The Cost of Price Transparency

"If you can't beat them, join them." This nugget of 1930s political wisdom of indeterminate origin is no less true in a wide variety of situations than it was nearly 80 years ago. While it may be the only option for hospitals faced with growing demands for price transparency, the problem is this: knowing who to beat and where to join isn't so clear. At this point, however, it's looking like hospitals may be out of options.

Even without the price transparency issue, it's difficult to be an acute-care provider navigating the changing landscape of healthcare. Steven Brill's TIME expose, "The Bitter Pill: Why Medical Bills are Killing Us," published March 2013, brought the topic to widespread public attention and effectively forced hospitals' hand to do something — anything — to assuage concerns over a rare, yet alarming reality of hospital charges.

The fallout

The next nine months were somewhat of a whirlwind for the issue. CMS published chargemaster pricing data in May 2013 for the 100 most common inpatient and 30 most common outpatient treatments. The New York Times began a six-month, six-installment series in June 2013 on the cost of various procedures. Several organizations published state-by-state price transparency report cards, and North Carolina passed a law to increase price transparency. In the furor, hospitals have attempted to accommodate public demands for price transparency to varying degrees of success. Miami Children's Hospital was the latest, in mid-January, to take action, reducing its chargemaster prices by 30 percent.  

"It's such a big buzz because it's a new concept for hospitals. At first blush it's like playing poker with your cards face up — exposed and vulnerable — unless you have a firm grasp on what price means, what it includes and the risk that comes with it," says Joe Kuehn, a senior partner with KPMG's Healthcare Management Consulting practice.

The entire point of the price transparency push is to commoditize healthcare like other goods so consumers have the ability to price discriminate. As a result, hospitals are becoming increasingly responsible for comprehensive price inventories. They must take stock of what their services are worth and make a plan for communicating value.

No easy choices

The trouble with this for most institutions, according to Mr. Kuehn, is that they may not have decision support systems with the data and analytics capabilities necessary to appropriately evaluate the cost of care delivery for bundles of service in conjunction with related quality measures. This is where competitive pricing becomes complex and strategic; overpricing can price institutions out of the market, while underpricing causes losses.

The consumer half of the equation makes pricing even more convoluted. "A consumer with no other information will decide higher facility prices — the "Porsche" or "Audi" — are better. Hospitals do not have a particularly good mechanism for educating the public about how good they are and that there is potentially no correlation between cost and quality," says Wendy Lynch, director of the Altarum Institute's Center for Consumer Choice in Healthcare.

Jim Lee, Altarum Institute's vice president, agrees. "Consumers do not trust insurers when they send them to low-cost, high-quality services," he says, noting that the concern is one Altarum Institute sees a lot in its work: Hospitals struggling to effectively communicate value in price transparent scenarios.

This shortcoming is one that hospitals ought to address as soon as possible, because it is the next necessary step to successfully weather the transition to a price transparent world, according to Adam Powell, PhD, president of Payer+Provider Syndicate. "The first generation of price estimators is basically useless [to consumers]," he says. "They provide a rough average for providers. Most people know they are getting treatment and are trying to decide where to do it. They don't care about the average cost of treatment — they want to know what it will cost them at the actual providers they are considering using," he says, adding that the race to the bottom might threaten the sustainability of hospitals and hospital profits.

Changing times

Mr. Kuehn puts the situation plainly: "The train has left the station, and the pressure's on," he says. "Avoiding the issue could cost a hospital everything. If they can't price correctly, it could mean their business — though that's an extreme — and it could mean their reputation as well. If they don't have the data and analytics capability to cost and then price their services, they have to start today. Otherwise it could cost them literally in the millions, tens of millions, in both real and opportunity costs."

That's the long and short of it. Price transparency is here to stay, and the best hospitals will find ways to adapt, dovetailing quality and price and partnering with consumers to lead them to value in care.

While the way forward is beginning to look clearer, there are no foregone conclusions about winners and losers. Transparency is in its early days, and it is still possible to weather the storm. Dr. Lynch agrees: "I think the impact has the potential to be huge, but as of yet it's still very targeted efforts on very targeted procedures by leading-edge corporations. But the tip of the potential iceberg is here."

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