Actuarial Perspective on Price Transparency in Health Care

Have we found a path to lowering the total cost of care? Lee M. Parrott


While other industries have made price transparency their hallmark, the U.S. health care system has struggled. This is not a new issue. Research and various regulatory proposals about price transparency in health care have been ongoing for at least the last 20 years. Continued consumer concerns and frustrations have kept the cost of health care a top political issue in the United States, with little relief from federal and state regulations or from marketplace innovations. High-deductible insurance plans now make up 43 percent of employer-sponsored coverage.1 With patients paying more of their own health care costs, will price transparency help them become better consumers?

With recent Centers for Medicare & Medicaid Services (CMS) regulations and American Hospital Association (AHA) lawsuits making headlines as the United States continues to struggle with making health care more affordable, what does a health care pricing actuary need to understand about how much price transparency and consumerism might contribute to lowering the total cost of care? Will price transparency regulations and proposals tip the scales and lead to a lower total cost of care through actuarial innovations in benefit designs, pricing models and data science?

Current Happenings Related to Price Transparency

Recent activity includes the Health Care PRICE Transparency Act introduced by Republican senators to codify two health care price transparency rules that came out of the June 24 executive order that requested draft price transparency regulations. The executive order provisions require hospitals and insurers to display negotiated rates to consumers before they receive medical care. If enacted, these regulations would protect against further lawsuits by hospital and insurance lobbyists, which is timely after the recent AHA loss to negate rules promulgated by CMS. The Federal Register has not yet published the details of the PRICE Transparency Act at the time of writing.

Hospital Pricing

CMS proposed rules relating to price transparency for hospitals. They require hospitals to make standard charges public for at least 300 “shoppable services” (services that can be scheduled in advance) that the hospital should provide in a consumer-friendly manner. Seventy of these services are CMS-specified, while 230 are selected by the hospital.2

Analysis by the Health Care Cost Institute found that the 70 CMS-specified shoppable services totaled 12 percent of 2017 medical spending, excluding prescription drug spending, and made up 16 percent of out-of-pocket medical spending.3

Is this a big enough piece of the pie to change consumer and market behavior and tip the scales to lower the cost of care? Will publishing prices incentivize providers to change their behavior to lower the cost of care? Or will they simply recoup needed revenue by shifting costs to the “non-shoppable” services?

Insurance Company Prices and Member Cost-Sharing

CMS’s proposed rules for Transparency in Coverage require insurers to give consumers real-time personalized access to cost-sharing information for covered services, disclose rates negotiated with in-network providers and publish allowed amounts paid for out-of-network providers. Cost-sharing estimates are to be provided to members of the insurance company, and prices are to be shared with the public.

Evidence That Prices of Health Care Services Are an Issue

A review published in January 2019 in Health Affairs substantiated the claims in the 2003 article “It’s Still the Prices, Stupid.”4 They validated that prices continue to be the primary reason why the United States spends more on health care than any other country, despite health policy reforms and health system restructuring that have occurred since the original article’s publication.

They state: “Because the [United States] is still not devoting more real resources to medical care than the typical OECD country, we believe that the conclusion that “it’s the prices, stupid,” remains valid. What is different between 2003 and 2016 is that the differential between what public and private insurers pay for health care services has become wider. Lowering prices in the [United States] will need to start with private insurers and self-insured corporations.”5

According to a Kaiser Family Foundation issue brief, private payment rates for hospital services are 141 percent to 358 percent higher than Medicare rates, and 118 percent to 179 percent higher for physician services.6

The 2018 Health Care Cost and Utilization Report by the Health Care Cost Institute found higher prices for medical services were responsible for about three-quarters of the spending increase from 2014 to 2018.7 And prices are projected to continue to lead the increase in health care spending through 2028, according to CMS’s Office of the Actuary. “The acceleration is largely due to expected faster growth in prices for medical goods and services (2.4 percent per year for 2019–2028, compared to 1.3 percent per year for 2016–2018).”8

Economic Models Support Price Transparency

The judge in the AHA lawsuit against the CMS rule on the disclosure of negotiated charges ruled against all arguments, criticizing the use of a commonly referenced research study on the Danish concrete market from 1997. This study found that average prices increased 15 percent to 20 percent and converged due to transparent publication of prices in the Danish concrete oligopoly.9

In Transparency and Competition, Arvid Nilsson from the Stockholm School of Economics proposed mathematical models to determine the relationship between transparency and competition.10 These models proved that prices increase when there is price transparency and few competitors, as existed in the Danish concrete cartel. Conversely, prices decrease with more firms in competition.

