By Tonic Advisors

On June 24^th, President Trump signed Executive Order 13877 (EO 13877).  The order requires providers and insurers to provide price transparency information in a publicly accessible format.  Importantly, this goes beyond the Affordable Care Act regulations that require only the posting of “chargemaster” data (commonly referred to as hospital “list” prices).  This order seeks to require providers and insurers to publish the rates that are actually paid.  The order requires the Secretary of Health and Human Services (HHS) to issue proposed regulations within 60 days of the order, and within 90 days the Secretary is admonished to solicit comment on the proposed rulemaking.

Like other broad transparency initiatives coming out of HHS, the order drew immediate and polarized reactions.  Consumer advocacy groups lauded the order as consistent with the goal of transparency.  Empowering patients to make better choices requires piercing the veil of secrecy that surrounds healthcare pricing.  Industry groups, including insurer and provider trade groups, cautioned that any regulations pose a risk of backfire.  They argue that they will lead to higher prices.  They also believe that the forced dissemination of information is an unwarranted intrusion into business practices.

It’s too early to begin to aggressively mobilize in anticipation of the changes created by EO 13877.  Other EOs, such as those eliminating the safe harbor on pharmacy rebates have been walked back over time.  Also, it is likely that both provider and insurer trade groups will litigate the validity of any regulations that are issued.  This could cause further delays and uncertainty in implementation.  Nonetheless, it is useful and interesting to look at the issues at play.  Why are certain constituencies for or against EO 13877? Wow could the order affect costs and the overall industry landscape?  We believe the implications are far reaching.

Stated Rationale

The EO’s stated rationale is that consumers are unable to make rational choices regarding their health care.  The challenge consumers face is inadequate visibility into the “true” pricing of the procedures and services available to them.  For example, they are unable to easily determine the price differential of receiving a service at Hospital A vs Hospital B, within the context of their insurance company’s negotiated rates.  This information is vital to them if they are to make good choices.  For example, if they have High Deductible Health Plans, they must spend a significant portion of their costs out-of-pocket before their insurance starts to pay.  If they have coinsurance they must pay a percentage of the cost incurred.  Knowing the hospital’s list price is not enough, they need to know the “real” price that they and their insurer/employer will be expected to pay.  That negotiated “real price” is the amount used to calculate their out of pocket obligations.

Trade groups point out that in reality, this information is not very helpful because in many cases patients have limited choice of providers, and the prices also do not factor in quality.  Advocacy groups counter that inapplicability in all circumstances should not deter use of the information in some or many circumstances.  In other words, the perfect should not be the enemy of the good.

Alternative Rationale

There are other very good reasons for transparency, which go beyond the stated rationale.  We lump these into 1. Shame, and 2. Disruption

1. Shame. One of the key unstated goals of the regulation is to shame providers by making the prices evident to the public. When people see the massive price variations, the theory is that they will demand an explanation and possibly reductions in price.  In some ways, however, the variation in prices can in fact be justified.  For example, hospitals with high rates of indigent care or Medicaid care often receive more from commercial insurers in a tacit agreement to even the financial playing field.  Hospitals with residency and fellowship programs to train new doctors also typically are paid more to account for this burden (which benefits everyone in the long run).  On the other hand, some providers just extract exorbitant amounts because they can.  The thought is that this could create a disincentive for such behavior.
2. Disruption. Right now, insurers know what they pay to each of their providers and providers know what they get from each insurer but no one has the complete picture.  The thought is that by making this information available, new more innovative payment models could be developed.
   1. Current insurers will have difficulty competing on the basis of negotiated prices. They will have to up their game, and come up with new ways of competing through more efficient care or by improving quality.
   2. New competitors can enter the market. There is a key opportunity (discussed in more detail below) for employers who self-insure to rethink how they cover their employees’ health care needs.

Who’s against this & Why?

Basically both “incumbent” sides of the health care industrial complex are against the executive order because it radically upsets the status quo, which thrives on secrecy.  It’s not surprising that providers such as hospitals are loath to provide the information to the public, but insurers also have much to lose.

1. Providers. Providers do not want the public to know how much they get compensated for a procedure relative to the competition—especially if they are the high cost provider.  As noted above, this is not entirely without fair reason.  Not all providers are in the same economic position, some face costs not borne by others.  Providers also argue that providing transparency will not lower costs.  They cite examples in which transparency has actually resulted in increased costs (i.e., transparency sets the floor not the ceiling for prices). The challenge with believing the argument that the regulation will increase prices lies mainly in the fact that organizations such as the American Hospital Association (AHA) are against EO 13877.  This implies that the AHA is against a regulation that would increase revenue to its members.  This is tough to believe. That said, transparency has led to higher pricing in other industries. How it may impact health care is still unclear and largely depends on what additional “rules of the road” are developed.
2. Insurers. If one believes that the regulations that ultimately get enacted would reduce costs, then one would think that insurers would be in favor.  The challenge is that one of the key value propositions for insurers are the negotiated rates that they have with providers.  Each insurer claims that their rates are better than the other in areas that matter.  If the regulation results in a leveling of rates across carriers, then one of their key differentiators and much of the mystique of their value proposition becomes commoditized.  Insurer business models will need to evolve.  This is bad news for incumbents with a lot to lose, but could be welcome for upstarts looking to expand and disrupt.

How might the industry adapt?

It’s probably foolish to think that the industry will sit idly by as its business models get disrupted.  We will look at possible moves that could be made in future analytics once more detail is available. One can imagine, for example, the use of back door undisclosed discounts or rebates to foil the regulations.  The Pharma industry uses such rebates today to make the pricing more opaque.  More to come as more is learned.

What does this mean for Employers?

The EO opens the door for employers to think about new ways to provide for their employees’ health care.  In the past, employers were often dependent on large carriers for their negotiated rates with providers.  In a new transparent world, contracting between providers and almost anyone could be simplified.  Instead of a byzantine chargemaster vs. negotiated rate world, in the new world prices could simply be “what you see is what you pay.”  The system could move on from the haggling of the Grand Bazaar to the set-pricing of Costco.  Employers could eliminate the middleman and discuss pricing and agree to terms directly with providers.  Employers could more easily create custom networks that met their employee’s needs, saving money both in provider costs, and administrative fees.

Conclusion

If this EO moves forward, it is big news and big change for the industry.  Health and Human Services under Secretary Azar has been quite aggressive in moves towards reform.  Our sense is that the EO echoes the aphorism that change can mean both “crisis” and “opportunity.”  In this case, the established industry giants face a crisis.  Others such as self-insured employers are being provided with a great opportunity.

The opinions, beliefs and viewpoints express by the authors do not necessarily reflect the opinions, beliefs and viewpoints of Pittsburgh Business Group on Health, its board or its employees.