With the recent increase of high deductible health plans – known as “major medical” insurance before the debut of all-inclusive managed care plans in the 1970s – the Trump administration hopes that development will spur individuals and employers to purchase hospital medical procedures on an a la carte basis. The goal is to increase competition to drive down prices. “Shoppable services make up a significant share of the healthcare market, which means that increasing transparency among these services will have a broad effect on increasing competition in the healthcare system as a whole,” asserts an executive order issued June 24.
A key element of the order requires the U.S. Department of Health and Human Services to propose administrative law within 60 days requiring hospitals to “publicly post standard charge information, including charges and information based on negotiated rates and for common or shoppable items and services.” The order states the following rationale for hospital price transparency:
“One study, cited by the Council of Economic Advisers in its 2019 Annual Report, examined a sample of the highest-spending categories of medical cases requiring inpatient and outpatient care. Of the categories of medical cases requiring inpatient care, 73 percent of the 100 highest-spending categories were shoppable. Among the categories of medical cases requiring outpatient care, 90 percent of the 300 highest-spending categories were shoppable. Another study demonstrated that the ability of patients to price-shop imaging services, a particularly fungible and shoppable set of healthcare services, was associated with a per-service savings of up to approximately 19 percent.”
The Trump administration is effectively attempting to upend how major medical care has been obtained and purchased over the past four decades, with inpatient and outpatient hospital services bundled into pre-paid plans, their prices negotiated in advance by the plans. Given how well established this scheme is, it’s unlikely the market can be transformed quickly enough to produce significant downward pressure on prices over the near term.
The nature of the market and consumer behavior also poses a challenge. Hospital care is typically consumed unexpectedly, not as a planned purchase that lends itself to price shopping. In addition, hospital services are likely to exceed most plan deductibles, reducing incentive to price shop since individuals will be out of pocket for that amount regardless of where care is obtained. It’s also uncertain to what extent hospitals can or will accept pre-negotiated cash payment for services for employers and individuals seeking discounts off posted reimbursement rates negotiated by their plans.
In any given metro area, hospitals are not as numerous as other service providers such as home improvement contractors, auto body shops or landscapers. That naturally lowers competition and reduces incentive to compete on price. In less populated areas, there is often only one hospital.
The administration’s policy direction stands in sharp economic contrast to proposals by Democrats in Congress and the current presidential election cycle to reduce medical costs. The Trump administration’s strategy favors a “many buyers” competitive market model. By contrast, many Democrats support expanding public coverage in order to leverage the government’s monopsony purchasing power to drive down prices.