Will price transparency in health care markets work?
The scholarship suggests that more transparency in health care could backfire, causing prices to rise instead of fall…
“I don’t know if you have had the misfortune of having health economists tell you about Danish cement,” said Amanda Starc, an associate professor of strategy at the Kellogg School of Management at Northwestern, one of several scholars who mentioned a paper with a punny name: “Government-Assisted Oligopoly Coordination? A Concrete Case.”
“Everybody loves the Danish concrete example!” said Matthew Grennan, an assistant professor of health care management at Wharton, who has studied the effects of price transparency on hospital purchases.
The Danish government, in an effort to improve competition in the early 1990s, required manufacturers of ready-mix concrete to disclose their negotiated prices with their customers. Prices for the product then rose 15 percent to 20 percent.
The reason, scholars concluded, is that there were few manufacturers competing for business. Once companies knew what their competitors were charging, it was easy for them to all raise their prices in concert. They could collude without the sort of direct communication that would make such behavior illegal. It wasn’t easy for new companies to undercut the existing ones, because the material hardens so fast that you can’t ship it far…
Research on gasoline markets has likewise found that publicizing prices appears to enable collusion in places where there are only a few competitors. But among more plentiful Israeli supermarkets, a database of prices appears to have lowered them.
Scholars at the Federal Trade Commission put out a paper in 2015 cautioning against the kind of price transparency that the president is embracing.
That is all from Margot Sanger-Katz (NYT). And via Ilya Novak, here is a recent piece by Zach Y. Brown:
This paper examines whether information frictions in the market for medical procedures lead to higher prices and price dispersion in equilibrium. I use detailed data on medical imaging visits to examine the introduction of a state-run website
providing information about out-of-pocket prices for a subset of procedures. Unlike other price transparency tools, the website could be used by all privately insured individuals in the state, potentially generating both demand- and supply-side effects. Exploiting variation across procedures available on the website as well as the timing of the introduction, estimates imply a 3 percent reduction in spending for visits with information available on the website. This is due in part to a shift to lower cost providers, especially for patients paying the highest proportion of costs. Furthermore, supply-side effects play a significant role—there are lower negotiated prices in the long-run, benefiting all insured individuals even if they do not use the website. Supply-side effects reduce price dispersion and are especially relevant when medical providers operate in concentrated markets. The supply-side effects of price transparency are important given that high prices are thought to be the primary cause of high private health care spending in the US.
I hope we learn more about this soon.