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Why is Healthcare so Expensive: Part Five

As we near the end of our series, we wanted to address price transparency and how it affects healthcare costs. Our CEO, Matt Dale, shares his thoughts as we try to answer the question, “why is healthcare so expensive?”

 

The Concept of Price Transparency in Healthcare

Price transparency is exactly what it sounds like: display the cost of medical care. Healthcare is the only industry where prices are not visible and you can’t shop around. By showing the price for a knee surgery or an MRI, healthcare consumers can look for the best deal. Insurance companies could incentivize their members to go where care is affordable. A competitive market showing prices will drive down costs.

Examples of this are clear. Think LASIK eye surgery or lap band procedures. Prices dropped because consumers demanded prices when they were responsible for the cost.

 

Why Has Price Transparency Been Difficult to Implement?

There’s money to be made when prices are not available. Just look at who's trying to stop the movement. The American Hospital Association and other industry groups are spending large amounts trying to block it. Another challenge is that healthcare insurers aren’t incentivized to keep costs down. They make a profit off of total premiums. As for providers, they’re for-profit institutions that will keep raising prices as long as they’re able to. The lack of price transparency isn’t a root cause of these problems, but rather a side effect of the broken system. If we flipped it on its head and said that patients had to pay for every penny of care, there would have been price transparency ages ago.

 

Positive Outcomes from Price Transparency

Not only will price transparency push actual costs down, but it’s also going to push premiums down. Shedding light on the healthcare system makes it easier for employers who offer employment-based health insurance to get involved and help patients make smart choices. 

Let's say, for example, that a company was covering the cost of an employee’s flight or hotel. A company would never allow an employee to buy a hotel room or airline ticket on a website that’s three times more expensive than another website. Employers would encourage employees to make smart choices with company money. With price transparency in healthcare, that same concept will be in play.

Price transparency could incentivize insurance companies to keep costs down. Remove the language around what insurers can use premium dollars for (Medical Loss Ratios) and they wouldn’t have to charge higher premiums to make more profit. Conceptually, it seems like a good idea to tell insurers they have to spend 85% of premium dollars on claims, but when looking at other industries, that concept would never be applied. It would be ridiculous to tell a car manufacturer they have to spend 85% of their sales on the actual engineering of a car. It is up to them as a business in a free market how they spend their resources.

The main goal is to lower healthcare costs. Legislation that makes sense would incentivize insurers to lower premiums. For insurers to lower premiums and still make a profit, remove the laws around the Medical Loss Ratio.

 

How Do the Elections Affect Price Transparency?

The Trump administration has called for legislation around pricing to start in January 2021. Under the Biden administration, it’s unclear what will change. I do not foresee price transparency going away completely. The Democrats have called for a stronger reliance on the government to provide healthcare. Whether that’s through universal healthcare, a reinforcement of the Affordable Care Act, or something else entirely, if the government is paying for individuals’ healthcare there’s not a need for price transparency. Should independent healthcare insurers and employer-based insurance still be an option, there’s no reason the Biden administration wouldn’t want price transparency for these sectors.

 

Final Thoughts

One of the reasons why there are so many options and efficiencies in a country that has a free market economy is because consumers have choices. If consumers can’t choose, there’s no way to control costs. The minute price tags start showing, it creates a pricing system where companies tend to be competitive which results in lower prices. A consumer isn’t going to go to the gas station that charges $7 a gallon when the one across the road charges $2 a gallon unless neither displays their prices. In a free market economy, there’s a great opportunity for prosperity in the lives of individuals and businesses. Healthcare is the final frontier in America for the free market to be applied.

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