Price transparency may have unintended consequences that may need to be addressed as greater transparency takes hold. Two significant issues that will require monitoring and, potentially, policy solutions are (1) the impact of transparency on prices in different markets and payment environments and (2) the impact of transparency on the provision of societal benefits.

Potential Impact of Transparency on Prices

Price transparency can take a variety of forms depending on the intended audience and its information needs. For example, most prices for commercially insured patients are the product of private negotiations between health plans and providers in a business-to-business marketplace. Certain areas of health care are becoming, or already are, more like a retail marketplace, including the market for elective procedures such as Lasik eye surgery or cosmetic surgery. Recent trends in consumer-driven and value-based insurance design are moving "commodity services" such as lab work, imaging, and screening tests, as well as some procedures, more toward a retail model. And new payment models are potentially reshaping how care will be delivered and priced. Price information needs—and the impact of price transparency—might vary significantly among different markets and payment environments.

Transparency in the Business-to-Business Marketplace

The business-to-business marketplace between providers and private health plans determines payments that make up approximately one-third of a typical hospital’s total revenue. Some healthcare economists and the federal antitrust enforcement agencies have noted that public transparency of negotiated rates could actually inflate prices by discouraging private negotiations that can result in lower prices for some buyers.1 Providers, for example, may have less incentive to offer lower prices to certain payers if they know other payers in the market will demand similar rates. They may also have less incentive to offer lower prices if they think this will set off a price war with other providers. Within the privately insured market, these considerations suggest that an approach to transparency that emphasizes out-of-pocket payments for insured patients instead of full transparency of negotiated rates may be preferable.2

Reference pricing. In other contexts, evidence suggests that price transparency may help lower prices. This effect has been noted in pilot programs involving reference pricing, an emerging alternative model to fee-for-service payment. Reference pricing sets a limit on the amount that, for example, a large employer with a self-funded plan will pay for healthcare services purchased by its employees. (This price limit establishes the reference price). The employer communicates to employees a list of the providers who have agreed to accept the reference price (or less) for their services. If an employee chooses a provider who has not accepted the reference price, the employee is responsible for the amount the provider charges above the reference price.

If a provider cannot lower its costs for providing a reference-priced service, it may raise its prices on other services to help mitigate the impact of meeting the reference price. Employers and other care purchasers should be sensitive to the potential for cost shifting when focusing on price reductions for a particular service.

In summary, price transparency may have varying impacts on prices depending on the context, the means by which price information is communicated, and the nature of the information communicated. The healthcare industry should remain sensitive to these factors and carefully monitor the impacts of transparency on prices.

The Safeway Reference Pricing Pilot

The Safeway chain of grocery stores launched a reference pricing pilot in 2009 to address market variations in price for screening colonoscopies that, in one regional market, varied from $848 to $5,984 for the same procedure. Safeway set a reference price of $1,500 for the facility and provided employees with a list of physicians who used the facilities that charged less than the $1,500 limit. (The physicians were paid according to a uniform fee schedule that had little variation across facilities.) The success of the pilot led to nationwide expansion of the program in 2010, with the reference price reduced to $1,250.3

Provision of Social Benefits

One goal of price transparency is to make the healthcare system more efficient, encouraging providers to focus on maximizing the efficiency of their operations and reducing their internal cost structure so they can better compete on price. In some instances, however, providers offer services (e.g., a Level I trauma center) or programs (e.g., a strong teaching and research mission) or serve low-income, indigent, or rural populations to address community or societal needs but may not produce a profit or positive margin, regardless of improved efficiencies.4,5 

As noted in one analysis, “until the political system is willing to level the playing field by explicitly paying for under- and unfunded services, market changes such as price transparency and specialization, although beneficial in their own right, could have severe negative consequences.”6 This is not an argument against price transparency, but a reminder that any system of price transparency should be implemented with full awareness of these potential consequences, which may require policy solutions to ensure the continued provision of necessary but unprofitable services.


1 For a summary of the federal antitrust agencies' concerns regarding provider exchanges of price information, see the U.S. Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care, Statement 6 (Aug. 1996).
2 For an overview of the potential adverse effects of transparency in business-to-business healthcare marketplaces, see David Cutler and Leemore Dafny, "Designing Transparency Systems for Medical Care Prices," New England Journal of Medicine, vol. 364, no. 10 (2011): 894-895.
3 For a description of the Safeway program, see James C. Robinson and Kimberly MacPherson, "Payers Test Reference Pricing and Centers of Excellence to Steer Patients to Low-Price and High-Quality Providers," Health Affairs vol. 31, no. 9 (2012): 2028-2036.
4 For an overview of challenges facing rural hospitals, see American Hospital Association, Trendwatch: The Opportunities and Challenges for Rural Hospitals in an Era of Health Reform (April 2011).
5 For an analysis of the costs to academic medical centers and teaching hospitals of maintaining their teaching and research missions, as well as providing standby capacity for medically complex patients, see Lane Koenig et al., "Estimating the Mission-Related Costs of Teaching Hospitals," Health Affairs, vol. 22, no. 6 (2003): 112-122.
6 Stuart H. Altman, David Schactman, and Efrat Eilat, "Could U.S. Hospitals Go the Way of U.S. Airlines?" Health Affairs, vol. 25, no. 1 (2006): 11-21.

Publication Date: Tuesday, March 10, 2015