Why price transparency rules won't fix healthcare

When my daughter was a teenager, I used to tell her that if she ever wanted to earn some extra money as a waitress, to work at a restaurant where they serve lobster, not hot dogs. 

Delivering two hot dogs on a tray is about the same effort as delivering two lobster rolls, yet the cost of the hot dogs may be $10 vs. $60 for the lobster rolls. A 20% tip for delivering the hot dogs is $2, while the 20% tip on lobster rolls would be $12. It doesn’t make sense, but that is the way it is. The compensation variance is not a function of the labor, but the cost of the underlying product.

This life lesson easily brings to mind the healthcare world where “price transparency” is now a popular buzz phrase. The Transparency in Coverage Final Rule issued by the Centers for Medicare and Medicaid Services (CMS) took effect July 1, 2022, and is being rolled out in phases. According to CMS, “beginning on or after January 1, 2023, most group health plans and issuers of group or individual health insurance coverage are required to disclose personalized pricing information… through an online consumer tool, or in paper form, upon request.” It follows the January 1, 2002 implementation of the No Surprises Act. 

Read more: What the Hospital Price Transparency Rule revealed about healthcare costs in your state

Healthcare pricing is unlike that of almost any other industry, and there are reasons for this that few will understand. If you browse LinkedIn, you will find the “self-appointed price transparency warriors” who regularly point out that this surgery cost $100,000 in Hospital A and $50,000 in Hospital B. However, these obviously crazy disparities are often presented out of the context of the broader picture of our healthcare system. It is no different than stating that the compensation to deliver a two-pound tray of food can pay you either $2 or $12. 

Without knowing that one tray has hot dogs on it and the other lobster rolls, one would wonder why there’s a difference. In the restaurant business, most consumers would understand this disparity and don’t even question it, but in healthcare it is much different.

Unlike other industries, healthcare has many regulations and other “rules.” For example, close to 40% of the U.S. population is on Medicare or Medicaid with the federal government negotiating fees that are “discounted.” By law, hospitals are also required to treat those who are uninsured and go to the emergency room. In the private sector, insurance companies negotiate different fees for their insureds. Unlike most other businesses, hospitals need to be “always open” and ready to treat people with a broad range of conditions at any hour of the day or night. 

Read more: Two years in, is the Hospital Price Transparency Rule a success?

Imagine if a supermarket were subject to these same conditions. What would the cost of a loaf of bread be if 40% of the customers were to get almost 50% off, others who enter the store with no money would get “free” bread, and every other customer had a different fee schedule for the same item? 

Healthcare is more like the fire department than a supermarket. It always has to be “on,” regardless of demand. Someone has to pay for the infrastructure. Someone has to pay for people to be trained and ready even when there is less demand. Hospitals are often busier in the winter than summer, yet they can’t layoff doctors, nurses and rest of the staff in summer. Imagine what it would cost to put out a fire if the payment system were fee-for-service as in our healthcare system. It would be $10,000 to get your cat out of a tree and $75,000 to put out a fire.

Some think the key to fixing the healthcare system is price transparency. I beg to differ. The real picture of price transparency may look like this.

Surgery
$20,000 
Cost to support uninsured
$5,000 
Medicare & Medicaid price shortage fee
$10,000 
Pandemic preparedness fee
$3,000 
Healthcare system maintenance cost
$7,000 
Total
$45,000 

The healthcare industry is filled with those who want to represent their price as a percentage of healthcare costs. Even Obamacare set eligible medical loss ratio limits for insurance companies as a percentage of healthcare costs. What a sweet deal for insurance companies. Who wouldn’t want to get paid some percentage of a cost that keeps on going up at double inflation rates?!

While price transparency may be something that makes people feel better, all it is going to do is expose the craziness of our healthcare financing system. Until we attack the root cause of this perverse system, this national problem will not be fixed. Anyone can ask a hospital to reduce its fees by shifting the costs onto someone else, but it doesn’t solve anything.

So don’t be fooled by the new transparency rule and law. They won’t solve anything. And if you don’t understand how and why a hospital bill is what it is, don’t blame the hospital. It is time we blame our healthcare financing system. However, when we do this, we can expect a lot of pushback from those who are delivering the lobster rolls.