Abstract
In January 2021, hospitals and payer-specific entities in the United States were mandated to comply with the new pricing transparency rules. These rules applied to all standard charges a hospital applied to services provided to and for a consumer. From a financial perspective, the issue of price transparency in health care has for several decades surfaced as a legitimate concern of consumers, health care providers and payers. The aim of this article is to historically examine where and how pricing in health care began and to illustrate financial issues leading up to the current transparency in pricing required by health care payers and providers. A comparative analysis of issues and challenges pertaining to the transparency in pharmaceutical product pricing between the United States and India is also provided in brief.
Introduction to Health Care Plan Establishment
In 1929, Baylor University Hospital developed a partnership between a local hospital and its financially struggling patients, many of whom were local teachers in the Dallas, Texas area. The partnership was to provide health care insurance for hospital services for up to 3 weeks per year, and this partnership marked the beginning of Blue Cross insurance (Blue Cross and Blue Shield, 2023). In response to such hospital-dominated health plans as Blue Cross, physicians in 1937 formed Blue Shield to allay their fears that hospital-dominated insurance plans for medical services could potentially affect physician compensation, while the public continued to feel the financial burden of paying for health care (advocacy.consumerreports.org, 2013).
With Blue Cross and Blue Shield’s continuing success, commercial insurers began to offer medical health service plans to individuals and especially employers. When WWII created a shortage of able/skilled workers, employers began offering health benefit plans as a means of attracting new talent for their workforce. The passage of the Stabilization Act of 1942 and subsequent tax law changes under the Revenue Act of 1942 further added to the benefit for employers offering a health plan as a means of attracting workers (Mihm, 2017; Rook, 2020). The Stabilization Act, by way of a presidential executive order, established a freeze on wages and salaries for all workers in the US. From an employer’s position, this wage freeze, along with wartime labour shortages, created a financial hardship for employers as they could not use salaries as a competitive factor for hiring employees. However, a clause existed in the Stabilization Act allowing insurance and pension benefits to grow at a reasonable rate during the wage freeze. Financially, the Revenue Act helped employers use employee benefits expenses because those expenses could be deducted from any profits of the employer. Health care insurance was beginning to play a major role in the financial expenses and tax reduction of an employer.
Additionally, during the early 1940s Henry Kaiser and Sydney Garfield provided a health insurance plan for workers in the Kaiser shipyards, where Kaiser Permanente Hospital was later established (Griffin, 2020). After WWII ended, Kaiser and Garfield opened their Permanente Health Plan to the public, and the plan became the forerunner of the Health Maintenance Organizations (HMOs), where health care delivery and financing functions combined and resulted in a decrease in costs and utilisation of acute health care by focusing on preventative care (Cutting & Collen, 1992; Falkson & Srinivasan, 2022). Resulting from the success of the health plan model of Kaiser and Garfield, the federal government in 1973 created the Health Maintenance Organization Act in the hopes of increasing the number of HMOs. An HMO established under the control of the Health Maintenance Organization Act seeks to develop alternatives to the traditional forms of health care delivery and financing, thus making pricing a factor for health care services (US Government Accountability Office, 1978).
The 1960s and Medicare/Medicaid
With the coming of the 1960s, the number of individuals within the US who were covered by some form of private insurance had greatly increased, with most coverage existing in the form of employer provided insurance. As most health plans came in the form of employer-provided coverage, the elderly, unemployed and the economically challenged were left without health insurance coverage. This gap in coverage became the beginning of President Lyndon Johnson’s Great Society programmes. Out of these efforts, Medicare and Medicaid became government-funded health insurance programmes for the elderly and poor (History-CMS, 2021). The development of these two programmes allowed the US government to become the largest purchaser of health services.
Citing the loss of autonomy and financial prosperity under government-controlled Medicare and Medicaid, physicians opposed the two programmes. However, both programmes helped alleviate physicians’ concerns when a ‘fee-for-service’ model of billing allowed for a ‘usual and customary’ rate to be charged by the physician (Cohen, 1985; Zelizer, 2015). This ‘fee-for-service’ government-funded model opened the door for hospitals and physicians to decide on what they would charge, thus allowing both to increase their fees to increase their revenue. This ‘fee-for-service’ method was the exact pricing system adopted by earlier health insurance plans where hospital and physician-led health care plans utilised a cost-plus system where payments were based on ‘customary and reasonable’ charges set by the physician. Hospitals received payment as a percentage of their costs and working capital. Both physician and hospital payment systems saw the opportunity for financial gain by increasing costs to increase income. Over time, the fee-for-service reimbursement model became unaffordable and helped add to the rising costs of health care (RevenueXL, 2022). With the earlier beginnings of commercial insurance and the addition of government-funded Medicare and Medicaid, both of these payers for health services simply adopted the same defective system as that of private health insurance, which accelerated the rate of price inflation creating more financial hardships for consumers, providers and payers.
