Two recent publications make it clear that the problem of irrational pricing in health care is far from resolved despite the current suite of transparency requirements.

First, the Purchaser Business Group on Health (PBGH) completed a year-long deep dive into the pricing information posted online by hospitals and insurers since early 2021 when the current transparency rules took effect. That review confirms again what others have found which is that there are widespread disparities in pricing across and within markets, with no real explanation beyond opportunism. Patients are being charged for services based on what providers think they can get away with rather than objective market realities.

Second, Jim Jusko, Neil Mehta, and Christopher M. Whaley posted a succinct and clear exposition of the root cause of this pricing dysfunction and why the current rules are unlikely to ever provide an effective remedy without further reform. Their convincing argument is that government rulemaking must shift away from today’s coding-based construct toward disclosure of prices that are relevant to average consumers.

In its study, PBGH took on the complex work of sorting through the avalanche of data that hospitals and insurers have posted online pursuant to a series of rules and legislative requirements put in place during the Obama and first Trump administrations. Officials in the Biden administration largely continued with the policies that were in place when they assumed control but with perhaps a more forgiving approach to compliance enforcement.

One important finding in the PBGH study is that a large portion of posted data remains unusable for a variety of reasons. For instance, the study states that pricing posted by Kaiser Permanente is so riddled with problems that none of it could be used in the analysis. In other cases, hospitals and insurers have posted prices meeting the minimum federal requirements but with non-standard modifications that make comparisons with industry competitors impossible.

Still, there is enough salvageable data in the massive files posted online to reveal interesting patterns. For example:

• Across the ten regional markets PBGH examined, the median price for a total hip replacement conducted in a hospital outpatient facility ranged from $16,000 to $50,321. The same procedure in the same markets, when performed in ambulatory surgical centers, had median prices ranging from $10,506 to $20,500. The difference between an outpatient center and an ambulatory surgical center is mainly one of labeling and not of competency.
• The gap between the 25th and 75th percentile prices for hip replacements in the New York City/Northern NJ metro area was over $40,000.

Jusko, Mehta, and Whaley zero in on the market distorting effects of a legacy billing system built on thousands of highly specific and technical medical service codes. When hospitals and physicians send bills to insurance companies or Medicare, these codes are used to trigger reimbursement. This construct was not put together with patients in mind but rather to facilitate a fee-for-service insurance design, starting with Medicare. Not surprisingly, the industry has become expert at using this system to its advantage, and mainly to the detriment of pricing discipline.

For patients, what matters is the total price for a full episode of care. While in some isolated cases it might be straightforward to guess at a total price from what is posted online, most often it is not. Moreover, the uncertainty regarding accuracy will be enough to deter most people from devoting the time necessary to build a single price out of a series of fragmented disclosures, or to go through such work multiple times to allow for pricing comparisons.

The solution is to facilitate a more structured market with consumers as the focus. That starts with rules requiring providers to offer their services in meaningful consumer bundles with all-in pricing. As the authors of the Health Affairs post note, providers, not consumers, should do the hard work of boiling down a fragmented billing system into prices that consumers can digest and use.

However, such a rule would solve only half of the problem because consumers also need an incentive to shop for services. Today, many patients are insensitive to the total costs of their care after they satisfy their annual deductibles because their insurance companies pay 100 percent above these thresholds. Congress should require insurers to let consumers to keep all of the savings when selecting relatively lower-priced providers, including when they have already fully paid their deductibles. Providers of services would then have stronger incentives to lower their prices to attract more patients.

Despite the continued problems in the current market, the price transparency rules now in place were a step forward. The data they pushed into the public domain have allowed researchers to expose the harms caused by today’s irrational system and build the case for more far-reaching reforms.