Prices: High, Confusing, and Opaque. Would Transparency Even Help?

Too often, the prices of health care services and drugs are cloaked in mystery. A growing consensus demands that patients be given a clearer sense, in advance, of what things will cost. But there are obstacles–and some people benefit from the present confusion.

“Your insurance doesn’t cover this medication, so we applied a coupon,” said the matter-of-fact voice on the phone, that of an employee at a pharmacy 30 blocks from my Manhattan home who declined to give his last name. I’d had a potentially precancerous half-inch actinic keratosis growth removed from my right temple by a physician assistant at a dermatology clinic for my standard office-visit copay of $40. (A lab-fee bill of $10 would come in the mail later). Now I sought the topical ointment that clinician had recommended to heal the scar. I was told that at the distant pharmacy that medication would cost me $30. And if I chose to use my regular pharmacy instead?

“That’d be $1,000,” an employee at my drugstore soon confirmed in person.


There is a lot of outrage about high prices in U.S. health care today. But there is also concern—to some extent separable—about why prices are often so hard to find out or understand. Many experts clamor for “transparency,” and in the minds of many (particularly Republicans), if people only knew what they were going to have to pay, they’d make savvy choices, and those choices would exert market pressure to keep prices in line. But in many situations, health care pricing is the polar opposite—frustratingly opaque, and full of mystery.

Why, for instance, would a coupon reduce a price by 97%—but only if I trek to a distant pharmacy I’ve never heard of? And where can I get such coupons for the other things I buy in life? The temptation to irreverence is keen, as writer Kate Sidley proved when she spoofed itemized hospital billing in a “Shouts & Murmurs” humor column in the March 4 New Yorker. She explained a charge of “$900 for beeps” with the observation: “Boy, lots of things beep when you’re in the hospital. Each beep is 50 cents.”

Hard-to-learn prices

Of course, when you’re sick or injured, it’s no joking matter. “Don’t be afraid to push” to find out what a medical service you’re offered will actually cost, Elisabeth Rosenthal, MD, counseled consumer readers in her 2017 book An American Sickness. But that push can be Sisyphean. Rosenthal told of a man who had to struggle for a year and a half to find out from a dozen-plus Rhode Island labs what they charged for certain basic blood tests. The fact that he was the state’s commissioner of health, in charge of licensing the labs, didn’t seem to help. (When at last revealed, the prices varied by a factor of 20.)

Until a couple of decades ago, doctors were known for their obliviousness to cost information—even if patients asked them about it, they were blissfully unaware. That situation has improved but still has far to go. Rosenthal wrote of a mother who was referred by her toddler’s pediatrician to a plastic surgeon to close a cut on the child’s face by sewing three stitches. Unfortunately, the pediatrician didn’t ask the plastic surgeon’s price, and neither did the mom—even though she was a doctor herself and thus a presumably smart medical shopper. The three stitches turned out to cost $50,000. Rosenthal adds that the plastic surgeon’s office had “greased the wheels” for referrals by providing the pediatrician’s office occasionally with free sandwiches.

Is a health care system critically influenced by sandwiches and mysterious coupons—in effect, by secrets—any less ridiculous than one that features 50-cent beeps?

“The entire health care system is opaque, and some of that is just the nature of health care,” says Anthony E. Wright, executive director of Health Access, a California health care advocacy organization. “You seek treatment for one condition, then tests show you actually have three other things. You go for a routine surgery, but complications ensue.” In such situations, says Wright, costs to the consumer may legitimately be unpredictable.

But opaqueness goes way beyond that. Contracts—often private, and sometimes creating incentives that go every which way—govern the relationships of employers with health insurers, insurers with enrollees, insurers with hospitals, insurers with pharmacies, and hospitals with doctors and other providers. The pricing that emerges from that labyrinth is so arcane, complex, and ill-explained that no one can be sure just what bills may be coming, when (it may be months after the service was delivered), and for how much.

Managed care has done little to fix the problem—and often exacerbates it. “There is no such thing as transparency in managed care pricing,” says Peter Boland, a health care consultant in Berkeley, Calif., and a member of Managed Care’s Editorial Advisory Board. “It is designed to be opaque because, at its root, is a contracting process that the public and individual consumers are cut out of.” He argues that it’s in the financial interests of insurers and hospitals to keep secret how prices are arrived at, and that these prices often “bear little resemblance to actual costs.”

Opaqueness is pervasive in health care, and making things clearer may call for a vast rethinking of the industry—if Democrats, Republicans, and all the industry sectors could ever agree on such an ambitious undertaking.

Meanwhile, two areas in which consumers and others are flummoxed and sticker-shocked with particular ferocity are prescription drug prices and “surprise” out-of-network bills. Each has lately inspired government reform efforts.

