On Jan. 1, 2021, the U.S. federal government’s hospital price transparency regulation went into effect. Previously, the prices that hospitals charged were not readily available to the public, and the negotiated prices that health insurance carriers actually paid were secret and considered proprietary.
As a result of the law, some U.S. hospitals have published their charges and negotiated prices with health insurance carriers. The now-transparent prices vary wildly across insurance carriers for the same service at the same hospital, as well as across hospitals for the same service with the same insurance carrier. The negotiated prices appear random and chaotic, but they are not. Instead, these prices reveal a practice of negotiating to reach a total payment level—the primary concern of both hospitals and health insurance companies—which impacts all Americans with commercial health care coverage.
The hospital price transparency regulation requires hospitals to publish their standard charges publicly on a website.1 There are two subsets of charges that must be published. First, all of a hospital’s charges must be posted in a machine-readable format and include:
- Gross charges (i.e., billed charges)
- Discounted cash prices
- Payor-specific negotiated charges (i.e., the allowed amount)
- De-identified minimum and maximum negotiated charges
“Machine-readable” means a CSV, JSON or similar file format—something a tech-savvy person could wrangle, but not something the general public could necessarily access. Another important vocabulary note is that the price a hospital charges (the “billed” charge) has almost no impact on what a health insurance carrier will pay the hospital. That rate (the “allowed” charge) is negotiated roughly every one to three years. An uninsured patient would, however, pay the billed charge (unless the facility offered an uninsured discount, an increasingly common practice).
Back to the law itself: A hospital must also post 300 “shoppable” services in a consumer-friendly format, so a person could schedule services in advance. For these 300 services, the hospital also must post:
- Discounted cash prices
- Payor-specific negotiated charges
- De-identified minimum and maximum negotiated charges
The penalty for noncompliance with the hospital price transparency regulation is small, but there are plans to increase it substantially. Currently, the federal government fines hospitals $300 for each day they are not compliant with the regulation—a total of $109,500 in a year.2 That is a relatively small fine compared to the hundreds of millions or billions of dollars in annual revenue that are typical for a hospital system. While many hospitals are partially compliant, PatientsRightsAdvocate.org estimates that only 5 percent of hospitals are fully compliant. As a result, the federal government is proposing an increase in the fine based on the size of the hospital, with a maximum fine of $5,500 per day—a total of more than $2 million a year.
The prices posted by hospitals vary widely. An Aug. 22, 2021, article in The New York Times highlights the three distinct ways prices vary.3 First, prices vary at the same hospital for the same service with different insurance carriers providing the payment. For example, a colonoscopy at the University of Mississippi Medical Center with Cigna costs $1,463. That same procedure costs $2,144 with Aetna health insurance.
Second, prices vary at the same hospital for the same service for the same insurance carrier—but for different plan types within that insurance carrier. For example, an MRI at St. Luke’s Hospital in Milwaukee with a UnitedHealthcare PPO costs $4,029. With a UnitedHealthcare HMO, it costs $1,092.
Third, prices vary with the same insurance carrier for the same service provided at different hospitals. For example, a rabies prevention treatment at Intermountain Healthcare in Utah costs $5,000, while it costs $10,000 at the University of Florida Medical Center—both instances have the same insurance company providing the payment.
Why Prices Vary
When hospitals and insurance carriers negotiate their contracts, the hospital gives the insurance carrier a discount in exchange for the insurance carrier steering patients to the hospital for being in network. The hospital gains more patients (revenue), while the insurance carrier gets lower prices per patient.
Both parties care most about the total amount of money paid over the course of a year, and the individual negotiations over the final allowed amounts for specific hospital services are simply the means of reaching that yearly reimbursement total. Accordingly, each hospital and insurance carrier can reach that reimbursement total with different service-specific negotiations.
The hospital and insurance carrier negotiations over specific services may go something like this. Hospital A asks for relatively high reimbursement for a service such as labor and delivery at $16,000 per normal delivery. The hospital may believe it has a strategic advantage in deliveries because of its newly redesigned maternity wing or Level 4 neonatal intensive care unit (NICU). The insurance carrier agrees to that high reimbursement amount, but in return it asks for a relatively low reimbursement for a service such as an MRI at $800 per scan. The hospital agrees.
To make matters more complicated, services are priced in a variety of ways—the “per delivery” and “per scan” examples are simplistic. The delivery may be paid on a per-delivery basis (a “case rate,” perhaps via a diagnosis-related group [DRG] payment), but it also could be paid on a per-day basis (a “per diem”) or a percentage of billed charges. This second source of variability contributes a new set of incentives for both parties in the negotiation. The carrier may prefer DRG reimbursement for deliveries because of the savings available through auditing the claims and the removal of the incentive to extend stays for increased revenue. The hospital may be OK with DRG payment for deliveries, but it may ask for infused drugs to be paid at a percentage of the charge in exchange (which could allow the hospital to increase revenue by increasing billed charges).
