Price Transparency in Health Care: Impact, Transformation, Policy
Information technologies — and information — have deeply transformed firms, markets, and industries, a script that has repeated over and over again in industries such as retail, travel, and banking. Technology transforms how goods are made and exchanged, how they are priced, what goods are made and where they are sold, who the winners and losers are, and the industry structure itself.
A massive transformation is imminent in an industry sector that accounts for about 20% of spending, namely health care. This transformation will occur on account of emerging technologies for price transparency, a concept that is simple and yet radical in the context of health care where consumers must routinely make decisions while blind about the prices they would pay. Here’s an example of price transparency in prescription drugs, featuring data on prices and alternative products.
What is price transparency?
The aim of price transparency is that decision-making stakeholders (e.g., patients and their advising physicians) have timely access to accurate and personalized information about costs of care. In the US, recent federal and state regulations require health care providers to make such information public. However, these regulations are rather modest in ambition and inadequate by design. Specifically, price information will make little impact unless a) it is accompanied by discovery and display of substitutable alternatives and prices, b) it is delivered to patients under the umbrella of an expert advisor (e.g., physician), c) it is highly accurate and contextualized to the individual patient vs. being generic price data, and d) it is timed appropriately in the decision process.
In other words, price transparency is useful when it leads to “shopping decision support” in health care. Fortunately, innovative new companies and technology entrepreneurs are achieving this, and have moved the price transparency needle far faster and further than required by regulation. This mix of entrepreneurial activity and emerging technologies includes dedicated “search engines’’ (such as TrueView, Gemini Health, CashMD, GoodRx) which provide ex ante information about prices, products, and providers, cross-provider data exchange and app technologies (e.g., PokitDok), and industry consortia (e.g., the Surescripts alliance for medications).
What are the likely effects of price transparency?
It takes little imagination to realize that price transparency in health care could potentially have profound and wide-ranging consequences, affecting every aspect of the industry, including but not limited to prices, price dispersion, product variety and quality, profits, new innovations, distribution of market power within the industry, etc. However, the scope and direction of these effects is debatable and unclear.
Effect on price levels and price dispersion
Price transparency — combined with suitable technologies for computing product fit — leads to “comparison shopping” , enabling decision makers to consider a wider range of substitutable products, thus increasing price competition across them. Yet, it will not necessarily lead to lower prices or less dispersion in prices. For one, it seems imperative that price (and alternative products) data be given not just directly to patients but under the supervision and guidance of informed and trusted advisors (i.e., physicians). Further, the effects will vary across different spending categories in health care depending on (from among patients, insurance providers, physicians and healthcare providers, and sellers of healthcare products and services) who decides, who pays, who advises, who is the seller, and who owns the technology.
Effect on product mix and new products
Moreover, first-order effects of price transparency (changes in price levels, price dispersion, and spending) will likely be surpassed by second-order effects, i.e., by the strategic responses of firms in the industry to the first-order effect of price transparency (e.g., changes in product assortment, levels of customization etc.). For instance, if price transparency reduces prices and sellers’ profits, they will respond by varying the levels of product differentiation, product quality and other factors that might restore price levels. If price transparency causes price competition to become intense, this can throttle development of new drugs which rely on high margins to compensate for the high and risky fixed costs of development. Even when patents help the innovators avoid direct price competition, comparison shopping technologies will make it easier for doctors and patients to look at partial substitutes thereby restricting the profit margins for new products.
Effect on insurance plans and payment schemes
Similarly, insurance plans may have to be redesigned to better align total costs with patient out-of-pocket expenses. Further, price transparency technologies may change the mix of the types of insurance plans offered in the market, because price transparency will create greater competition among providers who serve PPO plans (which traditional offer more choice of providers), thereby possibly endowing them both with greater choice and lower cost. A good understanding of these effects should help steer the design and implementation context of price transparency technologies towards positive outcomes.
What is the business model for price transparency technologies?
The business model of price transparency technologies is another factor that can vastly affect the nature of transformation. The preferred (and sensible) business model today is for these technologies to be financed by savings from price transparency (which occur to payors — insurance providers and patients); but if the technologies succeed in reducing price dispersion across sellers then they also make them less necessary and beneficial!
This business model paradox will lead to alternative business models, such as sponsored search (an evolution we have previously seen in music played by radio stations, airline reservation systems, travel search engines, generic search engines, etc.).
Conversely, if price transparency technologies become too powerful on account of becoming indispensable for health care shopping, then just like Google, Amazon, Uber and other data-driven platforms, they may be able to exert this market power in numerous ways: e.g., extracting commissions from sales or entering into product markets.
To end …
Price transparency technologies are (and will be) as revolutionary in health care as Google and Amazon have been to shopping in general. While these technologies are motivated by the pressing need to reduce health care spending through price competition and reduction in market prices, these effects are by no means guaranteed. Achieving them will require careful design and implementation, but also prudent management and regulation that reflects an understanding of how market forces will interact with price transparency technologies. As we stand on the edge of these revolutionary technologies, it behooves us to anticipate, predict and plan for the transformations that are likely to occur rather than merely wait to assess their effects, and then regulate and reorganize.
For more …
Bhargava, Hemant K., Price Transparency in Health Care: Impact, Impending Transformation, Competition Strategy, and Policy Implications (December 9, 2019). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3501919