Transparency in medical costs would help

Gerhard B. Holt

is a senior policy fellow at the Codman Group, an advocacy group for open data in medicine

Joseph Bernstein

is a clinical professor of orthopaedic surgery at the University of Pennsylvania

Hidden prices are higher prices. When information about price is obscured, markets cannot function effectively. This idea should be intuitively obvious: Only a fool visits a used-car dealer without some knowledge of what the desired vehicle should cost.

Despite this, nearly 20 percent of our economy attempts to function without clear price information. Specifically, health-care prices in America are hidden prices.

A study in JAMA Internal Medicine, for example, reported that consumers cannot obtain reliable price quotes for even simple medical services such as electrocardiograms. It should be no surprise, then, that health-care prices in America are the highest in the world.

Greater transparency in health-care prices should help limit spending. With prices disclosed, consumers can comparison-shop and select alternatives that best suit their needs and budgets.

A law mandating that all prices be disclosed in advance is, nevertheless, unlikely to work. For one thing, just as hospital bills are notoriously incomprehensible, published price lists are also apt to be hard to decipher and use. Further, while some simple services such as electrocardiograms could be given a uniform price, the prices of many other services (major surgery, for example) legitimately vary, owing to the natural variability in case complexity.

Still, there is something a new law can do.

We propose that the Centers for Medicare and Medicaid Services (CMS) be allowed to prepare a price advisory report (PAR) for anyone who requests one. These reports would be generated from providers' invoices, or their estimates of anticipated costs, and will inform the recipient simply how much of the charged amount Medicare would have paid had it received such an invoice for a Medicare beneficiary.

The software for implementing this kind of price reporting is already in place. CMS routinely distributes to Medicare beneficiaries a "summary notice" - a printout showing all services billed to Medicare; what Medicare paid; and the maximum amount the patient may owe. The only twist we recommend is that CMS be allowed to send a similar report to non-Medicare beneficiaries. (These reports would be available for a small fee - maybe $5 - enough to make the program self-sufficient and to dissuade trivial use.)

The PAR would provide benchmarking information to customers much the way the Kelley Blue Book value of a car informs automobile purchasers. The law establishing the PAR system would impose no obligation on providers to accept a specific price.

A PAR system would particularly help the uninsured and those who pay a large share of their costs out of pocket. Another important group that would benefit would be people facing bankruptcy from health-care bills. With a PAR in hand, people could better negotiate with providers, and perhaps avoid bankruptcy altogether.

The use of PARs would also enhance the effectiveness of health spending accounts. Users of such accounts have great incentive to comparison-shop, but without good price information in hand, have little means to do so. The PAR system would fix that flaw.

There would, of course, be resistance to this proposal. While it is hard to be against transparency in principle, the latent hostility to the PAR approach would be considerable. Remember: If hidden prices are higher prices, then transparent prices would be lower ones. Under price transparency and market competition, providers whose higher prices are not justified by superior quality can, should, and would lose market share.

America needs to enlist the power of markets to rein in health-care spending. Yet markets cannot function when prices are not transparent. PARs will clarify pricing, enhance the power of competition, and restrain costs.