Price Transparency Is the Best Answer to Calls for Single-Payer

Published August 5, 2019

An explosive new study has unlocked some of those secrets. It finds employers and their insurers are failing to control hospital costs, increasing calls for transparency in insurer-hospital agreements.

The rising interest in single-payer health care can be explained by a simple fact: The cost of private, employer-sponsored health insurance keeps going up. The original sin of the American health care system—the exclusion from taxation of employer-sponsored insurance—has created all sorts of incentives for hospitals, drug companies, and other health care industries to keep raising their prices, knowing that patients are several middlemen removed from the cost and value of the care they receive.

Employers have been reluctant to control costs, because workers often get upset if a favored but costly hospital or doctor is excluded from the employer’s plan. The end result has been a passive-aggressive approach in which deductibles have tripled over the last decade and wage growth has been suppressed by the growth of health insurance costs.

High Price of Hospital Care

The biggest driver of these problems is the high cost of hospital care, which represents more than one-third of the cost of health insurance.

A study published in Health Affairsin 2015 found the cost of a hospital stay increased by more than 50 percent, in inflation-adjusted dollars, for the privately insured between 1996 and 2012. Over the same period, hospital costs for Medicare patients remained stable. By 2012, the average privately insured patient was being charged 1.9 times what the average Medicare patient was for a hospital stay.

A new analysis by Chapin White and Christopher Whaley of the RAND Corporation shows hospitals are charging the privately insured 2.4 times what they charge Medicare patients, on average.

The Rand analysis, encompassing hospitals in 25 states, is in some ways the most important analysis of hospital prices ever done, because White and Whaley were able to access the actual contracted prices used by employers representing four million workers.

Normally, these contracts between insurers and hospitals are a closely guarded secret. Hospitals don’t want anyone to know about the anti-competitive practices and pricing strategies that are often embedded in these contracts, and insurers have convinced themselves that their negotiations with hospitals are trade secrets that give them an advantage against their competitors.

‘Cost-Shifting’ Debunked

The hospital industry defends its escalating price hikes for the privately insured by claiming hospitals lose money caring for Medicare patients—what wonks call the “cost-shifting” theory, the idea being that hospitals shift the cost of caring for Medicare patients onto the privately insured.

Austin Frakt of Boston University, at his blog, The Incidental Economist, has for years compiled research that has shown “cost-shifting” is a myth. A recent study found that from 1995 to 2009, a 10 percent reduction in Medicare payments was associated with a nearly 8 percent reduction in private prices. Another study found a $1 reduction in Medicare inpatient revenue was associated with an even larger reduction, $1.55, in total revenue. This would be impossible if hospitals were compensating for lower Medicare revenue by charging private insurers more.

Private prices go down when Medicare rates go down—not the sort of thing that would happen if cost-shifting is real.

What’s actually happening is something much simpler: monopoly exploitation. Hospitals take advantage of the secrecy of their contracts with insurers to make all sorts of anti-competitive demands on insurers.

As the RAND report notes, “Some hospitals have instituted ‘all-or-nothing’ clauses, which require all hospitals to be in [an insurer’s network] if a single hospital is in the [network].”

These abuses are hidden not only from the public’s view but also the scrutiny of regulators, who lack the practical means to subpoena every hospital-insurer contract in order to find the ones engaging in illegal behavior. We need a new approach.

Reforms Proposed

The good news is that a new approach may be coming soon. The Trump administration has proposed a requirement that all hospitals disclose the prices they secretly negotiate with insurers. This requirement, in combination with a national all-payer claims database, would make available to the public, for the first time, what hospitals actually charge insurers for their services.

Two bills introduced in the current Congress—the Hospital Competition Act by Rep. Jim Banks (R-IN) and the Fair Care Act of 2019 by Rep. Bruce Westerman (R-AR)—would end the ability of hospital monopolies in a given market to charge exploitative prices, by requiring them to accept rates no higher than Medicare’s from private payers, unless they divest their holdings and restore a competitive hospital market.

Political Premises Challenged

In recent years, Republicans have been reluctant to take on monopoly power, on the premise that doing so requires government intervention, such intervention being bad. Democrats, on the other hand, have largely ignored the problem of hospital monopolies, on the premise that three-fourths of hospitals are nonprofits, naively believing that  nonprofits are always the good guys.

Both sides, for their own reasons, are going to have to take on the scourge of hospital monopolies if they want their ideas to win.

If Republicans want to fend off a government takeover of health insurance, they’ll need to give private insurers the tools to take on hospital monopolies. If Democrats want the math to work on single-payer health care, they’ll need to fund their proposal by ending the pricing power of hospitals.

Thus far, it’s Republicans who have been more willing to take on hospital monopolies. As the Democratic presidential contest gets underway, will that change?

Avik Roy ([email protected]is founder of the Foundation for Research on Equal Opportunity (FREOPP). An earlier version of this article was published by Forbes on May 11, 2019. Reprinted with permission.