Employers Can Revolutionize American Healthcare and Accelerate Economic Growth by Embracing Price Transparency.

• Author: Laffer, Arthur B.

National healthcare costs continue to spiral out of control. In 2020, the United States spent $4.1 trillion, 19.7 percent of gross domestic product (GDP), on healthcare (CMS 2020). According to the Kaiser Family Foundation (2021), the average annual family premium cost for employer-sponsored health insurance was $22,221 in 2021, a 47 percent increase (28 percent in real terms) over the last ten years. Over the same period, the average general annual deductible increased 92 percent (Kaiser Family Foundation 2021). A RAND study finds that average U.S. hospital prices are 247 percent of the rate Medicare pays (Whaley et al. 2020). Average prices exceed 400 percent of the Medicare rate at some hospital systems across the country. Recent Johns Hopkins University research published by Axios finds that hospitals mark up their prices by an average of seven times their cost of care (McGhee and Chase 2021).

Healthcare costs now make up roughly one-third of total employee compensation for employees in the bottom half of the wage scale (Samuelson 2018). The percentage of small businesses with fewer than twenty-five employees that offer healthcare coverage fell by nearly one-third from 2008 to 2017 (Frostin 2018).

In November 2019 and October 2020, U.S. Health and Human Services (HHS) finalized new price transparency rules for hospitals and then for health insurers, respectively. These rules require hospitals and insurers to post their actual transaction prices, including discounted cash rates, secret negotiated rates, and cost sharing. These transaction prices allow employers and patients to shop for the highest quality care and coverage at the lowest possible prices for the roughly 90 percent of healthcare spending that excludes emergency care (Jacobson 2013). The hospital rule took effect on January 1,2021, and the insurance rule is currently scheduled to be implemented in July 2022. The hospital rule has been marred by widespread noncompliance. PatientRightsAdvocate.org (2022b) released a report in February 2022 that finds that just 14.3 percent of hospitals are complying with the mandate a year after its implementation.

Independent of federal health policy, employers can immediately begin reducing their healthcare costs by using their market clout to pursue price-transparent contracts with providers. Before the COVID-19 pandemic, American employers provided healthcare coverage to around 181 million Americans (Lytle 2019). Most individuals receiving employer-sponsored coverage are part of self-insured (a.k.a. self-funded) health plans, in which employers assume direct financial responsibility for paying claims and have control over benefit design without paying premiums to a traditional insurance carrier to access its network. Given their market power and exposure to rising healthcare costs, employers are well positioned to take advantage of price transparency. They can do so by transitioning from the status quo of ever-rising healthcare costs, price opacity, and countless expensive middle players to a price-transparent model.

Real Prices Are Needed to Reverse Healthcare Cost Trends

Runaway healthcare costs are a function of healthcare consumers' lack of pricing information prior to receiving medical care. How are consumers expected to spend wisely when prices are unknown? This bizarre pricing dynamic holds patients captive and prevents consumer discretion, facilitating high prices, widespread price discrepancies, administrative bloat, waste, overtreatment, and overbilling.

A study published in the Journal of the American Medical Association (Shrank, Rogstad, and Parekh 2019) finds that administrative waste accounts for roughly 25 percent of U.S. annual healthcare spending. Researchers examined seventy-one estimates of the cost of healthcare waste in the following six domains: failure of care delivery, failure of care coordination, overtreatment or low-value care, pricing failure, fraud and abuse, and administrative complexity. They estimate that total annual costs of waste in these domains equals up to $935 billion. They conclude, "Implementation of effective measures to eliminate waste represents an opportunity to reduce the continued increases in U.S. health care expenditures." Addressing pervasive waste through price transparency and competition can save nearly $1 trillion annually that can, instead, benefit employees in the form of higher wages and earnings. Research from Johns Hopkins University (Lyu et al. 2017) estimates that 15 to 30 percent of total American medical care is associated with overtreatment. When price transparency ushers in consumer knowledge of standards of care, outcomes, and quality, comparison shopping will significantly shrink this wasteful spending.