A surfeit of secrecy

The profusion of coupons and rebates by which pharmaceutical manufacturers adjust their list prices when making deals with insurers and PBMs has long made drug pricing a dark art. In recent years, some insurers and PBMs have added to the confusion with a new “benefit” called a copay accumulator, which prevents costs paid via a drugmaker’s coupon program from counting toward a member’s deductible. That controversial new feature has increased the sniping among pharmaceutical manufacturers, PBMs, and insurers about who’s really to blame for the sky-high and fast-rising prices consumers often pay. Each industry sector “is very interested in making sure the attention is elsewhere, and the reality is, that’s keeping us from getting to the root of the problem,” AARP’s Leigh Purvis told Managed Care in 2018.

Indeed, the lack of clarity in drug pricing has served as a convenient smokescreen behind which cash registers keep clanging. Says Claire McAndrew, the director of campaigns and partnerships at Families USA: “We have a very convoluted and complex system that a lot of entities make a lot of money off of.” The Pew Charitable Trusts issued a report on retail pharmacy spending in March that, among a multitude of calculations, figured out how much of the drug dollar is retained by each link in the drug supply. Pew’s numbers show that drugmakers get the lion’s share ($204.6 billion of the $341 billion spent in 2016, which works out to 60%) followed by pharmacies ($79.6 billion, or 22.5%).

How the money flowed in 2016

The biggest spender on prescription drugs was the government (Medicare, Medicaid, Medicaid managed care, the VA, the Department of Defense), which accounted for 41% of the $341 billion spent on prescription drugs, or $139.8 billion. On the “money in” side of the ledger, manufacturers retained the biggest share, 60% of the $341 billion, or $204.6 billion.

Source: Pew Charitable Trusts, “The Prescription Drug Landscape, Explored,” March 2019. Used with permission.

Removing perverse incentives

Lawmakers are getting involved. In January, Democrats in the House and Republicans in the Senate both held committee hearings on drug pricing. “There’s too much secrecy in this business,” Senate Finance Committee Chair Sen. Chuck Grassley told reporters. The Trump administration says it is taking several steps to lower drug prices and make them more discernible. In January 2019, it released a proposed rule aimed at eliminating rebates from pharma manufacturers to PBMs in Medicare Part D and Medicaid managed care organizations by replacing the HHS regulatory “safe harbor” to the antikickback statute with a much narrower one.

The new rule’s intent was to replace rebates with “discounts provided to beneficiaries at the point of sale,” the administration said. If it becomes final, it could remove some of the perverse incentives in the system, such as drugmakers’ incentive to keep raising list prices.

See if you can follow the bouncing ball in this passage of incisive analysis from a February 1 Health Affairs blog post by Rachel Sachs, a Washington University associate law professor, on what’s screwy about the present rebate system: “It encourages pharmaceutical companies to continue increasing their list prices over time, if they can use an increasingly large rebate to negotiate a favorable formulary placement. PBMs, which are often paid at least in part based on the amount of discounts they are able to obtain for insurers, may profit directly from the list-to-net difference. The insurer may use its portion of the rebate to lower premiums across the board.”

The administration admits it can’t predict just what industry responses its proposed regulatory change might trigger. Its best guess? Beneficiaries’ out-of-pocket coinsurance obligations would go down, but premiums would rise.

Sachs noted that PBMs have been a target of the administration’s rhetoric on drug pricing. The American Pharmacists Association called it a victory for transparency last fall when the president signed bipartisan legislation banning the “gag clauses” by which PBM contracts had prohibited pharmacists from telling consumers when a drug’s cash price was actually lower than the applicable copay through their insurance.

But questions about PBMs didn’t end with that bill signing. Says Edmund Haislmaier of the conservative Heritage Foundation: “There are people who have clearly exploited opaqueness, and I think that’s part of what’s going on now with the debate over the role of pharmacy benefit managers.”

Last fall, HHS proposed a new rule that would require drugmakers to include their list prices in direct-to-consumer television ads; pharma lobbyists are fighting against it. Earlier, the Trump administration’s May 2018 “blueprint” proposal on drug prices complained that “lack of transparency in drug pricing benefits special interests and prevents patients from being able to make fully informed decisions about their care.” The proposal sought to speed access to lower-cost drugs, curb gaming of the system to “unfairly protect mono­polies,” and make other changes. But Haislmaier says what drew his attention in the proposal—a “sleeper,” he calls it—was a line far down in the White House summary that called for “requiring pharmacy benefit managers to act in the best interests of patients.”

Haislmaier argues that PBMs are legally fiduciaries of neither the supplier (drug companies) nor the customer (insurers), but instead are “exploiting opaqueness to arbitrage in the middle.” In his view, that contributes to both high prices and a lack of transparency.