This two-fold negotiation continues across all of the hospital service lines: outpatient surgery, inpatient general medical admissions, cardiac imaging, chemotherapy infusions and so on. Often, the contracts between hospitals and carriers are many years old and are changed incrementally over time. The carrier will enter negotiations with a set of strategic priorities (often a mix of companywide priorities and hospital-specific considerations), and the hospital similarly will come to the negotiation with its desired outcomes. Ultimately, both sides care most about the total annual reimbursement, and if one side has a particular request, it may be granted if the overall annual reimbursement remains level. The give and take of each negotiating cycle can produce a contract that, viewed outside of the historical process that created it, appears to be a hodgepodge of disparate terms and payment structures.
Historically, these negotiations take place at each hospital between each carrier in isolation and with asymmetric information. When a hospital is negotiating with a carrier, it knows what its contracts with other carriers are and general information about other area hospitals (i.e., the new maternity ward and Level 4 NICU). But the hospital knows almost nothing about the carrier’s contracts with other hospitals. The carrier similarly enters the negotiations with limited information about the hospital’s contracts with other carriers—it may have a vague idea by reverse-engineering claims from members covered by two separate insurance policies (coordination of benefit [COB] claims). As a result, the contracts for each hospital/carrier combination are wildly different.
I previously mentioned that billed charges have almost no impact on what a hospital actually gets paid. While that is mostly true, an insurance carrier’s employer clients are deeply interested in the billed charges discounts a carrier’s contracts allow (the percentage difference between the billed and allowed charges). A practical impact of this arrangement is that the hospital increasing its billed charges may benefit the insurance carrier by allowing it to report a more advantageous discount percentage to its employer clients, while at the same time not paying anything extra.
Why Price Transparency Matters
For patients and employers—the customers of hospitals and insurance carriers—the highly variable allowed amounts and their secrecy are problematic. Patients are unable to know their out-of-pocket costs in advance of an elective test or procedure because the allowed amount is kept secret by the hospital. Likewise, employers are unable to direct employees and their dependents to high-quality, cost-effective hospitals for specific services because they too are kept from knowing the allowed amounts in advance.
The hospital price transparency regulation is a major force in revealing the pricing machinations of hospitals and insurance carriers that previously have been obscured from the public. Now that the formerly secret allowed amounts of hospital services are being disclosed, patients and employers can use price as part of their decision-making process when buying health care. A higher-cost hospital for a particular service may be avoided in favor of a lower-cost hospital.
In addition, hospitals and insurance carriers may change the way they negotiate in response to patient and employer choices. If consumers begin making medical decisions based on price, the hospital’s previous incentives in the marketplace (the maternity ward and Level 4 NICU) will be less important. Similarly, if both parties enter negotiations with good information about similar contracts, we may see more uniformity in contracting.
At the same time, some have predicted counterintuitive outcomes from the law. Famously,4 when a 1934 law required executive compensation disclosure, average CEO compensation increased. Lower-paid CEOs were able to compare their salaries to their peers and argue for salary increases, but well-paid CEOs (except for exorbitant outliers) did not see any decreases in pay. Could we see a similar outcome as lower-reimbursed hospitals can argue for rate increases by comparing themselves to their peers, while higher-reimbursed hospitals avoid decreases?
The full impact of the health transparency law is still unknown, in part because few hospitals are fully complying with the law. Even where hospitals are complying, the disparate formats and layouts of the data files they publish are not easy to analyze. However, the Centers for Medicare & Medicaid Services (CMS) increase of the fine for noncompliance signals it believes transparency is important to a well-functioning insurance market and intends to see the law have its desired effect.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
- 1. Centers for Medicare & Medicaid Services. Hospitals. Centers for Medicare & Medicaid Services, September 30, 2020. ↩
- 2. Morse, Susan. CMS Proposes Penalty Increase for Hospitals That Fail to Comply With Price Transparency Rule. Healthcare Finance, July 20, 2021. ↩
- 3. Kliff, Sarah, and Josh Katz. Hospitals and Insurers Didn’t Want You to See These Prices. Here’s Why. The New York Times, August 22, 2021. ↩
- 4. Mas, Alexandre. Does Disclosure Affect CEO Pay Setting? Evidence From the Passage of the 1934 Securities and Exchange Act. Princeton University and NBER, March 2016. ↩
Copyright © 2021 by the Society of Actuaries, Schaumburg, Illinois.