverage to command that hospitals be up front about their prices, are sending their employees to best-in-class facilities all over the country for treatment — and saving money in the process.
Some of those savings are the result of negotiating heft. But some are the result of extricating beneficiaries from areas where one hospital dominates the market and charges accordingly.
Such market dominance is one of the limitations of transparency as a cost-cutting tool. If patients only have two hospitals to pit against one another, then the price-lowering, quality-enhancing effects of competition may be limited. But in a healthy, competitive market, there's no telling what doctors and hospitals might do to get an edge on their rivals.
Making information on prices public allows markets to work. This permit sellers to stay abreast of their competition, and buyers to pit those sellers against one another for their business. The lack of pricing information in health care is one reason why costs have risen unchecked. Sellers hold all the cards.
By shining a light on prices, President Trump's executive order will tilt the competitive landscape back in favor of consumers.