How to Lower Healthcare Prices with State Led Transparency

Healthcare bills have become an intolerable burden on Americans. Polls show that over 13 million people know a friend or family member who has died because they couldn’t afford medical care. Healthcare pricing is no longer an issue of income, either: Even households making over $120,000 a year report putting off medical care for fear of bills that will break the bank.

Despite recent presidential efforts to expose large health systems’ crony pricing behavior, costs are still soaring upwards. The problem with price transparency is that there are not enough incentives for patients to use new information to shop around and reward more affordable providers. The solution to lowering costs lies with state legislatures and their ability to incentivize patient engagement in healthcare shopping. To empower patients, states need to begin implementing more shared savings programs, reference-based pricing, and preventing insurers from punishing patients who go out-of-network to less expensive providers.

Price inflation in the American healthcare system can be boiled down to two overarching causes. One, patients currently have no strong incentive to shop around, which stifles competition in the healthcare market. Two, some federal laws create opportunities for special interests to close the market and maximize profits through price inflation.

Patients today have little reason to shop around even for elective care. Nearly 155 million Americans are on their employers’ insurance plans, which typically insulate them from major out-of-pocket costs. Why would a patient look to save their insurer $300 on an MRI scan when their copay is $100 at both an expensive and lower-cost provider? There is no point.

To make things worse, federal law is creating perverse incentives for some large insurers to reward price-gouging providers. Under the Affordable Care Act, insurers have to maintain a medical loss ratio that requires them to spend 80% of their premium income on policy holders’ medical bills. This means insurers can only pocket 20% of their premium income to pay business costs. In order to maximize profits some insurers realized it’s actually better to payout larger medical bills because it gives them justification in raising premiums so they can pocket 20% from a larger pie. For an insurance executive isn’t it better to pocket 20% of a billion than a few million?

Both patients and insurers are not exhibiting typical cost-saving behavior. As a consequence, health providers are facing less market pressure and are relatively unhindered in raising prices to whatever insurers will pay. Healthcare price inflation is a multi-layered issue that has to be tackled on multiple fronts. With the federal government in perpetual gridlock, state governments are in the best position to remedy problems facing healthcare markets. 

States can disrupt the current status quo by implementing policies that expose ridiculous price variations, create programs that allow patients to easily contrast prices, and ultimately incentivize patients to pursue high-quality providers who offer affordable services.

The MRI market is a great example of where states can make a difference. For instance, the cost of an MRI between two competing imaging centers, a few blocks away from each other, can vary by $400. Even though federal law mandates providers post prices on their website, it doesn’t mean patients will hunt them down to compare. Listing scattered pricing information for thousands of hospitals with no streamlined way to easily contrast that information hardly helps anyone. 

To fix this, state legislatures can start commissioning referenced-based pricing studies that collect posted prices from all providers in a region. This would allow states to contrast price data and eventually calculate a region’s average rate for MRIs. Once a state establishes a benchmark average for an MRI, say $220, they can go a step further by ordering insurers to offer shared savings programs that rewards patients who find a provider charging under the benchmark average. Theoretically, if a patient finds a provider charging only $100 for an MRI, the insurer could be compelled to give them a portion of the savings between $50 – $100. Together these two policies would allow states to unearth the realistic cost for an MRI and help motivate patients to not be herded towards price-gouging providers. An excellent real-world example of this can be seen with Rep. Wyman Duggan (R-FL) pursuing a very strong reference-based pricing proposal for state employees in Florida. 

The icing on the cake would be requiring insurers to cover a patient who finds an out-of-network provider charging under the benchmark price. Some large hospital systems are attempting to push-out independent practices from popular insurance networks. Since hospitals cannot buy the independent practice out, they tend to contract with insurers to exclude them and make sure patients would have to pay out-of-pocket if they went to the independent provider. By mandating insurers cover affordable out-of-network providers, states can ensure that patients will reap the benefits of shared savings and referenced-based pricing across all networks. Rep. John Snyder (R-FL) is taking the initiative to implement a strong out–of-network reform this year. 

The American people should no longer have to associate medical bills with crippling financial burden. Implementing these three reform ideas would allow states to simultaneously create useful transparency among large health systems, inject competition to lower prices, and reward patients for shopping. Patients need results now, and the fastest way to help America turn the corner is by having states realign incentives and crack down on the special interests corrupting the market.