Transparency in Hospital Pricing and Insurance Coverage: What Will It Mean to You?

On November 15, 2019, CMS released two rules related to transparency in healthcare pricing: a final rule addressing hospital pricing and a proposed rule addressing transparency in insurance coverage. Both rules were published in response to President Trump’s June 24 executive order calling for greater transparency, and CMS is touting them as a major win for patients who are frustrated by their inability to anticipate the cost of services. These rules are projected to go into effect on January 1, 2021. The hospital pricing final rule has already been challenged in court, so it seems likely the insurance coverage proposed rule will also face resistance before it is finalized.

Given the uncertainty surrounding these rules, coupled with the fact that it will be almost a year before they go into effect, some provider organizations may be tempted to take a wait-and-see approach rather than immediate action. ECG’s view is that despite the uncertainty, it makes sense for providers to begin preparing for greater pricing transparency in the industry, since the impact could be significant. In this article, we highlight the major provisions of the two rules, provide our thoughts on how these rules will impact the healthcare industry, and offer suggestions as to how provider organizations might respond.

Hospital Pricing Final Rule

The hospital pricing final rule takes its legal authority from a provision in the ACA that requires hospitals to make their “standard charges” available to the public.¹ Previously the term “standard charges” was commonly understood to mean gross charges, and it has little bearing on the consumer’s out-of-pocket costs. In the final rule, CMS is broadening the definition of standard charges to include the following data elements:

• Gross charges
• Payer-specific negotiated rates
• Deidentified minimum and maximum reimbursement rates across all payers
• Any cash payment discounts to self-pay patients

This data must be made available in “machine-readable” format for all goods and services appearing on the hospital’s charge master as well on the charge master for the hospital’s employed physicians, if applicable.² Because charge masters contain such an extensive list of items and services, CMS has also required hospitals to publish, in a consumer-friendly format, the same data elements (with the exception of gross charges) for 300 “shoppable services.” CMS has specified 70 of these shoppable service but leaves it to the discretion of the provider to determine the remaining 230.

This data must be made available in “machine-readable” format for all goods and services appearing on the hospital’s charge master.

Almost immediately upon its release, the rule was challenged in court by the American Hospital Association and others on the grounds that (1) the broadening of the definition of “standard charges” went beyond the ACA’s intent and (2) requiring negotiated rates to be published is a violation of the contracted parties’ First Amendment rights. While the outcome of these legal challenges is difficult to predict, it’s certainly possible they will alter or delay the proposed rule’s implementation, if not succeed in striking it down entirely. In the meantime, it is worth considering how the final rule could play out, assuming it emerges from the legal challenges in substantially the same form it is currently.

Limited Benefits for Consumers

We believe the hospital pricing rule will do little to provide pricing transparency to consumers. To begin with, provider organizations will have difficulty complying with the rule, because much of the information is not readily available to them. For example, negotiated rates cannot be easily produced due to complex reimbursement rules and, in some cases, proprietary payer fee schedules. Also, because some payers utilize rental networks, providers often don’t know which payers can access their plans and at which rates.

More importantly, even if providers are able to make accurate information available, most patients would find it hard to put the information to use. Comparison shopping would require them to visit multiple provider web sites, each of which might publish different information (based on the provider’s selection of “shoppable services”), in different formats. Patients typically lack the basic healthcare literacy to know which services they need, which ancillaries or other services might come into play, whether professional fees are provided by employed or nonemployed physicians, etc. Also, as stated above, the actual costs could differ substantially from the original estimate. Finally, as if these challenges weren’t significant enough, patients will still be comparing the total cost of these services (inclusive of insurance payments) rather than their out-of-pocket cost, which is the thing they are most concerned with.

Accordingly, some hospitals may conclude that the rule’s provisions do not really benefit the patient and may therefore do the minimum necessary to comply with the letter of the law. Others may determine that even minimal compliance is more costly than the penalty for noncompliance ($300 per day, or $109,500 annually) and that their public image would suffer more by publishing confusing and inaccurate information than by publishing nothing at all. Therefore, some providers could choose to simply opt out and pay the penalty.

Transparency in Coverage Proposed Rule

Because the Transparency in Coverage proposed rule is still a work in progress, it is wide open to speculation with respect to potential legal challenges and its final form. That said, we believe it could have a major impact on the industry by providing information that is truly useful to the consumer. The proposed rule would require that health plans make two types of cost information available for consumers.

The first type of information, which must be made available via an internet-based tool and in paper form, relates to expected insured-patient costs. Insurers would be required to include the following information pertaining to covered items and services, specific to the provider from which the patient may receive services:

• Patient’s cost-sharing liability, including deductibles, coinsurance, and copayments
• Accumulated amounts toward deductible and/or out-of-pocket limits
• Negotiated rate, if the negotiated rate impacts the patient’s cost-sharing liability
• Out-of-network allowed amount
• Items and services content list for items and services that are paid as a bundle
• Notice of prerequisites to coverage (e.g., concurrent review, prior authorization)
• Disclosure notice regarding what out-of-network providers may bill for

Note that this information, by design, is similar to what patients would expect to find in an Explanation of Benefits. In effect, insurers are being asked to apply the same logic used in adjudicating a claim—before the service has been provided. It remains to be determined whether payers will be able to comply with this requirement, but to the extent they are able to, this information would offer patients several key advantages over what the hospital pricing rule calls for:

• It addresses out-of-pocket costs, which is patients’ top concern.
• Beneficiaries would have a single platform to compare prices across multiple providers.
• Information would likely be standardized and more detailed.
• More accurate cost estimates should be available, based on insurers’ more sophisticated data and analysis capabilities.

