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August 31
09:24 2022


Is there any amount of information that will power consumer-driven competition?


A quick review of hospital pricing data … revealed that … individuals could pay for two hospital procedures per annum without insurance “kicking-in” for payment.


By Kevin P. Hennosy

Policymakers in Washington, D.C., continue to introduce reforms aimed at expanding transparency in the healthcare sector. The assumption behind these actions is that transparency will fuel competition, which will improve the price and value of healthcare products, services, and insurance coverage.

Take for example the requirement that compels hospitals to post prices for common medical services and devices for public review. The requirement arises from a provision of the Affordable Care Act (ACA), which former President Donald Trump expedited through an Executive Order.

No magic?

You may already notice policyholders and certificate-holders spending hours comparing hospitals’ prices for medical services to judge their value before carefully scheduling medical procedures.

No? Really?

What about the Magic of the Marketplace? Does not consumer choice drive down prices and drive-up quality?

Shut the front door! What does this mean about the Tooth Fairy?

The lure

Well, it all depends on how one defines the word “consumer.” This question recalls a family memory, so bear with me.

My wife’s late Uncle Vic, a World War II veteran and lifelong small businessperson, was not a formal student of economic theory, but he knew something about commerce.

“Kevin,” he always called me Kevin, “a fishing lure’s design is successful as soon as the fisherman is lured to buy it and walk out of the store with the   product in a bag.” Luring and catching fish are, at best, an afterthought for the fishing lure manufacturer and sporting goods store.

Who is the consumer in what many refer to as the “healthcare market?” As that economic sector continues to evolve, the individuals who receive products and services—which the technology sector calls the “End User”—is not the hospital patient.

In today’s healthcare sector, the patient is not any more a consumer than an automobile is a consumer of a mechanic’s services. Most purchase decisions take place long before the end user slips on one of those drafty hospital smocks. The hospital must sell its services to insurance carriers and their provider networks.

Carriers shopping

If anyone is “shopping” the spreadsheets of hospital prices, they probably work for an insurer.

Negotiators for the carriers should edge a bit closer to playing the role of an informed consumer, which is necessary for the maintenance of a competitive marketplace. Still, the change is not sufficient to achieve the theoretical benefits of a competitive market—determining efficient pricing.

Those newly empowered shoppers have already been making phone calls to uncomfortable hospital administrators to ask why another carrier’s network received a better price for a service.

What is the hospital administrator going to say? “Well, your representative is not a very good negotiator, so we mined some profits from you.”

It is reasonable to expect that giving carriers hospital pricing data will result in hospitals coalescing at a uniform price point, or price range; but that is not really the same thing as competition establishing efficient pricing. Such a coalescence reflects the establishment of cartel power.

Certainly, the data may help the 30 million uninsured Americans shop for non-emergency services.

Well … maybe. Have you looked at any of those hospital pricing spreadsheets?

Twilight Zone

As many Rough Notes readers will know, as of July 1, 2022, a new federal rule requires employer-sponsored health plans to report price information for in-network costs to plan participants.

The Centers for Medicare & Medi-caid Services (CMS) explains the public value of the new rule this way: “Health plan price transparency helps consumers know the cost of a covered item or service before receiving care.”

Depending on the implementation of the new CMS rule, patients will have a bit more information than they had on June 30, 2020. Yet, there is reason to doubt the efficacy of this policy initiative.

Channeling the style of Rod Serling, “Submitted for your approval, during an annual dermatology exam, the doctor finds an odd growth and suggests removal and biopsy. Until the biopsy results come back, the medical necessity of the procedure is not clear. The patient asks about the price of the procedure. The doctor responds, ‘I really do not know, because those plans have different stand- ards for coverage and negotiated price.’”

Now who is the informed consumer in this “Twilight Zone” scenario? That patient may just say, “I am not rolling the dice when it comes to skin cancer, so cut away Doc!” Will the health plan price transparency really aid in the patient’s decision making in a way to place downward pressure on prices, or upward pressure on value?

