Tom Coburn: Here's why price transparency can revolutionize health care

Democratic presidential primary candidates are spending a lot of time talking about health care but no time talking about the primary driver of runaway costs – the lack of price transparency.

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Price transparency is the right to know what things cost before you buy. Consumers demand price transparency in every other area of the economy.

Imagine, for instance, if the prices for products on Amazon suddenly disappeared. Consumers would be apoplectic. But in health care opacity is the norm. The Trump administration wants to change that.

In June, President Trump issued an executive order requiring hospitals to post actual prices. The president said, “To make fully informed decisions about their health care, patients must know the price and quality of a good or service in advance.”

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Only in health care is this radical. Making price discovery a norm in health care could be a game-changer and help reduce the $765 billion our country wastes every year through inefficiency.

Even progressives acknowledge America’s third-party payment model, which separates patients from the purchase of health care, doesn’t make sense. As economist Jonathan Gruber, a key architect of ObamaCare, says, “[T]here really isn't a single health care expert who would design a system from scratch which would include this feature.”

The feature Gruber was describing was an accident of history. During WWII, the War Labor Board essentially allowed employers to increase pay to avoid wage controls by offering tax-free health benefits, thus creating employer-sponsored insurance (ESI).

While ESI isn’t the problem per se (employers would have good reasons to offer coverage without a tax benefit) this feature created a third-party payment system. We now have 75-year era of opacity that has turned basic price discovery into a tedious research project for consumers.

Today, our health care system is like a football game in which one team (consumers) is wearing blindfolds while the other team (third-party payers from government to hospitals to insurance companies) runs up the score at will.

And run it up they have. Over the past few decades, health care inflation has far outpaced inflation in every other area of the economy. Between 1998 and 2016 prices for Medical Care Services more than doubled (+100.5% increase) while prices for Hospital and Related Services nearly tripled (+177% increase), according to Mark Perry at AEI. However, overall consumer prices only increased by 47.2% during that same period.

The bloat in employer-sponsored insurance (ESI) plans is obvious in how they are structured. Annual premiums for families reached $19,616 in 2018 but workers only contributed $5,547 toward the cost of their coverage. Even costs of unsubsidized family plans on the non-employer market were 30% lower than ESI plans.

I saw first hand how the third-party paradigm drove up costs in my career as a family practice physician, which was interrupted by serving in Congress. I delivered more than 3,500 babies and watched families struggle as more of their money went to third-party middlemen.

As Professor Larry Van Horn at Vanderbilt University estimates, in the late 1970’s the cost of delivering a baby was about $1,500 or 8% of a household’s median income. By 2013, the cost ballooned to $22,000 or 40% of median income. Today, the costs are now over $32,000 for standard births and more than $51,000 for cesarean births.

Those of us who believe in the free enterprise system have to recognize that America’s health care system is not a good character witness for capitalism. But our health care system is not capitalistic in character. The problem is not that our health care markets have failed. The problem is they have never been tried.

Today's status quo is a rallying cry for proponents of single-payer. Those of us who believe in the free enterprise system have to recognize that America’s health care system is not a good character witness for capitalism. But our health care system is not capitalistic in character. The problem is not that our health care markets have failed. The problem is they have never been tried.

Across health care, market distortions are the norm. Employers continue to bear additional costs while hospitals are getting richer. America’s small businesses still say the cost of health insurance ranks as their number one concern, as they have for three decades. Health insurance costs for small firms have risen 56% in the last decade, far outpacing wages and inflation.

Only hospitals are coming out ahead. A joint project from the Manhattan Institute and OpenTheBooks.com showed how even the so-called non-profit health care sector benefits handsomely from the status quo. Net assets for the nation’s top 82 non-profit hospitals increased 24 percent in 2017, from $164 billion to $203 billion.

Meanwhile, patients are getting poorer. Health insurance premiums more than doubled in the individual market between 2013 and 2017.

Some argue patients don’t want to be bothered with shopping for health care, but once you give consumers transparency in any sector they don’t give it up. In areas of the health care economy that are shielded from the market distortion effects of the third-party paradigm, such as LASIK and cosmetic surgery, market forces keep inflation under control.

States are also leading the way. Kentucky recently implemented a transparency experiment called the Vitals SmartShopper program that saved the state $546 per shopped claim.

Americans can make a difference by voicing support for the administration’s price and quality transparency executive order. The rule could produce dramatic change quickly as consumers discover how little they’ve been allowed to see from the cost of everything from knee replacements to x-rays.

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The market itself will provide a correction with new apps and tools to help consumers shop and save. You will even know quality outcomes by doctor and hospital. Price transparency will drive competition and competition will drive improvements in quality.

Not surprisingly, hospitals and insurers are fighting back. They are claiming prices are proprietary trade secrets but the facts are not on their side. Insurers routinely explain what they pay in explanation of benefit (EOB) statements and all economies depend on prices, even when they are hidden and opaque.

Hospitals know that at least 90% of health care transactions do not involve an emergency, which means patients almost always have time to shop.

Trump is betting that Adam Smith’s invisible hand is a more compassionate hand than the heavy hand of government. Kicking 156 million Americans off their plans, as most Democrats running for president want to do, and ushering in single-payer won’t do anything to fix the underlying dynamics causing runaway inflation.

If consumers can see prices, Smith will once again be proven right.

Tom Coburn, a former United States senator, is a senior fellow at the Manhattan Institute and is the Honorary Chairman of OpenTheBooks.com.