Greater Price Transparency Will Improve Affordability

Inefficiencies plague our current healthcare system. Politicians are quick to blame these problems on the market and subsequently advocate for ever greater government control. But government programs, which are already major players in the healthcare market, provide lousy insurance for patients and undermine the viability of doctors and hospitals. Expanding the government’s role will only worsen these problems.

Rather than expand the government’s role, reforms need to address the price opacity problem that is obstructing the ability of healthcare professionals to deliver higher quality care to patients at lower costs. The price transparency problem afflicting hospitals exemplifies the problem.

As the Center for Medicine in the Public Interest (CMPI) documents, hospitals account

for nearly one-third of the nation’s total healthcare expenditures. While attention is often placed on pharmaceutical companies and insurance providers, hospital systems, especially nonprofit institutions, are the primary driver of healthcare cost inflation and systemic inefficiency.

To substantiate this claim, CMPI documents that hospital prices have increased by more than 250% over the last 25 years, which was double the rate of overall medical care inflation. Clearly, if hospital costs are one-third of spending and those costs are rising faster than the overall healthcare sector, then hospital costs are driving healthcare inflation. But it gets even worse.

Hospital costs are also growing twice as fast as the median household’s income. Consequently, hospital services are becoming increasingly less affordable for the average family. And while insurers and government payers are supposed to cover these costs, a larger share is being shifted to payments through large deductibles and coinsurance obligations.

Addressing the problem of price opacity will help control the growth in expenditures at hospitals because “a significant portion of this spending arises from redundant services, excessive administrative overhead, and inefficiencies embedded in payment models.” Establishing a competitive market with clear and transparent prices would impose discipline on hospital prices, make it difficult to inflate overhead costs, and rein in expenditure growth.

It is important to recognize that it matters how transparency reforms are implemented. Previous efforts to mandate transparency have fallen short due to lack of follow-through. In its Seventh Semi-Annual Hospital Transparency Report, PatientRightsAdvocate.org estimated “that only 21.1% of the 2,000 hospitals are in compliance with all of the price transparency rule requirements.”

Consequently, patients and insurers still cannot easily compare prices and the ability of competition to improve quality and reduce costs is still hampered. The Trump Administration should address this problem by enforcing the existing regulations and ensuring that patients and payers have access to clear and upfront pricing data.

Greater price transparency would also help mitigate the cost pressures created by the rampant abuse of the 340B program by many hospitals. The 340B program was created to subsidize hospitals and clinics serving low-income populations to help these institutions provide more care for vulnerable populations at lower cost.

To achieve this goal, 340B allows qualified hospitals to buy steeply discounted drugs and then resell these medicines to Medicare or privately insured patients at full price and pocket the difference. While the program offers hospitals large profit opportunities, the costs have become a burden that inflates costs for other patients and insurers. As a New York Times investigation noted,

prescription drug spending for state employees [in North Carolina] jumped almost 50 percent from 2018 to 2022. A report in May from the state treasurer’s office found that 340B was partly to blame: Hospitals that participated in the program billed the state health plan far more than hospitals that did not — almost 85 percent more for certain cancer drugs. In one example, hospitals bought a drug commonly used to treat melanoma for an average of $8,000 but billed the state $21,512.

Due to the extreme profitability of the program, the program has experienced rapid growth. In 2009, the discounted value of 340B purchases was $4 billion. By 2023, these purchases grew to $66 billion – a sixteen fold increase!

Yet, as I document in JAMA Network, abuse of this well intentioned program has turned it into a profit center for large health systems that do not pass the savings on to patients and tend to provide less charity care than the average hospital. Worsening the impact from the program, it has grown so large that the prices for other patients are increasing to help cover 340B’s costs.

With over one-half of nonprofit hospitals participating in the program, not to mention major pharmacy chains, the program’s adverse impacts are materially harming the broader healthcare system. Coupling price transparency reforms with policies that address the abuses by contract pharmacies and ensure that 340B hospitals serve their intended purpose can rein in the 340B program materially improve drug affordability.

Markets only work when transparent prices reflect the desires of consumers and the costs of producers. While the third-party payer system creates complications, this principle holds for healthcare markets. Regulatory reforms that promote widespread price transparency offers Congress and the Trump Administration an opportunity to meaningfully bend the healthcare cost curve and improve the quality-of-care patients receive.