June 27, 2023

Washington’s latest solution to the high cost of health care is to mandate price transparency, at present for institutions like hospitals and outpatient facilities, but eventually for everyone — even solo practitioners (if any still exist).  Advocates claim that since price transparency works to drive down prices for other commercial activities such as buying a car, it will bring down the unaffordable expense of health (medical) care. 

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Price transparency won’t work, for six compelling reasons. 

First, there is healthcare (one word) versus health…care (two words).  The former is a massive, Byzantine system consuming 18.3 percent of U.S. GDP.  Health (medical) care is a personal, legally protected, highly confidential fiduciary service relationship between one patient and one provider.  The regulatory solution — to require price transparency — completely ignores the high cost of healthcare, the system, which accounts for nearly half of all U.S. “healthcare” spending.  In fact, additional regulation will increase spending and consume more “healthcare” dollars.

Second, healthcare is not a true (free) market; it is a distorted or centrally controlled market.  Third parties — government and/or insurance companies, not buyers (patients) or sellers (providers) — decide how much to expend, how much will be paid, to whom, when, and even if there will be payment.  Healthcare is effectively a monopsony, a market with one buyer, the third party.  Economists know that a monopsony can totally control a market: both price (payment) and demand — i.e., benefits. 

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The reason transparency works in other commerce but not healthcare is because in healthcare, buyer and seller are “disconnected.”  Buyer doesn’t pay seller directly (other than a tiny co-pay), and therefore buyer has no incentive to economize.  Seller is not paid the set price or charge; payment is arbitrarily decided by the third party, ultimately Washington, since insurers and health plans generally follow the federal “allowable reimbursement” schedules in Medicaid and Medicare.

Third, as stated above, price is not what is paid.  Making a meaningless number transparent will not change behavior of either buyers or sellers except to give the public a false impression that providers are making huge profits, which they are not!  The median profit margin for U.S. hospitals is two percent. 

Writing from personal experience, this author’s charge after doing a cardiac catheterization in a critically ill newborn ranged from $3,500 to as much as $9,000 when devices had to be used inside the baby’s heart.  Medicaid paid $367, take it or leave it. 

Fourth is the cost of regulations.  People tend to think they are free.  They are most definitely not.  Think of the cost of the legislators and staff, analysts, reviewers, agents, accountants, consultants, implementing bureaucrats, overseers, and compliance officers.  Nearly half of all healthcare spending goes to bureaucracy, consumed by the regulatory process.  Keep in mind that these dollars paid to bureaucrats are dollars taken away from people who provide care.  This is called “bureaucratic diversion.”

In a true free market, there is no cost of regulation because buyer and seller are directly connected without a third-party decision-maker in between.  Buyers’ incentive to economize and competition among sellers keep prices low, quality high, and access timely, all for no cost to anyone — the “magic of the marketplace.” 

Reason #5: When combined with a centrally controlled market, price transparency tends to encourage gamesmanship such as collusive behaviors; upcoding (using a more expensive billing code than proper); and cherry-picking patients, including refusal to accept Medicaid patients.  The most harmful “game” is accepting patients for care (and receiving per capita payment) but delaying provision of care until it is too late: death by queue, when patients wait so long for care that they cannot be saved.