The 1980’s and 1990’s
Price inflation practices continued for several years until 1983 when Medicare adopted a prospective payment system (PPS) directed towards hospital reimbursement through utilisation of diagnosis-related groups (DRGs) of illnesses (Cunningham, 2007; Scott, 1984). This adoption allowed hospitals to shift patient costs to other activities that were not covered by the controls of the PPS. During the 1980s, there existed two payment systems for hospitals: the government-funded system and the private, negotiated rates from health plan systems. This two-payer system created two pricing systems depending on which one paid the hospital. The two-payer system marked the beginning of different hospital prices depending upon the payer, with both the hospital and payer seeking financial interests. As commercial insurers began to consolidate during the 1980s, their bargaining power increased, and payment methodologies became based on contractual schedules or negotiated rates. Resulting from these changes in payment methodologies, the ‘master price list’ held by hospitals became less indicative of the actual costs of services rendered, except for the individual without insurance, who paid nothing.
As the 1980s progressed, payments for hospital inpatient stays were considered a reasonable estimate for the actual payment. However, during this time period of the 1980s, hospitals began to believe that the payments received from third-party and/or government-funded payers were inadequate for the services they rendered. The result was that hospitals raised their billed charges, which included the amounts paid by patients and third-party payers who were unable to access the low rates being paid by large insurers and Medicare. These actions, over time, widened the gap between charges accessed for a service and the actual payment received for reimbursement. Effectually, the results of these actions by both payers and hospitals forced many hospitals to accept the prices paid (price takers) for many of the services provided, which in turn allows the hospital to pass along costs (price setters) to other patients to help increase revenue. This price setting by hospitals passes much of the cost of care to individuals who are the least likely to be able to afford it, such as self-pay patients, persons with high deductibles and high-cost sharing health insurance. These groups of patients are serving as the underwriters of the cost of the low rates paid by large insurers and Medicare.
Studies suggest price setting by hospitals could prove most impactful in reducing health care spending and improving the financial outlook for health care providers and consumers, yet many hospitals are not in agreement as the idea could reduce their financial situation. This has added to the idea that transparency in pricing is the second-best option to lower costs (Hackett, 2021).
Throughout the 1980s and 1990s, the cost of health care continued to rise and became a social and political issue. The lack of transparency in health care pricing began to be examined as a means of assisting in controlling costs. Questions were asked by policymakers and politicians about how much information was needed by an individual to make good, cost-effective medical choices. Policymakers at the state and federal level began to take notice of the pricing transparency issue and lack of regulatory control measures in a financially failing health care market. In 2001, in the Institute of Medicine’s (IOM) publication, Crossing the Quality Chasm: A New Health System for the 21st Century, a new call for price transparency was made by those favouring consumer-driven health care (CDHC). Federal policy changes were made through financial tax incentives for high-deductible plans as the federal government began to join others in the call to support price transparency in health care. These changes towards transparency in pricing and quality information were directed towards such federal programmes as Medicare and Veterans Affairs hospitals (Reed, 2019).
The 2000’s and Beyond
Financially, states also face the health-care-costs burden as they followed the lead of the federal government by examining the increase in price transparency and health-care costs. Beginning in the 2000s, many states began enacting legislation calling for increased disclosure of health care pricing and cost containment. Several states established all payer claims databases (APCD), which served as a repository for public and private payers to provide information in terms of their capacity to produce price, resource use and quality information for consumers (Agency for Healthcare Research and Quality, 2018; National Conference of State Legislatures, 2018).
The goal of an APCD is to assist in financially improving health care affordability, efficiency and cost transparency. The implementation of state-mandated APCDS was opposed by insurers, and in 2016, the Supreme Court ruled in favour of insurers, stating that states may not require data collection from non-governmental self-insured group health plans. These plans represented about one-third of all covered people, thus making it difficult for states to seek insurer participation in an APCD (Young & Fiedler, 2020). The ruling limited states from legislating pricing transparency participation by insurers, especially financially self-funded providers and their third-party administrators (Reed, 2019). As of May 2020, only six states required health care transparency from providers, making robust price transparency laws not very widespread in the US (DiBase et al., 2020; LaPointe [1], 2020).
