Man in hospital.

Following the Yellow Brick Road Toward Hospital Price Transparency

By Laura Karas

The Center for Medicare and Medicaid Services (CMS) scored a victory on the price transparency front in June of this year with the D.C. Circuit decision in American Hospital Association v. Azar, No. 1:19-cv-03619-CJN.

The CMS final rule at issue in the suit requires price transparency for hospital items and services. The legal victory will begin to remedy the information asymmetry that has kept patients in the dark about hospital prices for far too long.

As the final rule states, its aim is to empower patients to become “active consumers” of health care “so that they can lead the drive towards value.” The rule is part of a federal effort to improve the ability of patients to make informed choices based on price and gain leverage to negotiate unreasonable hospital charges.

The American Hospital Association, the Association of American Medical Colleges, and several other groups brought suit to contest the CMS final rule mandating that hospitals make public and update annually certain “standard charges” for hospital “items and services.”

In the suit to block the final rule, plaintiffs alleged that the final rule requires hospitals to “publicize . . . a huge quantity of confidential pricing information reflecting individually negotiated contract terms with all third-party payers, including all private commercial health insurers.”

The American Hospital Association and other groups argued that this mandatory reporting of price information exceeds the statutory authority of CMS, violates the First Amendment, and amounts to an excessively burdensome rule that is “arbitrary and capricious” under the Administrative Procedure Act. Plaintiffs claimed that the “[t]he CMS final rule . . . does not provide the information patients need,” namely information on out-of-pocket costs.

Judge Nichols of the D.C. Circuit was not persuaded. A motion for summary judgment was granted in favor of the Department of Health and Human Services (HHS), and the CMS final rule is on track to require hospitals to make public five measures of “standard charges” beginning January 1, 2021: (1) gross charges, (2) discounted cash price, (3) payer-specific negotiated charges, (4) de-identified minimum negotiated charges, and (5) de-identified maximum negotiated charges. This comes fifteen years after CMS launched publicly available hospital quality data in 2005. In other words, hospital price reporting is long overdue.

(Of note, an appeal has been docketed, so the June 2020 decision may not be the final word on hospital standard charges. Nonetheless, the rule is likely to take effect while litigation remains in progress.)

If the story of health care price transparency were made into a movie, in this scene patients and CMS administrators would be skipping hand in hand down a yellow brick road toward a large castle labeled “hospital price transparency.”

The key question is, to what end? It is known that human beings suffer from a host of cognitive frailties that impede rational decision-making. Will posting five different measures for hospital “standard charges” be a game changer? Or merely a small step in the right direction? Or does it offer an illusory promise? Only time will tell, but it is safe to say that “we’re not in Kansas anymore.”

If the published charges are effective at steering patients toward more cost-effective sites for care and toward insurers with better rates (price data, after all, will be payer-specific), real savings could result, to the detriment of hospitals’ and insurers’ bottom lines (which explains their vehement opposition).

However, there are a few valid objections against giving patients access to hospital chargemaster prices.

First, patients are ignorant of many of the technicalities of health care provision, which means that price data may not be fully comprehensible to them. Even if it were, human beings are not rational decision makers; understandable and accurate pricing information does not mean that patients will respond appropriately to it. For example, lower-income individuals are more likely to delay or forgo health care due to cost than their higher-income counterparts, which means that pricing information could have the perverse effect of discouraging necessary care among low-income Americans.

Second, hospital pricing information should not be viewed in isolation, but rather it should be paired with hospital quality data. (Low prices for poor quality health care is not an outcome patients or CMS administrators desire.) The problem is that hospital quality measures are controversial and (some would argue) not very useful. How many Americans make use of CMS Hospital Compare and the CMS Hospital Quality Star Rating system? Studies on patient utilization of these sites seem to be lacking. But the extent to which patients access and bear in mind CMS hospital quality data when choosing among hospitals may be a good predictor of whether patients will find price data beneficial.

Third, agencies such as the Federal Trade Commission have expressed concern that transparent health care prices could lead to tacit price coordination or collusion, especially in small markets with only a few providers.

Even in the face of these concerns, I would argue that patients should nonetheless be empowered to choose among hospitals on price. Public policy can help counteract perverse incentives in health care decision-making. Hospital quality data can always be improved. And antitrust enforcers can detect and bring enforcement action against providers that engage in price collusion.

At the end of the day, consumers are better off with knowledge of prices, and an ability to act on this information, than without it. Market failures are not synonymous with a defunct market; the market for health care services, with all of its deficiencies, is here to stay. Providing patients with price information will yield benefits that outweigh the above-listed objections, many of which can be remedied with sensible law and policy.

As they await the public reporting of hospital “standard charges” this January, hospitals will continue to hope that they can tap their heels together and wake up in a world that maintains the status quo of clandestine prices.

Laura Karas

Dr. Laura Karas is a student at Harvard Law School and a Petrie-Flom Student Fellow for the 2020-21 academic year.

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