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New price transparency rules can help health care transformation become unstuck

Why CEOs should back price transparency despite short term obstacles.

David Brailer | December 3, 2019

[Editor’s note: Welcome to the first edition of Leadership Matters with David Brailer.  In the monthly column, Dr. Brailer will focus on what top  health care leaders should be doing to set the tone for a more socially responsible, sustainable industry with calls to action for taking the long view and having the courage to forge the future we all want.]

The Trump Administration late last month proposed aggressive price transparency rules for both health care providers and payers, including commercial insurers, to disclose the real cost paid for health care services. These rules have elicited the expected outcry from health care organizations, but these rules are overdue and are key drivers of industry transformation.  And despite past failed bottom-up price transparency efforts, these top-down rules will drive rapid adoption and change.

At the core of any efficient market is a transparent, floating and value-based price.  None of us want to buy anything without shopping around and finding the best price.  This may not always be the lowest price – we may pay more to a reliable seller with a good reputation or for more add-ons.  But we can’t perform this most basic market behavior without discovering what the price is across a landscape of sellers.  With each buyer seeking out the “best” price they can find, and each seller selling for the “best” price they can offer, markets function, goods are traded and capital is allocated.

Service economies, of which health care is a shining example, are more complicated than buying bread, iPhones or cars.  When services are traded, it is much more difficult to compare the “product” that is being sold.  A CEO asks two consultants to bid on a strategy project with the same duration and deliverables.  But are they comparable?  Can they both equally steer a company to the right future?  This is where the CEO needs to be diligent, understand their needs and peculiar situation and ensure that the bids are truly comparable.

[Related: Many CEOs say health care pricing is too complex to be transparent]

There is already a chorus of complaints against the proposed price transparency rules, not least of which is that prices are protected by confidentiality clauses in commercial contracts.  However, there really are only two valid economic counter-arguments against the rules.  First, even for planned elective treatments such a hip replacement, the services that are offered by different facilities are different.  We know from two decades of health services research that treatment outcomes vary widely.  For example, one facility may have a hip replacement complication rate of 2%, below the national average, while another may have a complication rate of 4%, above the average.  These procedures, with very different complication rates, are really different products, and we should expect them to be priced differently.  But it is very difficult to measure all the different variations in treatments at different facilities being performed on populations of different risks.  This is true across the board in health care services, where there are substantial variations in outcomes and quality across the wide array of health care services.  Without detailed outcomes data, it is hard to compare what the value the service is truly delivering in terms of health and wellness.

Second, consumers generally lack the resources and knowledge to perform diligence at the levels that are required for complex health care treatments.  Many consumers and their families, when faced with the onset of a serious health care problem, are often not prepared to make urgent life-altering decisions.  They may ask friends or their local physician, but these are unreliable mechanisms of informed decision-making.  I know this as a physician with a nation-wide network of colleagues – I get asked all the time to help the son, mother, friend, cousin or another close relation of someone who isn’t a health care insider.  I do my best, but it is often just my judgement based on the “what would I do for my mother” test.  This is no way to run a $3 trillion industry.

So here we are today, in a health care marketplace without price data and with ambiguous value data, and with buyers who may not be acting rationally.  It is one reason, perhaps the major reason, that health care is such an inefficient industry.  Without price transparency, the health care market can’t perform the basic functions of a capital market.  It can’t correctly allocate capital to the right institutions, or within an institution to the right activities.  It isn’t possible to know the appropriate level of debt – the principal fuel of non-profit health care – organizations should carry.  It isn’t possible to know the true value of the services provided.  Without clear and visible prices, we are just making multi-trillion dollar guesses when we move capital around the health care economy.

So why move on price transparency given the other barriers to market efficiency?  The answer is that price transparency is the lever arm that will move the other barriers.  If there is a pathway to price transparency, we suddenly see real value in investing in outcomes data.  New companies will be formed to take advantage of the enormous amount of health care information now being amassed.  There will be fights over the accuracy of the data, and it will be more useful in some conditions than others, but the value part of value-based care will move quickly from science and pilot projects to the real world.

Similarly, there has been real growth in companies that help consumers navigate health care and find the best place for their care.  These “care stewards” are advocates and guides to finding the most appropriate treatments in a time of crisis.  These companies can offer real value to patients when they are making complex health care decisions.  For example, a recent study showed that, for Walmart employees diagnosed with cancer, second opinions changed the treatment more than a half the time, and discovered that 10% didn’t have cancer at all.  This emerging value proposition will create strong financial incentives for these companies to grow and support the population.

The knee jerk among providers and payers is that these rules should be resisted.  But, fighting these rules won’t lead to the best outcome for health care or for the private health care marketplace.  In a time when the health care industry has not been able to find sustainable macro-economic financing and operating margins continue to shrink across all health care sub-sectors, price transparency is a step in the right direction.  Moreover, when leading Presidential candidates openly advocate a government take-over of health care, private sector leaders need to demonstrate that the health care marketplace works and places a priority on meeting consumer needs.

Health care is stuck and we aren’t making progress toward a value-based system fast enough.  Price transparency can get us unstuck.  This is the time when the leading providers and payers should break from their peers and support these rules.  The need to help the industry take the long view, that an efficient market will be better for everyone, including their own organizations.  They need to help their peers understand that while the proposed rules will create short term obstacles, they won’t result in less capital being invested in health care.  They will result in more capital being invested in health care, and that capital invested more wisely.  It will be an important step to health care becoming a sustainable industry into the future.  No one should be against that.

About the Author

David Brailer, MD, PhD, is the Founder and Chairman of Health Evolution

David Brailer is known around the world for his leadership and entrepreneurialism in health care. Over the past three decades, Dr. Brailer has built a variety of private and public-sector organizations. From 2007 to 2017, Dr. Brailer was managing partner at Health Evolution Partners, a fund that invested in companies with the potential to transform health care delivery. Prior to that, Dr. Brailer was appointed by President George W. Bush as the nation’s first National Coordinator for Health Information Technology. From 1996 through 2002, Dr. Brailer was founder and CEO of CareScience, a health care information management company. He earned his M.D. from West Virginia University and his Ph.D. in economics from The Wharton School. Dr. Brailer serves on the Board of Directors of Walgreens and as a board member or chairman of five private health care companies.