In August 2018, the Centers for Medicare and Medicaid Services (CMS) released a final rule for the Inpatient and Long-Term Care Hospital Prospective Payment System (IPPS/LTCH PPS). The final rule added new requirements for hospitals that participate in the Medicare programme. Beginning 1 January 2019, all hospitals must make public a list of their standard charges for items and services provided by the hospital. The rule stipulated that the standard charges must be made available on the internet in a machine-readable format, and the information must be updated at least once annually (Bresnick, 2018; Reed, 2019).
The new CMS 2019 rule provided implementation of Section 2718(e) of the Public Health Service Act (PHSA). The new 2019 rule built upon Section 2718(e), which in 2015 made it a requirement for hospitals to make public, upon request, a list of standard charges. Under Section 2718(e) of the PHSA, hospitals within the US were yearly required to establish, update and make public a list of the hospital’s standard changes of items and services that were provided. The requirement included diagnostic-related groups (DRGs) established under Section 1886(d) of the Social Security Act (CMS Fact Sheet [1], 2019; Yood, 2014).
As the new rule (1 January 2019) took effect, further measures towards ensuring cost transparency were being considered by the Department of Health and Human Services (HHS). To assist in providing better cost transparency, the HHS proposed a second rule in March of 2019. The proposed second rule focused on the 21st Century Cures Act of 2016 by addressing the act’s provisions against ‘information blocking’ and broadening the definition of ‘electronic health information.’ Additionally, within a small, short section of the rules drafted under the heading of ‘price information’, the way for price transparency began to take shape. Information blocking took its roots with the passage of the Health Information Technology for Economic and Clinical Health Act (HITECH) of 2009. This act provided for the HHS Office of the National Coordinator for Health Information Technology (ONC) to oversee policies and investments in support of a nationwide Health Information Technology (HIT) infrastructure that enabled and supported the development of a robust Health Information Exchange (HIE). Additionally, the passage (2010) of the ACA provided support for HIEs (21st Century Cures Act, 2016; Reed, 2019).
A 2015 ONC report to Congress on information blocking informed of varying methods of information blocking; yet none of those methods were related to health care prices for consumers. Further, the definition of information blocking within the 21st Century Cures Act made no mention of costs or prices (Reed, 2019). Instead, the report defined information blocking in terms of ‘a practice that is likely to interfere with, prevent, or materially discourage access, exchange, or use of electronic health information.’ The Act further includes a practice ‘if conducted by a health provider, such provider knows that such practice is unreasonable and is likely to interfere with, prevent, or materially discourage access, exchange or use of electronic information’ (Federal Reserve, 2019).
Based on the March 2019 proposed rule by the ONC, the definition of information blocking, along with the broadened definition of electronic health information (EHI) within the 21st Century Cures Act, provided the opportunity to advance the cause of price transparency. By redefining electronic health information, the rule reads as such: ‘To be clear, this definition (of EHI) provides for an expansive set of EHI, which could include information on an individual’s health insurance eligibility and benefits, billing for health care services, and payment information for services to be provided or already provided, which may include price information.’ The proposed rule reads further on the issue of price transparency:
The fragmented and complex nature of pricing within the health care system has decreased the efficiency of the health care system and has had negative impacts on patients, health care providers, health systems, plans, plan sponsors and other key health care stakeholders. Patients and plan sponsors have trouble anticipating or planning for costs, are not sure how they can lower their costs, are not able to compare costs, and have no practical way to measure the quality of the care or coverage they receive relative to the price they pay. Pricing information continues to grow in importance with the increase of high deductible health plans and surprise billing, which have resulted in an increase in out-of-pocket health care spending. Transparency in the price and cost of health care would help address the concerns outlined (within the proposed rule) above by empowering patients to make informed health care decisions. Further, the availability of price information could help increase competition that is based on the quality and value of the services patients receive. Consistent with its statutory authority, the Department is considering subsequent rulemaking to expand access to price information for the public, prospective patients, plan sponsors, and health care providers (Federal Reserve, 2019).
