Patients beware: price transparency can actually hurt you

Note: This column has been updated to clarify how price-check websites gather cost data.

Earlier this summer, the Centers for Medicare and Medicaid Services floated proposals to expand price transparency—giving consumers advance notice of the cost of services. CMS stated a concern that "challenges continue to exist for patients due to insufficient price transparency," including "patients being surprised by out-of-network bills for physicians, such as anesthesiologists and radiologists, who provide services at in-network hospitals [and] physician fees for emergency department visits."

It's a mistake for CMS to characterize surprise medical bills from out-of-network providers as a "transparency" problem—it is more accurately stated as a problem of gaming by physicians who wish to enjoy a captive clientele practicing at an in-network facility, without offering network discounts. Treating these problems as "transparency" problems could actually harm consumers more than it helps them.

Price transparency can have two consumer benefits. In a pure "shopping" scenario, in which a patient is able to compare prices, a consumer might be able to obtain care at a lower cost. In the aftermath of care obtained on an emergency basis, with no prior agreement on price, transparency can benefit the patient, but only if the proper price information is made available.

The problem for consumers turns on the distinction between "charges" and "market value" of a service. A charge is a provider's standard asking price. The market value of a service is the amount the provider usually receives for care. Standard charges are much higher than market value.  In any case in which a consumer must negotiate prices, knowing the market value is an advantage.

Here are three problems posed by price transparency:

1. Paradoxically, ignorance of charges can protect consumers

Under most states' laws, including Pennsylvania's, when parties do not have an explicit agreement on price, a court applies the legal doctrine of quantum meruit to set a service provider's fee. In a medical billing case, that fee is set at the market value, not the provider's "charges." Sadly, few consumers are aware of this doctrine and most will agree to pay the charges to get bill collectors off their backs. The impracticality of vindicating consumers' common-law rights is at the root of the surprise medical bill phenomenon.

The potential problem that transparency could cause is that if charges are posted, providers can argue that consumers are on notice of them and implicitly agree to pay them; a recent court decision suggests that posting of prices could negate patients' quantum meruit protections.

2. Providers can manipulate disclosures to their advantage

I recently had my first experience with a physician's disclosure of charges when my dermatologist gave me a new "financial policies" form to sign. The form indicated that the charge for an office visit was $150 and the charge for an excision was $800. After my visit, I reviewed my insurer's explanation of benefits form, which indicated that the doctor's billed charges for these items were $273.20 and $572.22 respectively; the insurer paid $92.48 for the visit and $152.53 for the excision.

Why did the "financial policies" form state a lower price for the office visit but a higher price for the excision? Perhaps the provider himself was not certain what his charges are. Or perhaps the price for the "office visit" was reduced because this is shoppable, whereas the need for an excision will be evident only when the patient is undressed and the doctor stands ready with his instruments, and the patient is less likely to dicker. Incidentally, the form also gives leeway for the doctor to call the listed fees "down payments" which will not be considered payment in full. It is difficult to imagine how the "price transparency" in this form benefits patients.

3.  Inflated costs on price-check tools

Consumer advocates agree that market value, not charges, is the appropriate amount for reporting on price transparency tools. (To see their analyses, click here here, and here.)

Price-check tools vary in the basis for their estimates.  For example, FAIR Health, a nonprofit organization created to settle a class action lawsuit against Ingenix, a site run by the health insurance industry, says that it provides prices based on amounts  paid by insurers for out-of-network and for in-network providers.  Other sites estimate what they regard as a "fair price," which can differ significantly.  For instance, a search on FAIR Health for the price of a new patient-intermediate level doctor visit (CPT 99203) in Philadelphia reports a charge of $213; meanwhile, a search on Guroo, a tool offered by the Health Care Cost Institute, reports a market value of $104. It is important to know how the prices you see were calculated.

In its proposed rules, CMS muses that "charge data may not be helpful to patients for determining what they are likely to pay for a particular service." That is correct. A better idea floated in the rule would be for doctors to disclose what Medicare pays for services, which might bolster uninsured or out-of-network consumers' ability to negotiate.

Jackson Williams is Director of Regulatory Affairs at Dialysis Patient Citizens, an advocacy organization for patients with kidney disease, and is a National Association of Insurance Commissioners' Funded Consumer Representative. He previously worked on health care quality and payment reform issues at the federal Centers for Medicare and Medicaid Services.