A Groundbreaking Proposal to Compel Healthcare Price Transparency

John McCracken, PhD

The Department of Health and Human Services (HHS) is seeking public comment on a tentative proposal to compel hospitals, physicians and other healthcare providers to publicly disclose the secretly negotiated rates they charge insurers, a move that would for the first time expose the actual prices paid for healthcare services.  

The proposal was buried on page 90 of a 187-page notice of proposed rulemaking on information blocking and interoperability published in the Federal Register on March 4th:  “Consistent with its statutory authority, the Department is considering subsequent rulemaking to expand access to price information for the public, prospective patients, plan sponsors and health care providers.  HHS goes on to define this as “the negotiated amount to be to be charged and paid for by the patient’s  health plan … and the amount to be charged and collected from the patient.”

This proposed rule has the potential to do more for healthcare price transparency and  containment than all the 40,000 pages of statutes and regulations spawned by the Patient Protection and Affordable Care Act (Obamacare).  Hospitals, physicians and insurers treat specific prices paid for medical services as closely guarded secrets, with contracts bound by confidentiality agreements.  Mandating public disclosure of these arrangements would completely disrupt industry control of pricing and put decision-making power into the hands of patients and employers. 

Between mid-2014 and the first quarter of 2018, average inpatient prices for privately insured patients rose four times as fast as those for Medicare patients, and about twice as fast as the national economy.  And because actual prices paid are cloaked  in secrecy, they often vary as much as 100% both within and across geographic markets. No unbiased observer could rationally argue that secrecy in pricing is not contributing to healthcare inflation and excessive price discrimination.

This year CMS began requiring hospitals to disclose their chargemaster prices, also known as billed charges (although there is no penalty for failing to do so).  These charges, however, are unrealistic and bear no relation to what an insurer or health plan actually pays to a provider who has a contractually lower rate. 

Undoubtedly the healthcare industry will marshal its considerable financial and political resources to fiercely resist any initiative to mandate price transparency.  The American Hospital Association has already fired an early salvo opposing the move, saying “Disclosing negotiated rates between insurers and hospitals could undermine choices available in the private market.”  It would certainly upend the market by exposing high price providers and allowing both patients and employers to make informed choices.  But once the inevitable (and likely considerable) disruptions work their way through the system, the market for healthcare services would become both competitive and more efficient.  

Can the Feds Compel Price Transparency?

HHS maintains that authority for the proposed regulation derives from the 2016 21st Century Cures Act.  The Act, which was overwhelmingly supported by both parties, directed HHS to basically determine what is and is not information blocking in the health IT realm.  HHS’s position is that it has the authority under the Act to interpret or define relevant information to include actual healthcare prices charged and paid. 

Because pricing between insurers and providers is sheltered by contract confidentiality clauses, any rule to require public disclosure would necessarily affect existing contracts.  The chief legal constraints to government interference with private contracts are the Takings Clause and Due Process Clause of the U.S. Constitution.  But these apply only to presently existing contracts, not to future contracts. 

Moreover, a 1923 Supreme Court decision handed the government a powerful defense against challenges based on interference with the performance of existing private contracts.  The Court held that government actions that only incidentally interfere with the performance of private contracts constitute only a “frustration,” not a taking of those rights and are legally permissible.  

Given current legislation and case law, it seems likely that a challenge to the government’s authority to require price transparency in existing contracts would not be upheld by the courts.  But since insurer-provider contracts are negotiated annually, even a successful legal challenge would eventually become moot as the contracts are renegotiated. 

Just Do It

It is incredible that the service pricing of an industry representing 18% of the U.S. economy is shrouded in a veil of secrecy.  Commercial healthcare markets are rife with secretly negotiated rates and hidden charges that make it impossible for patients and employers to clearly see which hospitals and physician practices are driving high costs.  Market competition and consumer-directed choice cannot function in such an environment.  Though industry opposition will be fierce, HHS needs to force the issue.  As former Supreme Court  Justice Louis Brandeis famously observed, “Sunshine is the best disinfectant.”

John McCracken is Director of the Alliance for Physician Leadership, an educational partnership between the University of Texas at Dallas and The University of Texas Southwestern Medical Center which offers an MS/MBA program in healthcare leadership and management exclusively for physicians.