The proposed rule cited facts illustrating that ‘the price insurers paid for procedures varied materially, even within the same locality.’ The ONC concluded from studies of price variation: ‘illustrated the secretive nature of pricing in the health care market, as well as the extreme variations in price that can exist for the same procedure within the same locality.’ The proposed rule further concluded that ‘making such price information available to insurers through application programming interface (APIs) would drive health care prices down, which could lead to significant benefits across the health care continuum’ (Federal Reserve, 2019). An API is a set of routines, protocols and tools for building software applications. It can specify how two or more applications interact with one another (Norton, n.d.). The proposed rule, as stated above, was ‘considering subsequent rulemaking to expand access to price information for the public, prospective patients, plan sponsors, and health care providers.’ This consideration was aimed at health care providers providing information on the negotiated rates paid by insurance companies and Medicare/Medicaid and rates that are charged to uninsured patients (Reed, 2019). The overall intent is to make any disclosure of price more meaningful to consumers and insurers than what is found in the charge master list of a hospital.
Related to the transparency in pricing issues, the concept of ‘surprise billing’ has received much attention. As previously mentioned, pricing information continues to grow in importance for the consumer, and surprise billing is one of the major contributors to out-of-pocket spending. In February 2019, the American Hospital Association (AHA) outlined several principles to assist in addressing the surprise billing issues. The principles outlined point out that many states have undertaken efforts to protect patients from surprise billing, but federal action was needed to protect patients, especially with self-insured employer-sponsored plans, which are regulated under the Employee Retirement Income Security Act (ERISA), which provides coverage for the majority of privately insured individuals. Federal guidelines would allow states to meet the federal minimum for consumer protection (American Hospital Association [1], 2019).
President Trump Era Policies to Address ‘Surprise Billing’ Issues
In May 2019, President Trump’s administration released guiding principles to lift the burden of surprise billing and protect patients. The principles supported the need for patients to have adequate price information to make informed decisions. By having price information, patients are thought to be more in control and lower the costs they may face from a medical situation (White House Fact Sheet, 2019).
In June 2019, President Trump issued an Executive Order on Improving Price and Quality Transparency in American Healthcare to Put Patients First. The order reiterated the issue of surprise billing practices (Section 7) and called for ‘making meaningful price and quality information more broadly available to more Americans.’ Further, the order called for disclosure of actual prices by providers and insurers. Actual price means charges based on negotiated rates between insurers and providers (Keith, 2019; LaPointe [2], 2019; White House Executive Order, 2019). In July 2019, HHS, in response to President Trump’s executive order, proposed rules that followed directives within the executive order. The proposed rules would advance the agency’s commitment to increasing price transparency (CMS Fact Sheet [2], 2019). In September 2019, the July 2019 proposed rules received opposition from the AHA (O’Brien, 2019). As anticipated, the AHA, along with other health care associations and hospitals, would file a lawsuit questioning the rules as they applied to hospitals’ disclosure of price information, especially payer-specific negotiated rates.
In November 2019, the HHS released the final rule, Hospital Outpatient Prospective Payment System (0PPS) Policy Changes: Hospital Price Transparency Requirements (CMS-1717-F2). The final rule followed the directives of President Trump’s Executive Order of June 2019. The final rule is intended to advance the HSS commitment to increasing price transparency. The rule called for disclosure of prices by hospitals, which includes all standard charges, including discounted cash prices, payer-specific negotiated charges and de-identified minimum and maximum negotiated charges for all hospital items and services. Further, the rule called for public disclosure of price information for at least 300 ‘shoppable’ services, 70 of which are CMS-specified and 230 hospitals selected. By providing the price of shoppable services it was thought this would incentivise consumers to seek out health care costs and allow for price comparison of those shoppable services. Additionally, the rule for hospital price disclosure gave CMS the ability to impose civil monetary penalties of US$300 per day (CMS Fact Sheet, 2019; Keith, 2019; Morse, 2019).
In December 2019, shortly after the release of the final rule, four health care associations and three hospitals filed a lawsuit against the HSS, challenging the mandate that hospitals have to disclose their payer-specific negotiated rates. The lawsuit alleged the HHS did not have the statutory authority to force hospitals to publish anything other than standard charges (American Hospital Association Letter, 2019; LaPointe [3], 2019). In June 2020, a D.C. District Court judge ruled in favour of the government, thereby paving the way for implementation of the rule on 1 January 2021 (Reuter, 2020; Sullivan, 2020; White, 2020). The AHA immediately filed for an appeal and would seek expedited review (American Hospital Association [2], 2020; Reuter, 2020; United States Court of Appeals-DC Circuit, 2020). On 29 December 2020, a federal appeals court ruled the price transparency rule could be placed into effect on 1 January 2021, as had been planned from its inception by HHS (Caffrey, 2021; Minemeyer, 2020).
