Increasing transparency in the pricing of health care services and pharmaceuticals

June 5, 2008

The rising cost of health care represents the nations single most important long-term fiscal challenge. CBO issued a new brief today on whether increased transparency about prices for specific health care services and pharmaceuticals would help to temper the rapid growth in costs.

One form of transparency -- regarding the incidence of overall health care costs -- may help to improve efficiency in the health sector. In particular, workers pay for employment-based health insurance through reduced take-home pay, but those costs may not be evident to many of them. A greater awareness of the total costs of health care and who ultimately bears them might generate increased demand for efficiency in that sector. This brief does not address this broader concept of transparency.

The brief focuses on another aspect of price transparency: thepossibility that if individuals know the prices of health care services, theywould bemore likely to seek out less expensive providers or treatments and to question how effective the care they are purchasing is likely to be. Itnotes that several factors may limit the effectiveness of this type of transparency in cutting health care expenditures:

  • On the consumer side, more than 80 percent of the population is covered by some form of health insurance, which insulates people from the full price of the health care they consume, limiting their incentive to compare prices. Doctors and other health professionals often direct decisions about what services to buy from whom, as individuals may have little information on the care they need or the quality or value of that care. Moreover, for insured and uninsured people alike, awareness of prices would make little difference in emergency situations or in the relatively small number of cases that account for a disproportionate share of overall health care spending.
  • On the provider side, more transparency would make information about the prices that hospitals,physicians, and drug companies charge insurers more visible, but whether such disclosure would lead to higher or lower prices for consumers on average is unclear and depends on the nature of competition in the relevant market. The markets for some health care services are highly concentrated, so increasing transparency in such markets could lead to higher, rather than lower, prices because higher prices are easier to maintain when the prices charged by each provider involved can be observed by all of the others. Whatever the effect on average prices, more transparent prices would probably reduce the range of prices.

The brief was written by Sheila Campbell of our Microeconomic Studies Division.