What does research on the Danish ready-mixed concrete market have to do with health care price transparency? There is no agreement that publishing prices will lead to lower prices and better-informed consumers.

A 2009 research report by the Congressional Research Service concluded the majority of empirical studies show greater price transparency leads to lower and more uniform prices, and that this would translate to health care markets.11

However, 70 percent of hospital markets are so consolidated that they lack effective competition, which leads to increasing prices with transparency. Also, there is little evidence from the seven states that currently require hospitals to disclose prices that this practice results in lower costs.12

How useful is price transparency when it’s limited to shoppable services? According to actuarial experts in hospital pricing who were interviewed on transparency, a likely reaction from hospital finance departments is strategic pricing, swapping out lower prices on the listed services with higher prices elsewhere to maintain revenue and financial viability. There are no incentives to lower the total cost of care across the entire hospital setting.

Low-Value Care, Quality and Health Care Prices

Will access to transparent prices reduce the utilization of low-value care? Will it lead to more patient discussions with physicians on the cost of various treatment options? According to a JAMA article titled “Waste in the U.S. Health Care System,” 10 percent to 11 percent of total waste is due to low-value care (this includes low-value care in medications, screening, testing or procedures, as well as overuse of end-of-life care).13

Will access to transparent prices lead to less variability in prices, indicating more efficiency? The same JAMA article states approximately 30 percent of total waste in U.S. health care is due to pricing failure, such as in medication, payer-based health services, or laboratory and ambulatory pricing.14

The U.S. health care system experiences a wide variation in prices across services and geographies, with higher cost not an indication of quality. The variance in cost for physicians who billed twice as much as others was not related to difference in use, nor was it associated with quality.15 Quality rating systems for providers exist; however, quality of medical care outcomes and value received is hard to measure objectively. Patients rely on and trust their doctor’s recommendations for treatment, and in the absence of data on outcomes, quality and value, this will continue even with price transparency for unit prices.

Will Price Transparency and High Deductibles Lead to Consumer Behavior Changes That Lower Total Cost of Care?

In general, U.S. health care consumers:

  • Don’t understand their insurance coverage
  • Don’t know what conditions or illnesses they might have until after they see a doctor
  • Don’t have the information to make complex decisions about treatment options under stressful situations
  • Have no idea what medical care will cost before deciding with a physician as to what should be done

Ninety-six percent of Americans don’t understand four basic health insurance terms: deductible, coinsurance, copay and out-of-pocket maximum. Only 4 percent of Americans could define all four terms in a PolicyGenius health literacy survey.16

Health care spending is highly variable: 5 percent of Americans accounted for 50 percent of health care spending in 2017, the top 10 percent accounted for 87 percent of total spending, and 50 percent of people make up the bottom 3 percent of spending. Separately, end-of-life care is expensive, and it can be difficult to weigh the high cost of care with extending life.17

Consumers experience health care in episodes, each with a different effective treatment path. This is not how traditional benefit plans are designed or priced. Deductible and coinsurance benefit designs are inefficient at distinguishing value in treatment options, with deductibles the same for low-value or high-value care, and a health care consumer is not armed with the information to know the difference.

The current state of provider billing practices by procedure code makes little sense to patients who experience care by episode, and they are caught in the middle as they don’t know which billing codes are used until after treatment occurs. Unit cost price transparency won’t directly change consumer behavior, as unit cost is not what matters. Members experience out-of-pocket costs based on their insurance coverage. There is no incentive to control costs when a member has exceeded their maximum out-of-pocket dollar amount or is unable to compare costs (such as in emergency situations).

