Health Care Pricing Shouldn’t Be Like Nuclear Codes

Ask just about anyone what the most closely held secret is in America, and odds are they’ll either say the nation’s nuclear codes or the formula for Coca-Cola. Yet running a close third is the actual selling price of pretty much everything in health care.

The health care industry, especially the large players that dominate the landscape today, keep the actual dollars paid for care hidden amongst themselves, often obscured within complex contract language. Yes, there are “published” prices, but they bear little resemblance to the reimbursements providers and payers are agreeing to behind the curtain.

Consumers can see evidence of this moving target for pricing when they offer to pay cash directly to a provider versus going through a payer (aka an insurer) at the negotiated rate(s). The differences in pricing negotiated in contracts between providers and payers can be much greater.

The result of all this secrecy is that the per capita cost of something every single American needs has tripled over the last 20 years, rising to become nearly one-fifth of the gross domestic product. Yet no one seems to understand how to change this trend because if they did they’d be proposing a workable solution.

Worse, as long as there is a lack of financial transparency, it is impossible to take the steps that will create meaningful competition across the health care industry. Without competition, pricing will continue to rise needlessly, exacerbating all the issues that are being discussed in Congress right now.

Here’s why the lack of transparency around provider pricing is so effective at killing competition: When payers enter into negotiations with providers, their biggest bargaining chip is the number of members they can drive to that provider. So if health payer A has 3 million members in the market and health payer B has 1 million members, health payer A may get a contract that includes a much greater reduction off the published prices than health payer B.

Health payer A can then elect to offer slightly lower premiums than health payer B. Since the most important consideration for many consumers in selecting a health plan is their premium cost, health payer A gains a distinct market advantage. Add in a few high-deductible health plan (HDHP) options that shift more of the cost to the patient, and health payer A can gain even more market share. 

This system of unknown selling prices is also why passing a law that enables insurers to sell across state lines won’t matter. When an insurance company enters a new market, it must negotiate pricing with local providers. The pricing it is offered is normally based on how many members it can direct to a provider. Since it starts out with zero members, it will pay much higher prices than the established insurers. The result will be higher premium costs. It then becomes a chicken-egg scenario. To secure competitive pricing the insurer must secure a large number of members. It cannot secure a large number of members, however, until it lowers its premiums. The new player is, in effect, locked out of the market.

What’s interesting is that health payers and providers didn’t always work together in such lockstep. Twenty-five years ago, the relationship was much more contentious. It wasn’t uncommon to read news stories about hospital systems that failed to reach an agreement with a particular payer and was thus terminating its contract and dropping out of the network. That is unheard of in this day and age.

It is also why those few startups that do manage to get off of the ground tend to rely on inventive strategies, such as narrow networks for high-cost procedures and broader networks for primary care. This two-tier approach is unorthodox but provides smaller insurers a way to find a foothold in larger markets.

If Congress really wants to bring down the cost of health insurance and spur competition, the solution is obvious: Level the playing field by requiring the health care industry to publish prices and costs and adhere strictly to those benchmarks. If an individual organization offers a discount to any player (including the federal Centers for Medicare & Medicaid Services), that now becomes the new price for everyone.

The creation of this type of price transparency will offer several consumer benefits. With pricing leveled and readily available for review, no single payer will have a huge, hidden cost advantage over the current competition.  An equal baseline for pricing will encourage payers to improve efficiency and reduce costs, and increased competition will furthermore help keep premium costs in check.

Level pricing will enable new, more efficient payers to develop, allowing for easier access to health care markets in other states.

Enabling such price transparency will allow consumers to shop for the best combination of quality and affordability; think Travelocity or Progressive, but for the best deal on health care in your area. This will be especially helpful as bundled payments and other value-based care options grow in popularity. Right now, if you call a provider and ask how much knee replacement surgery will cost, they won’t be able to give you a fast answer because it will depend on which insurance you have and which plan you’re on. With set pricing, you’ll be able to look it up online and compare.

Where final pricing is conditional on factors such as the state of the patient’s health, transparent pricing will make it easier for payers to deliver an instant explanation of benefits that will show patients exactly what their costs will be rather than being shocked by the costs months after the appointment or procedure. As more consumers adopt HDHPs, knowing those costs will be invaluable to both the patients and the providers who need to collect from them.

Perhaps the most important benefit, however, will be the freshly invigorated spirit of entrepreneurship that will drive down costs through innovative technologies and health care models we haven’t even imagined yet.

Think about how much cheaper air travel became after deregulation, thanks in large part to Southwest Airlines. Once Southwest started offering direct flights to destinations all over the United States for $39, every other airline had to slash its prices or perish. Consider what car buying is like now that automobile manufacturers publish their prices on the Internet for all to see.

Most of the current health payers are still using legacy green screen computing technologies from the 1980s. Why? Because they can. Startups entering the market using technologies designed for the digital age will create a need to modernize the established payers’ technology systems and processes so they can drive down their internal costs to compete with the startups’ significantly lower premiums.

These competition-driven efficiencies will lead to more options in the health insurance marketplace for consumers at lower costs, finally making affordable health care for all a reality. Not by government edict, but by intelligently harnessing the forces of the free market, which should satisfy all political persuasions.

The current system is unsustainable, but it is fixable. It’s time to quit treating health care pricing like it’s the nuclear codes and instead make real prices transparent to all.

Greg Borca is co-founder of SKYGEN USA, a company that is dedicated to transforming the delivery of health benefits through innovative, technology-enabled solutions that drive down the cost of care while ensuring healthier outcomes for all Americans. Greg can be reached at greg.borca@skygenusa.com.