The second type of information outlined in the proposed rule calls for health plans to make similar information available to the general public, and specifically envisions entrepreneurs that can aggregate information across providers and insurers. This is a particularly interesting feature because it could provide patients with information in a more usable format when comparing prices. It is easy to imagine companies developing scorecards that rank providers’ cost in a simplified and user-friendly manner, much as Expedia and Priceline assist in shopping for hotel rooms and airline tickets.

Implications for Providers

While the details of these rules remain unclear, it is worth contemplating what their effect would be if they were implemented more or less as proposed. We believe that enhanced transparency will not only impact reimbursement rates but will also significantly influence how providers interact with payers.

Impact on Payment Levels

The stated intent of these rules is to bring prices down, but is that what would actually occur? Some observers have argued these rules could drive costs up, because providers that have access to their competitors’ prices can more readily raise their own prices. This could occur either through unlawful collusion or by simply observing one another’s prices and responding accordingly.

In our opinion, neither scenario seems realistic. In the first scenario, organizations that are sufficiently motivated to collude illegally will probably not be deterred by the inconvenience of sharing prices clandestinely. Therefore, making prices public should not result in an outbreak of anticompetitive behavior. Similarly, in the second scenario, it would be very difficult to get competitors to raise their prices in unison without having direct communication and an agreement to do so.

Everyday experience suggests that prices are lower when consumers are able to shop around

Rather, everyday experience suggests that prices are lower when consumers are able to shop around, and economic theory supports this observation. The theory is this: Price shopping comes at a cost to the consumer, in terms of time and effort. If the cost is too high, consumers won’t spend the time and effort required to shop for the best prices, and competitive pricing will be stymied. It’s not simply that consumers won’t be able to find the good deals that are out there; rather, prices will be systematically inflated. Why? Because all providers, knowing their customers aren’t shopping for a better price elsewhere, will have an incentive to raise their prices without fear of losing significant business. However, when consumers are well informed and do shop around, there will be greater competition for those consumer dollars among providers, driving prices down throughout the market.

Payer-Provider Interactions

In addition to downward pressure on payment rates, these rules will likely force changes in the way providers engage with payers.

First, let’s look at how payers may respond, as this will impact providers. Many payers will undoubtedly push back on the proposed rule because it creates a major administrative burden for them. More significantly, it introduces a potentially unwelcome risk based on its disruption to payers’ business model. However, some insurers may embrace the rule as a competitive advantage—imagine the value that would accrue to the insurer that can help its beneficiaries manage their out-of-pocket costs more effectively than its competitors.

In addition, the emergence of third parties that aggregate information across payers and providers to make it available to the public could drive transparency. CMS anticipates this scenario as a possibility in the final rule and explicitly mentions it as a goal in the proposed rule.

Both outcomes—the new rule being embraced by insurers and the emergence of third parties—would not only provide downward pressure on rates but, for many providers, will change the way they choose to engage with their payers. For example:

• Shifting negotiation priorities
  For many providers, securing the highest rates possible may cease to be the primary objective in contract negotiations. Instead, they may wish to sacrifice margin in exchange for the opportunity for greater volumes, particularly in services that are most susceptible to price competition.
• Quality and patient experience as a real differentiator
  Providers that do try to push for higher rates will have to demonstrate that their quality and/or patient experience truly justify the additional cost. This has been difficult historically, as quality measures and incentives typically have been a source of frustration for providers rather than a real driver of change. However, as consumers become more active participants in their healthcare decisions, quality and patient experience will become an important differentiator.
• More packaged pricing
  Because packaged pricing simplifies the patient’s task in predicting the cost of shoppable services, payers are likely to place greater emphasis on bundled payments as a reimbursement methodology. This pushes greater financial risk to the provider, but those willing to accept the risk will have an opportunity to gain first-mover advantage.
• Direct-to-employer contracting
  Similarly, as greater transparency takes hold and consumers’ expectations increase, direct-to-employer contracting arrangements may gain in popularity, particularly for packaged-price items.

Each of these developments will not only impact the insurer-provider relationship but will also require providers to develop the internal capabilities needed to control costs while delivering on access, patient experience, and quality, as well as to manage pricing and funds flows under alternative payment models.

A More Transparent Healthcare Environment

While the future of these two rules remains uncertain, we should assume there will be a continued push toward pricing transparency and that it will have a major impact on the healthcare industry. In no other industry are the prices of goods and services as difficult to determine as healthcare, and the ever-increasing disparity between consumers’ increasing expectations and their actual experience cannot continue forever. We may never see the day when shopping for heart valve replacement surgery is as easy as finding the right pair of shoes online, but there is movement in that direction. It is not too early to begin developing a strategy for success in a more transparent environment.

Published January 13, 2020