Surprise Medical Bills A Growing Problem Requiring Price Transparency

(A version of this column was published by Forbes.)

Donald Trump’s health reform proposal during the presidential campaign promised to deliver price transparency to health care:

Require price transparency from all healthcare providers, especially doctors and healthcare organizations like clinics and hospitals. Individuals should be able to shop to find the best prices for procedures, exams or any other medical-related procedure.

Doctors and hospitals are infamously terrible at sharing price information with patients. It is a problem for both scheduled procedures and visits to emergency rooms. 

The root problem is not that providers are unwilling to share prices, but that prices are not formed through a normal market process. Instead they are administratively determined between government, insurers, and providers.

I have spoken with doctors who believe it would be illegal for them to disclose the price of a procedure to a patient before the insurer or government approved the claim! On the other hand, insurers’ and employers’ price transparency tools are not useful to most patients, and go largely unused.

A recent Consumers Union survey found nearly one third of Americans who had hospital visits or surgery in the past two years were charged an out-of-network fee when they thought all care was in-network. Other research from the Brookings Institution suggests this problem is getting worse.

This pushes against another trend. A survey by the Physicians Advocacy Institute and Avalere Health, a consulting firm, shows a significant increase in the number of physicians leaving independent practice and joining hospital-based health systems:

• From July 2012 to July 2015, the percent of hospital-employed physicians increased by almost 50 percent, with increases in each six-month period measured over these three years.
• In 2012, one in four physicians was employed by a hospital.
• By 2015, 38 percent of physicians were employed by hospitals.

Obviously, this should be reducing, not increasing the problem of surprise medical bills. These occur when a patient undergoes surgery in a hospital in his insurer’s network, but is then surprised by an expensive bill from an out-of-network anesthesiologist, pathologist, or other specialist who attended him in the hospital.

Patients control an almost insignificant share of the dollars spent on our health care. Only about ten cents of every dollar spent on our health care is spent directly by us. The rest is controlled by insurers or governments (while we pay indirectly through premiums and taxes).

No wonder out of network specialists unwittingly inflict so much financial anxiety on patient. They really do not have an incentive to worry about the pain they cause patients’ pocketbooks, because their incomes do not depend on ensuring a patient is able and willing to pay his bill in a relatively frictionless way.

Professors Zach Cooper and Fiona Scott Morton have published a new article reporting their research on surprise medical bills in emergency rooms. Examining 2.2 million claims from a database of privately insured patients, they found over 99 percent of visits to emergency rooms were at in-network hospitals, but over one fifth of those visits generated a claim from an out-of-network doctor. At the extreme, one patient faced a bill of almost $20,000.

Professor Cooper proposes a common-sense solution: State laws making hospitals price all services, including physicians’, in a bundled contract with insurers. How much doctors charge would then be subject to private negotiation between them and hospitals.

Within the current system, it is a reasonable step. Nevertheless, it invites the question: Why are hospitals, physicians and insurers not already operating like this? The answer must lie in the overly complex regulatory morass governing how these actors interact with each other.

No other service business would try to get away with this. Remember when President Obama was trying to convince us that the Obamacare health-insurance exchanges would operate like Expedia or Travelocity? It is laughable in hindsight. Nevertheless, while most people agree that actual airline travel (which is regulated by the federal government) is miserable, buying a ticket to fly is a convenient and transparent process. A passenger does not get a bill from the co-pilot a month after his flight, stating the co-pilot was not in the airline’s network, and the passenger must pay extra!

Bundled pricing is a characteristic of a normally functioning market. In health care, that invites less, not more regulation. My own proposal would rely on solutions based on common law, not top-down rule-making.