Hobson’s choice

Insurance carriers are the decision makers in most transactions, long before a patient seeks services from a hospital. And, it is still true that most individuals do not choose their insurance carriers.

Furthermore, individuals under a group health insurance plan may have the “choice” of coverage packages that feature differing out-of-pocket expenses and premium costs. Often, these coverage package decisions present a Hobson’s choice, which gives the individual the feeling of decision making with regard to premiums and other out-of-pocket expenses, but the decision does not make a material difference in what the insured will spend through the year. Pay me now or pay me later!

The standard use of provider networks in the deliverance of health insurance coverage retards the concept of shopping for healthcare services. An out-of-net- work provider will rarely be less expensive than a provider in the plan’s network. And, if that low-priced provider exists, and the individual uses those services, the expenditure will not count against the deductible established by the plan.

Offer credits?

The conservative State Policy Network (SPN) recognized this problem related to the economic disincentive presented by high deductibles for insureds who may want to use lower priced but out-of-network providers.

One of the SPN proposals to expand transparency and competition in the health sector at the state level calls for providing credit against deductibles for patients paying outside their insurance coverage (paying cash) or those who use out-of-network providers that would save the insured and insurance carrier money. The SPN opines:

“States should require insurers to provide in-network credit towards any out-of-pocket responsibility if the patient chooses to see an out-of-network provider that delivers a better deal (e.g., provides care below a certain benchmark such as below average in-network rates).”

The SPN argument continues: “Providers often will accept a lower cash rate because they avoid costly administrative expenses. Many lower-cost independent providers have been pushed out of network because they are not part of large health systems. Under the status quo, many patients are overpaying for services.”


A quick review of hospital pricing data in the Kansas City, Missouri, area revealed that the price of common hospital procedures equated to half of the average annual deductible for group policies in the area, which means individuals could pay for two hospital procedures per annum without insurance “kicking-in” for payment.

Of course, those of us who work in and around the insurance sector receive encouragement to believe that the use of high deductibles provides a disincentive for overuse of healthcare by covered individuals.

To understand the importance of economic disincentives of high deductibles, one must imagine that a certain percentage of people in this country consists of “colonoscopy freaks” who would keep scheduling that procedure for the “thrill of the prep” alone. Let us not even consider the money-losing potential arising from the “bone marrow exam enthusiasts” who lurk behind every tree, without instituting high deductibles!

Yes, Virginia, the previous paragraph is sarcastic, but it makes a point.

Third parties

The CMS description of the new rule on health plan price transparency contains the following pregnant clause: “This pricing information can be used by third parties, such as researchers and app developers, to help consumers better understand the costs associated with their healthcare.”

Also on the CMS website, the agency revisits this third-party concept: “In addition to the self-service tool and machine-readable files from plans and issuers, third-party developers may also create price transparency tools.”

In short, the CMS seems to suggest that third parties conduct pricing and coverage analysis that Congress assumed the states would conduct when it delegated jurisdiction over insurance regulation to the several states in 1945. Such state regulatory activity is extremely rare today.

Of course, CMS seems to assume that the motivation of third parties will be pure as the driven snow. What could go wrong? A sector that consumed 19% of U.S. Gross Domestic Product in 2020 would never attract grifters and self-dealers!

Baby steps?

As observed earlier in this column, the introduction of transparency to hospital pricing and certain aspects of health insurance policies represent small steps forward for individuals. Yet, while trying to finish this column, I have struggled to identify how.

Those of us born and reared in market-oriented economies feel compelled to welcome concepts like transparency and shopping; however, accessing healthcare is not a rational example of market participation.

A quote from John Maynard Keynes comes to mind, which is imperfect in application, but nevertheless persistent: “Markets can remain irrational a lot longer than you and I can remain solvent.”


The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.




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