Transparency and hospital prices

Health care costs are high in the U.S., making up 17.9% of the U.S. economy. The Economist reports on recent key drivers of US health care cost…and the answer isn’t drugs.

Mr Trump has correctly identified a big villain behind health-care cost inflation, and it is not Big Pharma. Hospitals account for over 30% of health-care spending, whereas drugs account for less than 15%. Ad in doctors and related professional services and the shar rises to over half. Hospital costs have been climbing by roughly 5% a year of late, compared with 1% for drugs.

There are a number of reasons for this. First, is hospital consolidation. The Economist cites a paper by Brent Fulton that finds that 90% of US hospital markets were highly concentrated. This is a trend on which that Healthcare Economist has previously reported. Second, Obamacare is partly at fault. Obamacare capped health insurer profits at 80% of revenues from premiums. Thus, whereas previously insurers could make more money by negotiating lower prices with providers, this is no longer the case. Since health plan profits are a fixed percentage of spending, health plans are now incentivized to increase rather than decrease premium in order to maximize their profits. Further, many insurers serve more as health plan administrators for self-insured employers, with employers rather than payers holding the financial risk.

President Trump is trying to fight this with a dose of transparency. Under a recent executive order, hospitals will be required to make public: (i) payer-specific negotiated charges, (ii) the amount the hospital is willing to accept in cash from patients for service, and (iii) the minimum and maximum negotiated charges for 300 common “shoppable services”. In addition, hospitals will be required to include charge information in a standardized format to facilitate data analysis.

While in the short run, low-cost hospitals may raise prices if they see have below market rates, in the long-run transparency is a good thing. However, one should not be overly confident that this will solve the health care problem. Consumers pay a small share of hospital charges and shopping for hospital services is difficult if individuals have acute health issues. Nevertheless, transparency is a step in the right direction.

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