Will price transparency reduce prices?

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Economic theory would say that in normal markets, the answer is yes. When prices are widely known, suppliers can compete on prices–as well as quality–and markets become more efficient. In the health care setting, however, a key question is ‘which price’? For hospital services, patients are the ultimate consumers of the service and do pay for care. However, patients typically pay a small fraction of the cost. Thus, while price transparency may be helpful, most patients don’t care what an insurer pays their hospital, they only care about what their out of pocket costs.

An article in Harvard Business Review actually argues that price transparency could increase prices. With price transparency, price discrimination is not as possible. Thus, prices will likely converge. It is unclear whether the equilibrium market clearing price will be a net price increase or decrease on average, but there is some evidence at the state level from States who have mandated price transparency.

There is a plausible case that making hospital prices public may actually increase costs. One reason — illustrated by the recent New York Times account of how making cement prices public in Denmark pushed them higher — is that hospitals with low fees may demand the higher prices charged by sister institutions. Since 70% of hospital markets are so consolidated that they lack effective competition, the ability of low-priced institutions to push fees up should not be underestimated.

There is also little evidence from the seven states that currently require hospitals to disclose prices that this results in lower costs. Only one state, New Hampshire, posts the prices online for public consumption. New Hampshire’s experience suggests that consumers with high deductibles who consult the site choose lower priced services, but since only a tiny fraction of the state’s population participates, the overall effects on costs are negligible.

Ironically, some research also shows that in the absence of understandable quality information, some consumers assume that high price means high quality and are actually drawn to higher-priced institutions. 

The ultimate result of price transparency is unknown. As the authors of the HBR article state, expectations should be tempered that price transparency will lead to a dramatic change in health care costs, at least in the short-run.