Price Transparency and Incomplete Contracts in Health Care
| Publication year | 2017 |
Price Transparency and Incomplete Contracts in Health Care
Wendy Netter Epstein
Market-based health reform solutions dominate the post-Affordable Care Act landscape. Under these plans, competition is supposed to bring down ballooning prices, and patients are to act more like consumers, refusing low-value, medically unnecessary care. Whether one embraces these solutions, one thing is clear: they cannot work absent price transparency—which the U.S. system lacks. To the contrary, the law explicitly enforces open price term contracts between patients and providers.
This Article is the first to synthesize theories of incomplete contracts from traditional law and economics and recent work in the behavioral sciences and to apply these theories to the price transparency problem. It argues that doctrine is out of step with theory, and proposes a contract law solution: an information-forcing penalty default rule. Courts should impose an undesirable default to force the parties to contract around the default. When providers fail to include a price, and it would have been reasonable to do so, courts should fill the gap with a price of $0. Rather than risk not being paid, providers will include a price in the patient contract. Legislative action has been both slow and ineffective in fixing the crucial price transparency problem. At no other time in recent memory has the importance of contract theory been put into such sharp relief and, remarkably, in an area of law that is at the very core of the emerging political economy.
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James, a sixty-five-year-old man, suffers from severe chest pain that is not improving with medication or lifestyle changes. His cardiologist tells him that he needs an angioplasty, a procedure in which a catheter widens a narrowed artery. After discussing the risks of the procedure, James agrees. He arrives at the hospital and signs a series of standard forms, one of which states that he "individually obligates himself . . . to pay the account of the Hospital in accordance with the regular rates and terms of the Hospital."1 He receives no information about the cost of the procedure, but by signing the form, he enters into a contract to pay whatever the charges end up being.
James later receives the bill for the angioplasty—$67,937. With his $5,000 insurance policy deductible and 20% copay, his portion of the bill amounts to $17,587. Ultimately, he must pay the out-of-pocket limit on his policy, $7,150 for 2017.2 Before receiving the bill, James had no idea how much the procedure would cost. He also did not know that an angioplasty at another hospital in the same city would have cost only $10,749—532% less. Had he had the procedure at the other hospital, James would have owed $6,150—$1,000 less than what he paid.3 Indeed, large price differentials despite similar quality are common in the U.S. system.4
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Although James is a hypothetical patient, most real patients who receive medical care in the United States do not know the cost of their care until they receive the bill.5 By that time, they have already legally committed to pay by entering into what contract scholars have termed "open price term" contracts. Imagine going to buy a car and telling the salesperson that you will take it regardless of the cost, or committing to pay for a hotel or rental car without knowing the cost. It sounds preposterous, but in health care, courts routinely enforce these contracts that lack a price term.
The absence of price transparency in patient-provider contracts is highly problematic.6 Patients suffer from both an imbalance of information and an imbalance of power. Providers have access to pricing information (working with insurers) and patients generally do not. Providers set prices. Patients have little room to negotiate.7
Patients can turn down unnecessary care or seek lower priced care. The industry is counting on them to do just that.8 There is a significant trend to make patients shoulder more of the economic burden of their health-care decisions—through higher deductibles, copays, and co-insurance9 —in hopes
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that it will prompt patients to act more like traditional consumers.10 Indeed, consumer-driven medicine is certain to be a hallmark of any replacement of the Affordable Care Act (ACA).11
But it is hard for patients to price shop, reduce overtreatment, or even put pressure on the industry to justify pricing in relation to quality when patients do not know prices before they enter into binding contracts to pay.12 In a country where one in five Americans still struggles to pay medical bills and three in five bankruptcies are attributed to medical costs, it is troubling that patients lack necessary information to make smart financial decisions, when possible, about their care.13 Indeed, it is hard to imagine patients doing many of the things that advocates of consumer-driven health care hope they will do if patients have no visibility into price at decision-time.14 It is also hard to see how providers will be incented to compete on the value of care they offer absent transparency.
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Questions concerning incomplete contracts—of which open price term contracts are one variant15 —have dominated contracts scholarship for the last several decades.16 Scholars have pondered why incomplete contracts arise,17 whether they should be enforceable,18 and how courts should fill gaps left by the parties.19 There has also been much scholarly debate on the desirability of relative completeness in contract drafting.20 Despite this scholarly attention, however, a coherent legal framework for analyzing incomplete contracts and a theoretical basis for understanding existing doctrine have been elusive.
in part, this is due to competing conceptions of what values matter most. The law and economics account has mostly focused on the role of transaction costs. While it may be more or less costly to detail a deal up front, depending in large part on the level of complexity and uncertainty in the deal, doing so may reduce expenditures down the line because parties are clear about their obligations.21 in general, law and economics scholars assume that detailed
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contracts reduce the likelihood that litigation will ensue later.22 On the other hand, a level of incompleteness is preferable in the law and economics account when the cost of detailed up-front drafting exceeds expected gains.23
More recent work in the behavioral sciences takes a different approach. Rather than viewing incompleteness only as a cost that makes eventual litigation more likely, this work has identified benefits to incompleteness in building relational capital between the parties.24 Incompleteness, particularly regarding task specificity, can prompt feelings of trust and foster collaboration between the parties.25 Completeness, on the other hand, can crowd out an agent's intrinsic motivation.26 This work has also identified negative cognitive implications of specification—namely, that specification prompts agents to adhere to the enumerated contractual requirements and to lose sight of the overall purpose of the deal.27
These two strands of scholarship inform a set of criteria for analyzing contractual completeness. In particular, this analytical framework addresses the question of how best to determine the desirability of relative completeness in drafting. It argues that when transaction costs of detailing are low, information asymmetry is high, and incompleteness is unlikely to build relational capital between the parties, a more complete contract is desirable. But when a deal is complex and uncertain, making transaction costs of drafting high, both parties are adequately informed, and there is a significant need for trust and collaboration to develop, a less detailed contract is desirable.28
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In this conception, a simple sales contract for widgets would probably not benefit from less complete drafting. Drafting a complete contract is a low-cost endeavor, and there is little to be gained relationally from leaving it incomplete. The sole purpose of entering into a binding contract in a transaction like that is to ensure compliance.29 But the contract in which a firm partners with another to co-develop new technology might be a good candidate for less complete drafting.30
Applying these criteria to the health-care example suggests that enforcing open price term patient-provider contracts is out of step with theory.31 Transaction costs of detailing would, for the most part, be low. Many health services would be both easy and inexpensive to price ex ante. For instance, a hospital should easily be able to price a standard x-ray, even with the minor complication that different insurers have negotiated different rates.32 The same is true even for more complicated, but still highly standardized procedures like a colonoscopy or cataract surgery.33 Certain emergency-room treatment and inherently uncertain procedures like complicated surgeries provide exceptions, but do not account for the bulk of medical care.34 Information asymmetry is high. Providers have far superior access to price information than patients, particularly in a world where health pricing varies tremendously in unpredictable ways and where it is so dependent on understanding a complex numerical code for medical procedures.35 Finally, it is hard to imagine that behavioral benefits (like increased trust) would follow from a provider's failure to include a price term. While the doctor-patient relationship is important, and the provision of medical care is not exactly akin to the sale of a
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widget, leaving out the price term does not seem likely to foster that relationship in the same way that a more open-ended contract for innovation would foster collaboration between two innovating entities.
Contract doctrine should encourage patients and...
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