Currently, PBMs depend on rebates for a large share of their revenues. Haislmaier suggests that they might better serve their customers by providing a fee-based service to insurers. (The PBMs’ trade association, the Pharmaceutical Care Management Association, stated in early March that “PBMs negotiate on behalf of consumers and work to keep a lid on overall costs for prescription drugs with market-based tools that encourage competition among drug manufacturers and pharmacies, and incentivize consumers to take the most cost-effective and clinically appropriate medication.”)

McAndrew of Families USA agrees with Haislmaier that nothing guarantees that the savings PBMs negotiate will be passed down to insurers or consumers. “But the entire reason we have a market where PBMs need to negotiate lower prices is because pharmaceutical manufacturers charge outrageous amounts for drugs,” she argues. “So focusing on PBMs is not getting at the source of the problem.”

The out-of-network ‘gotcha’

On March 18, CBS This Morning reported the recent experience of Mississippi mom Michelle Mills, who took her young son to the local hospital emergency room when he suffered a facial injury. (It turned out to be a broken nose.) Mills had the presence of mind to do what many mothers wouldn’t think to do before rushing out the door to take a child for emergency treatment. She called the hospital.

“Are y’all still in network with First Health?” she asked.

The answer was yes, so of course Mills concluded that her challenge now was simply getting her son treated.

Surprise! The hospital was in network, but its emergency room was not. Four months later, Mills received a bill for an extra $1,800. She managed to get that whittled down to $285, but she worried about others who might accept such an invoice (officially illegal, according to a little-enforced state law) more credulously. CBS reported that 65% of U.S. hospitals use emergency rooms staffed by outside companies—and that in a recent survey, 57% of Americans said they had received a surprise medical bill.

The prime surprise-bill suspects

A high percentage of ambulance services and the emergency department visits result in surprise out-of-network bills, according to recent studies.

Source: USC–Brookings Schaeffer Initiative for Health Policy, “State Approaches To Mitigating Surprise Out-of-Network Billing,” February 2019

Surprise bills have become fertile territory for investigative journalists, and preventing them is a political no-brainer. (In a crowdsourcing project among the readers of Vox, writer Sarah Kliff collected 1,182 ER bills and found that just the facility fee—what one pays for walking into the ER in the first place—varied from $533 to “well over $3,000.”) Nine business and consumer organizations, including America’s Health Insurance Plans, the health insurer’s trade group, issued a joint statement in December that endorsed banning surprise invoices for out-of-network providers. But the mechanics of how to do so have been the subject of fierce debate.

There are differences, too, over what level of government should address the problem. “There’s a tendency to have a national fix when in fact that might not be appropriate,” says Haislmaier of the Heritage Foundation, arguing that because the states customarily regulate insurance and handle medical licensure, it should be their job.

McAndrew disagrees. While pointing out that bills passed in New York, California, and Florida offer good models, she favors a federal law for two reasons. First, state insurance regulators have limited authority over self-insured plans. Second, a state-by-state approach would inevitably lead to a situation in which some states offer less protection than others.

U.S. Senate bills introduced last session by New Hampshire Democrat Maggie Hassan and Louisiana Republican Bill Cassidy would have spared Americans the pain of surprise out-of-network billing—Cassidy’s by capping charges at 125% of the median regional rate charged for the service, Hassan’s by prohibiting bills at higher than the in-network rate and mandating independent arbitration between providers and insurers, with the patient taken out of the middle. (And that means not receiving the eye-popping bill in the first place.) So far, the Senate bills have not been re-introduced in the current session.

According to a white paper on surprise billing released in February by the Brookings Institution and the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California, a study of one large national insurer showed that out-of-network emergency physicians’ charges averaged eight times what Medicare pays for the same service. But pricey out-of-network billing isn’t limited to the emergency department.

Prudent consumers choose a primary care doctor who is in their plan’s network, and if they’re able to plan their visit to a hospital they make sure that facility is in network too. The trouble often comes with “ancillary” professionals they may encounter in the hospital, such as anesthesiologists, diagnostic radiologists, and pathologists. Who would think to tick off this list of physicians involved in one’s care, interviewing each about his or her network status? And who would quiz the ambulance driver? In 2014, says the Brookings–Schaeffer report, “more than 50% of all ambulance cases involved an out-of-network ambulance.”

The surprise bills can be big ones. In what is perhaps not fully a coincidence, the specialties often involved in surprise out-of-network bills—anesthesiology, emergency medicine, diagnostic radiology, and pathology—are among the highest-charging specialties relative to standard Medicare payments. Drawing on Medicare claims data, Loren Adler, the lead author of the white paper, and his colleagues found that the top 25% of anesthesiology claims billed to Medicare patients had charges more than nine and a half times the Medicare rate.

No surprise about the high surprise billers

Anesthesiologists and other specialists are often the source of high out-of-network surprise bills. That makes sense because their average contracted payment rates, relative to Medicare rates, are among the highest.