System-wide price transparency will have the following three effects: (a) healthcare consumers will be able to identify and shop for the best care at the lowest possible prices for what they truly need, reducing overpriced and unnecessary services; (b) providers and insurers will compete over price to attract these empowered consumers, driving down prices system-wide; this dynamic will reduce the cost of what is needed and increase the efficiency of what is used; (c) upfront price discovery will improve quality of care as providers seek to differentiate themselves to attract consumers, increasing the collective benefits of good healthcare to the population at large. Lower prices plus enhanced medical proficiency will increase the use of beneficial health procedures.

Employers--with their market power--can drive this pricing revolution by demanding transparent prices in their employee-benefit packages. These businesses and their employees can act as "proxy shoppers" who usher in a competitive healthcare market in the same way that the relatively small share of drivers who compare gasoline prices keep pump prices fiercely competitive.

With price transparency, healthcare will resemble other sectors of the economy, including tech and retail, that put downward pressure on prices and spur innovation and improvements in quality. Approximately 90 percent of healthcare spending is nonemergency, and the majority of care is planned well in advance. Competition and transparent markets have reduced prices in some corners of healthcare, where they are evident. The price of Lasik eye surgery has held steady at about $4,000 between 2008 and 2021, while visual outcomes and safety have improved (Refractive Surgery Council 2021). Using the Bureau of Labor Statistics CPI Inflation Calculator, the inflation-adjusted price of Lasik fell by 25 percent over this timeframe.

System-wide price transparency can drive down prices and improve quality, just as in the airline industry after it was deregulated in 1978 and airfares fell by 50 percent in real dollars while quality, safety, and access improved (Thompson 2013). The same potential can apply to healthcare. Just as consumers can easily shop on Expedia or Google Flights for flights today, employers and all other consumers will be able to compare healthcare prices on their smartphones when tech companies, including MDSave, GoodRX, FireLight Health, Turquoise Health, and Sidecar Health, aggregate real prices into consumer-friendly apps.

Given the power of prices to create efficient markets, it is no surprise that there is a rich economic literature showing that price transparency reduces prices. According Van Horn, Laffer, and Metcalf (2019), cash prices for healthcare procedures are, on average, 39 percent less than insurers' negotiated rates within the same market. Zach Y. Brown (2019) examines how a website in New Hampshire providing price information reduced the cost of medical imaging procedures, finding that consumers who used it saved 36 percent on their imaging costs. He highlights how a large theoretical literature "argues that information friction can impede competition and lead to higher prices" (699).

Economists Christopher Whaley, Timothy Brown, and James Robinson (2019) find that after Safeway introduced price transparency and reference pricing, employees saved 13 percent on imaging tests and 27 percent on lab tests.

Often cash prices are substantially lower even within the same facility. One analysis found that at a hospital in Boulder, Colorado, MRI prices are $600 when paying cash versus $1,100 out of pocket when using insurance (Beck 2016). An acquaintance in Boston paid just $250 cash for an MRI at an imaging center versus an insurance rate of $1,750 with a $210 copay. Pomona Valley Hospital Medical Center near Los Angeles lists a cash price of $450 for a standard, noncontrast brain MRI versus $6,500 for the same treatment for patients covered by Cigna health insurance (Fisher 2022).

Given these substantial savings, it is no surprise that healthcare price transparency is overwhelmingly popular. A bipartisan supermajority of approximately 90 percent of Americans supports it, according to recent polls conducted by SocialSphere (PatientRightsAdvocate.org 2022a), Marist (PatientRightsAdvocate.org 2021b), the McLaughlin Group (2020), and Harvard/Harris (2019).

A transparent and competitive healthcare market will also expose and converge the vast price discrepancies that exist for the same healthcare services in the same facilities or markets. According to a Brookings report, the same commodity healthcare service can differ by nine times within the same market (Nunn, Parsons, and Shambaugh 2020). A recent study by the Health Care Cost Institute examined the prices at Sutter Health, Northern California's largest hospital chain. Prices for some knee X-rays there vary by eight times, from $77 to $616, depending on the hospital and payer. For lower joint replacements, prices differ by $55,000. Even at the same hospital, gastrointestinal biopsies vary by more than five times, from $1,800 to $9,500 (Kennedy et al. 2021).

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