Prescription Drug Pricing—Lack of Transparency
It is no secret that there is a great degree of variability when it comes to prescription drug pricing in the United States (Larkin et al., 2022). Perhaps one of the key reasons is also related to how the healthcare system in the United States is structured. Being a more of an insurance-based and capitalistic model, the healthcare system in the US has moved away from being more of a patient-centric societal model. There is no doubt that all countries can learn from each other when it comes to transparency in pricing, particularly when it comes to price transparency in the US healthcare system (Nagar et al., 2022).
When the US pharmaceutical model is compared to that of most of the countries in the world, one will see that there are many more products that are available over the counter (OTC) in those countries. By making more products OTC, there is one key advantage—the price of the products is more competitive and less inflammatory as compared to when they are prescription-only. The greater the competition, the more likely the product cost will come down as time goes by. But, by making the products OTC also come at a risk of misuse and abuse of the products. It also indirectly encourages consumers to substitute the expertise of a health professional for more of a self-diagnosis based on what they can now find on the internet.
When talking about transparency in pharmaceutical products, other countries in the world have demonstrated that they are more inclined to be transparent as compared to the prices in the United States. For example, in India, a pharmaceutical product already has the maximum suggested retail price (MSRP) printed on it. This transfers the discount potential to the retail outlet, as long as they do not charge more than the MSRP to the consumer. The biggest advantage is that the consumer already knows what the maximum is they have to pay and they are not surprised or get a ‘sticker shock’ when they get the product.
However, there have been some recent changes in the US prescription drug marketplace that have started to provide some price transparency, but not price uniformity (Feldman et al., 2022). Web searches and even mobile phone apps have become valuable tools for consumers to do some price comparisons for prescription products prior to purchasing them. These apps as well as most of the websites also have a disclaimer in which they state that the prices displayed are their best guess estimate and may not be the actual price. Above is a Table 1 of price comparisons for a few products found via GoodRx app. This is a very small list of prescription medications, just to demonstrate the wide variation in prices that they display from one store to the next in the greater Houston area of the USA.
Prices (in US$) for a 90-day Supply of Select Medications in the Greater Houston Area Found Via the GoodRx App.
The researchers have followed the prices of these products at different times of the year. They have noticed that the prices have frequently varied, and when inquired from the retail pharmacies if they would honour the price of the other pharmacy, their request was denied. This demonstrates the lack of transparency in the US pharmaceutical retail marketplace. Perhaps one of the most interesting observations in the Table 1 above is that Walgreens and CVS, the stores that primarily exist for pharmaceutical product sales, tend to have higher prices as compared to other stores where pharmaceutical products comprise only a small portion of their business model.
Current Issues in the US and Future Outlook
As the economy gets more challenging for consumers, the issues related to healthcare finance become more prominent and visible to the consumers, who have to often make hard decisions about whether to put food on the table or seek healthcare products or services for loved ones. Not a day goes by anywhere in the world where someone or the other is not talking about the healthcare costs and often about the profits reaped by the entities providing these products or services. There is also a debate about whether profits are important to encourage innovation and efficiency (Crowley et al., 2021). However, profits should not be considered the dictating factor when it comes to looking at the future of a healthier, happier and more productive society.
Currently, this is where the issue of price transparency stands as of 1 January 2021. With the new rule having been implemented, this has left hospitals and insurers in a quandary as to how best to approach compliance with the new rules of transparency. Questions arose as to how some smaller, rural hospitals would financially survive. Will cost shifting become more of a practice for hospitals trying to maintain their financial revenue streams? Will health care entities begin to consider new consolidation approaches with the changing methods of financial negotiation between payer-specific entities and health care facilities? The new rulings for transparency in pricing have created a new scenario for the health care consumer. The consumer can receive pricing information that provides little information on the actual costs for an episode of care, and within the pricing transparency ruling, the issue of quality of care for the consumer is little discussed. Many consumers equate higher price to mean higher quality, but that is not the case in health care. Consumers can shop for health care, but do they really know what they are shopping for, and how will they know if the price quotes are really what they can base their out-of-pocket costs on? Health care will continue to be a dynamic factor in society; however when change(s) occur, communicating those change(s) and how to interpret the change(s) become financially important for the consumer and health care provider. In this case, price transparency may fail to provide the consumer with much direction, but for hospitals and insurers, it has created an opportunity to examine their pricing methodologies and learn new ways of creating revenue and maintaining financial security. Financial security is important to a health provider, payer and consumer, so where is the middle ground for these three entities?
Footnotes
Acknowledgement
A portion of this article was previously presented and won the Best Paper in Track award in the Health Care Economics and Marketing track at the 2021 Business and Health Care Administration Association annual conference.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.