Innovation in Benefit Designs

Smarter insurance plans, as proposed by Peter A. Ubel, M.D., in his 2019 book Sick to Debt, are one set of alternatives.18 He proposes a recipe of options, with generous coverage for high-value services while requiring people to bear a greater portion of the cost of low-value care. One company is testing the waters with such a design: Bind, the on-demand health insurance company startup in Minneapolis founded by Tony Miller, the former CEO at Definity Health, which pioneered high-deductible health plans. According to Tony, high deductibles don’t work.19

Bind plan designs have no deductibles or coinsurance—just copays. However, they do have a maximum out-of-pocket cost. Bind provides price clarity by quoting episodic costs, which is how treatment really happens. The company provides the expected value of cost-share prior to a service, so the transparency is regarding the member’s out-of-pocket cost, not what the providers charge.

Bind quotes prices for shoppable services for providers in its network at the episode of treatment level, providing total out-of-pocket costs to patients prior to treatment. Bind updates prices quarterly and makes them available using mobile apps and its website. Bind is creating smart shoppers—who are shopping for value—and a market feedback loop. Providers approach Bind to renegotiate rates to appear more attractive to Bind members. Differences in price are not indicators of quality, but rather are due to opacity and lack of efficient markets in health care.

Transparent pharmacy pricing is also available through Bind’s pharmacy benefits manager (PBM). Pharmacy prices are updated daily, with full pass-through of all rebates to all sponsors, not point-of-sale. All pharmacy plans are driven by copays.

Bind members pay an additional premium for on-demand services via paycheck deductions, which are pre-tax, with financing available. On-demand services are potentially low-value services. For example, a low-cost alternative for knee surgery is available, starting with physical therapy. Bind defines low-value services by its own research conducted by its chief health officer and a Clinical Advisory Board that is independent of Bind.

The Bind actuarial team has created innovative pricing models. They research individual health care demand elasticity by service and the propensity of a member to move to a more efficient provider. These assumptions are inputs into their actuarial pricing model. They also study the probability that members will use effective versus ineffective providers.

Bind’s early results are encouraging, with its administrative services only (ASO) employer group experiencing reduced trends from traditional models, as it redirects care to lower-cost and efficient providers. The company also is seeing that it can change consumer behavior by giving them better information, and in turn consumers are changing provider behavior as well.

Physicians as Financial Advisers

Patients are not equipped to make medical treatment decisions on their own—they follow what their doctors recommend. The physician-patient relationship is complex with shared decision-making.

According to Sick to Debt, physicians need to consider what treatment options will cost their patients and not make recommendations in a vacuum. The book explores how equipped physicians are to incorporate cost impacts into their treatment path recommendations. Physicians and patients can make more effective treatment decisions when considering effectiveness, patient preferences and overall cost.

What if the in-network physician had access to a benefit financial adviser at the insurance company to provide a cost quote on treatment options? The insurance company could provide a pre-pay cost estimate along with outcome information on the treatment options. What if the insurance company then could schedule the procedure as well, pulling in all doctors (even, if needed, an out-of-network physician for anesthesia), to eliminate surprise billing? The doctor and patient could then lay treatment options and costs side by side to select the option with the best outcome and best value.

Physicians’ incentives need to align with goals for shared decision-making, including financial impacts. Even under capitation and value-based contracts, the incentive to provide more services may exist, as a large part of physician income could be based on the number of relative value units (RVUs) billed. With this type of incentive, physicians make less if they decrease low-value care. Incentives for physicians need to align with outcomes and the value of care.


What will price transparency bring to your market? Will hospital transparency lower or raise prices? Will it lead to better patient-provider discussions on treatment options and costs?

Price transparency is part of the equation to improve the affordability of care in the United States, but it is an inadequate solution on its own. Innovation in benefit designs, physician reimbursement, tools for shared decision-making and solid algorithms to measure quality of outcomes and value also are needed. Innovation in the United States includes personalized medicine to a genomic level. Now may be the time for innovations in personalized insurance that improves value at a member level.

Actuaries have the requisite skill set and are poised to partner with clinicians, delving into the complexities of improving the financial safety net of patients. We can continue to innovate actuarial models to design benefits and price plans that support improvement in physician and patient decision-making, helping to determine the path forward to lowering the total cost of care.

Lee M. Parrott, FSA, MAAA, is a senior actuarial director in the Commercial Actuarial practice at OptumInsight.

Copyright © 2020 by the Society of Actuaries, Chicago, Illinois.