Source: USC–Brookings Schaeffer Initiative for Health Policy, “State Approaches To Mitigating Surprise Out-of-Network Billing,” February 2019

The white paper adds that the mere ability to engage in out-of-network billing gives these docs leverage in negotiating high in-network rates. The authors also observe in a footnote that even though “discordant network status between hospitals and hospitalists” is currently rare, “recent private equity activity among hospitalist groups” suggests that hospitalists may be gearing up for either more out-of-network billing or more aggressive use of such an option to win higher rates. Opaqueness may still be a money-maker.

Medicare payment skews low and commercial rates for her specialty are a better index, says Mary Dale Peterson, MD, of the American Society of Anesthesiologists.

Both Vidor Friedman, MD, president of the American College of Emergency Physicians, and Mary Dale Peterson, MD, president-elect of the American Society of Anesthesiologists, reject any notion that their specialties are greedy outliers. Peterson says Medicare payment for anesthesiology services skews low, so that commercial rates for her specialty are a better index. Both doctors insist that it’s the health insurer’s responsibility to maintain an adequate network. At least occasionally, insurers have knowingly shorted networks to stick patients with out-of-network bills, they argue. Friedman and Peterson say their groups support proposed legislation that would take patients “out of the middle” and make sure they no longer receive surprise out-of-network bills. For a properly functioning market-driven health care system, says Peterson, “we need more transparency—and also network adequacy.”

Insurers need to maintain adequate networks that include specialists, says Vidor Friedman, MD, of the American College of Emergency Physicians.

Do health plans, then, deserve the blame for surprise billing because of their too-narrow networks? Adler and his Brookings–Schaeffer coauthors say that in many cases insurers tell them they do try to pressure hospitals to get their emergency department and ancillary physicians to accept network payment rates, but lack the market clout to insist on it, especially if the hospital is one that is essential to have in their network. Add to that the fact that in some communities the population of appropriate doctors is sparse; if an in-network doc is out sick or otherwise unavailable, an out-of-network doc may have to be called upon so that a procedure can be performed.

Transparency isn’t enough

On January 1, the administration started requiring that hospitals post their list prices online, but commentators quickly questioned the helpfulness of the resulting information. A pair of Kaiser Health News writers called it “a dog’s breakfast of medical codes, abbreviations and dollar signs—in little discernible order.” Indeed, many experts say transparency by itself isn’t enough to usher in high-quality, cost-effective health care—and Wright, Mc­Andrew, and Haislmaier are among them.

“Yes, prices are opaque, but making them more transparent” doesn’t always mean affordability, Claire McAndrew of Families USA says.

“Yes, prices are opaque, but making them more transparent to consumers doesn’t necessarily help consumers with affordability,” says McAndrew, “because information about prices can be hard to use, and there’s a question whether consumers who need health care really have an opportunity to shop around when they are sick and in urgent need of care.”

“Seventy percent of hospital admissions are through the emergency room,” says Wright. “And there’s no comparison shopping on the gurney of an ambulance.”

When a consumer has the time he or she will shop for a better price for a procedure, argues Edmund Haislmaier of the conservative Heritage Foundation.

Haislmaier concedes the point. “But when you have to have some test or procedure done and you have time in advance, there is shopping,” he says. He would emphasize giving consumers both the tools and the incentives to shop for price where choice is possible.

Arguing against the realism of that hope, however, are the results of a working paper from Yale’s Institution for Social and Policy Studies by Harvard Medical School’s Michael Chernew and three coauthors. Studying data from a large national private insurer, they looked at lower-limb MRI scans that were “potentially shoppable”—that is, not given on an emergency basis or in the midst of an admission. Not much shopping actually took place, they found; a physician’s referral, not the best price, was the key determinant of where people got their MRIs. “Despite average out-of-pocket costs of $300 a scan and free access to a price transparency tool, less than 1% of individuals in our sample searched for the price of lower-limb MRI scans before accessing care,” their report states. Patients on average traveled past six lower-priced providers on their way to the facility in which they were scanned. The lack of reliable, intelligible information about prices, bad as it is, would seem not to be the only barrier to a cost-effective system.

McAndrew of Families USA evokes a picture of consumers who are pinching their pennies more ardently—because they must. “Transparency can be a good first step,” she says. “But most consumers are seeking solutions that actually lower the price of health care so they aren’t left to choose between their health and their financial well-being.”

Let’s give Kate Sidley the last word, even though her faux-itemized “invoice” in the New Yorker was the satiric equivalent of shooting fish in a barrel. She wrote: “Remember how at one point an anesthesiologist walked into your room and said, ‘Are you Mrs. Phillips?,’ and you said, ‘No,’ and she said, ‘Oh, OK, must be the wrong room,’ and left? The anesthesiologist was out of network. That’ll be $2,500.”