The Trump Administration is making price transparency a centerpiece of its health care policy. The idea that providers should publicly reveal prices has bipartisan appeal. Mandating transparency, the logic goes, should increase competition and push prices downward. Under certain circumstances, however, the result can be the opposite—less competition and higher prices.
The Centers for Medicare & Medicaid Services recently released a sweeping 331-page final rule mandating transparent hospital prices. At the same time, officials proposed a parallel rule concerning pricing by insurers. Dozens of transparency bills have been introduced in the current Congress, many with bipartisan sponsorship. Some focus on specific health care markets, such as drugs sold via direct-to-consumer advertisements. Others would issue broad mandates to reveal prices throughout the supply chain. Countless transparency bills are currently under consideration by state legislatures or have already been enacted into law.
Opaqueness undoubtedly frustrates Americans to no end. The inability to get an answer to the question, “How much will this treatment cost me?” is an endless source of frustration to patients. Many blame opaqueness for the high cost of American health care, and that’s likely true, at least in some settings.
“Price transparency in health care” sounds like motherhood, baseball, and apple pie. So, what’s the problem? Actually, there are several, but perhaps the biggest is that excessive transparency can give rise to “tacit collusion.” (Lawyers sometimes call it “conscious parallelism.”)
With active collusion, competitors conspire to constrict supplies of goods and services, which pushes prices upwards. Engaging in such conspiracies against the public carries civil and criminal penalties. With tacit collusion, competitors restrict supplies and raise prices in ways that resemble active collusion—but without active communication between competitors or violation of antitrust laws. Tacit collusion entails an economic pantomime, with each competitor silently signaling its intentions to competitors.
Tacit collusion requires three basic ingredients to manifest itself: First, the number of competitors must be small. Second, there must be significant barriers to entering the market as a new competitor. And third, the competitors must have considerable knowledge of the prices its competitors are charging. In many health care markets (for example, local hospital markets or specific therapeutic drug markets), the first two conditions are already present. Mandatory transparency can provide the competitors with the final ingredient necessary. (For this reason, in some cases, antitrust authorities actually prohibit competitors from engaging in voluntary transparency, such as posting prices publicly.)
Under the right circumstances, transparency facilitates tacit collusion by relieving competitors of fear of undercutting one another. Without transparency, Company A might fear that Company B is charging $1,000 for some service, leading A to offer the service for $950. If a government website shows that B charges $1,400, then A has no need to go much below $1,400, if at all.
In an antitrust case, a few years back, it was noted that gasoline stations on Martha’s Vineyard, Massachusetts, charged abnormally high prices per gallon, compared with the mainland. The number of dealers was small, regulations made it difficult for new operators to enter the market, and prices were transparent—clearly posted on the gas station signs.
In another famous example, there were only a small number of companies selling cement in Denmark, where critics cited various factors that made it difficult for new firms to enter the market. The only missing ingredient, however, was that firms were somewhat in the dark regarding the prices their competitors were charging. That changed when the government began publicly posting each firm’s prices. After prices became transparent to the public, instead of falling, cement prices rose.
None of this says that transparency is always a bad thing. In many markets, it’s wonderful. But in those markets with few competitors and high barriers to entry, transparency can be counterproductive.
In many health care markets, the path to lower prices may lie not in mandating transparency, but rather in removing barriers to entry, thereby reducing ingredient #2. Rather than forcing hospitals to reveal the prices they negotiate with insurers, a better approach might be reducing barriers to entry, such as certificate of need (CON) laws.
In other words, transparency mandates ought to be applied with a scalpel rather than with a sledge hammer.