How to Create a Better Consumer Market for U.S. Health Care

Measures to make prices more transparent were good steps in the drive to create more competition in health care. But they don’t do what is necessary to create a vibrant consumer market in which patients would actively shop around for the best prices. Four additional steps that would make a big difference include: (1) force care providers to specify their prices for a list of standardized, consumer-focused bundles of services tied to full episodes of clinical interventions; (2) require all providers to participate in this bundled pricing system; (3) mandate that the prices posted for these services be available to all patients, irrespective of their insurance status; and (4) ensure that consumers who select service providers that charge prices that are below what their insurance plans will pay can keep the savings.

Health care price transparency is that rare policy initiative that elicits support across the partisan divide in the United States. The broad political consensus behind the required disclosure of relevant pricing led administrations of both parties to issue rules through the Centers for Medicare and Medicaid Service (CMS) that force the medical care and insurance sectors to post online an abundance of previously hidden pricing data. It is expected that employers and other payers, with help from technology firms, will use the data to drive competition by extracting lower fees, where possible, and that health care providers will be incentivized to disclose clinical outcomes to justify continued differences in the prices they charge for their services.

While these measures are welcome, what would be truly transformative would be measures that encourage patients to much more actively shop around for the best prices. Facilities and clinicians would then become sensitive to charging more than their competitors (and thus forcing their patients to pay more). Unfortunately, despite progress, a consumer-driven transformation is unlikely to happen without further regulatory changes. In this article, which is based on our study for the American Enterprise Institute (AEI), we offer a short list of refinements to the current rules that would address this deficiency — that would strengthen price competition by making it easier for patients to spot the highest-value providers of services and reap the full  benefit of any savings.

The need for greater pricing discipline in the health sector is obvious. In December, CMS released its estimates of national health expenditures for 2021, and, while the pace of escalation slowed compared to 2020, the overall trend remains alarming. At 18.3% of GDP, the United States devotes far and away the most resources to health consumption of any advanced economy (Germany is a distant second at 12.8%). Irrationally high prices are a major source of the U.S.’s cost problem.

The two main political parties in the United States mostly disagree on health care (Democrats favor regulation and Republicans more consumer choice); however, forced disclosure of relevant prices appeals to both sides. This is because it combines rulemaking (i.e., the CMS administrator’s ability to influence how providers deliver their services through its requirements) and consumer protection with improved market conditions (i.e., more complete and transparent price information for patients) to allow for more competition focused on optimizing outcomes per dollar spent. Further, leaders of both parties want to stop abusive billing practices (e.g., unanticipated high out-of-network medical bills), which have forced millions of their constituents to pay exorbitant sums beyond what their insurance plans will cover. Initial legislative successes in this area include the No Surprises Act, which provides novel consumer protections. Enacted in 2020, it went into effect in January 1, 2022.

CMS rules, started under the Obama and Trump administrations and further developed by Biden officials, reflect the broad interest in health care price transparency. Initial successes have included rules requiring hospitals to publicly display prices for 300 shoppable services and health insurance plans to post the rates they pay for in-network services. Soon-to-be implemented cost-sharing estimates, available through online tools and based on health insurance coverage, are also promising and will further shift market power away from the facilities and institutions that have benefited from legal price secrecy.

While the new disclosure requirements are long overdue, they are not sufficiently consumer focused to overcome the significant impediments that prevent patients from actively shopping for services based on price. Two major obstacles not addressed by current rules are noteworthy: a pricing system tied to jargon-laden insurance billing codes, which are difficult for consumers to navigate, and an insurance system that prevents consumers from benefiting fully when selecting lower-priced service providers because the insurers keep the savings.

To put consumers in the driver’s seat, CMS, working with Congress, can address both through four refinements to the current rules.

1. Specify standardized services.

Medical care providers should be forced to specify their prices for a list of standardized, consumer-focused bundles of services tied to full episodes of clinical interventions. These bundles of services should act as the minimum — as determined by physician consensus — needed to deliver a given intervention. “Add-on” services and innovations could be provided for additional fees based on individual physicians’ preferences. While progress has been made in designing, or defining, such bundles (e.g., the standardized childbirth bundle developed by the Bree Collaborative in the state of Washington), they are not yet used to help consumers shop for needed care.

Given the complexity of medical care, it is unrealistic to expect patients to determine what is or is not medically necessary for them to get better or stay healthy. For instance, it is unclear to the average patient what is required for a successful knee or hip replacement or a successful childbirth. Which lab tests should be purchased, and how often? Which imaging studies? What about hospital or other facility fees and the ancillary services related to many procedures (such as anesthesia)?

Transparent, “all in” prices for a standardized list of services required to fully complete a clinical intervention would address this problem and empower patients. With standardization, they could see clearly the full price of the clinical bundles and make apples-to-apples comparisons. The prices charged by competing networks of providers would be directly comparable because the clinical services included in what is being priced would be the same.

2. Make provider participation mandatory.

All providers should be required to participate in this bundled pricing system to ensure the market is populated with multiple options for patients. If only one network offers a bundled price, and its natural competitors are allowed to opt out, the market will not work. Further, providers should be required to post their prices at regular intervals (such as by December 1 for applicable pricing during the following calendar year) so that patients have faith that the posted prices are accurate and up to date.

3. Make the same prices available to everyone.

The prices posted for these services should be “walk up” prices available to all patients, irrespective of their insurance status. In today’s market, pricing for many services is applicable only to the enrollees within certain insurance plans, and the variation in negotiated rates is large, which means the potential size of the market is smaller than it would be if all consumers had access to the services at the same specified prices. This rule would not prevent preferential pricing for some insurance plans;  it would simply require providers of services to specify a price that applies to all consumers irrespective of their insurance coverage.

4. Ensure consumers reap the benefits.

For price competition to work as planned, consumers must appreciate that price shopping can be financially rewarding. Currently, insurance designs stifle incentives for consumers by making them largely price insensitive. After they have already paid the required copay and deductible, the insurer typically pays the full cost, so the consumer is not concerned about shopping for the best price.

This impediment to a consumer-driven market can be fixed by requiring insurers to make available to their enrollees the dollar value of their median out-of-network rates for the services covered by the standardization rules cited above. Patients could then apply those payments from their insurers to any provider of their choosing. If consumers select service providers that charge prices that are below what their insurance plans will pay, they would get to keep the excess dollar value. This requirement would encourage competition based on price as well as quality and reward facilities and physician practices that are willing to charge lower prices for their services. An additional option would be to allow patients to place the dollars saved by selecting lower-priced providers into tax-free health savings accounts (HSAs) for future use.

Although the primary beneficiaries of these changes would be consumers, more vigorous price competition likely would deliver savings to employers and insurers over time too. The prices revealed in a consumer-driven market would demonstrate that lower pricing is achievable as a result of improved competition driven by transparency in any setting, including the employer insurance market.

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Shopping for care based on price is not possible in many circumstances, but it could apply to about 40% percent of all spending on medical care. For discrete interventions (such as many common surgeries) and for routine care and management of chronic conditions, vigorous competition, built on pricing standardization and incentives, would disrupt the market for the better. Competition based on quality could then fully flourish.

The rules now in place are a major improvement over what existed previously, but they are not a complete answer. Policymakers should be willing to take the next steps and allow consumers to play their rightful role.