Medical price transparency simply won’t work

President Trump issued an executive order in February, titled “Empowering Patients Through Radical Price Transparency,” that promises to dramatically lower prices using the free market. Trump says his executive order will allow Americans to learn “the real price of health care services ... so they can shop for the highest-quality care at the lowest cost.”

Although the goal is laudable, price transparency simply will not work as Trump claims — in fact, it cannot. “Transparency” doesn’t show the real price and cannot lower costs. It is also insufficient to assess medical quality — high, low or even substandard — because medical outcomes are not a part of price transparency.

In every commercial transaction — except the purchase of medical care — price is equal to payment. A seller may put something on sale and discount the original price, but still, the discounted price — openly advertised (i.e., transparent) or the buyer won’t know from whom to buy — is the amount the buyer will pay and the amount the seller will receive.

This is so commonplace that we assume “price” equals “payment.” How can it be otherwise?

But thanks to the third-party payment structure, it is otherwise in health care. The buyer is the consumer but not the payer— a third party (an insurance company or the government) makes the payment. So, in contrast to other transactions, when patients “purchase” health care services, other than a small co-pay, they do not pay with their own money. Rather, they spend other people’s money.

Most people have limited financial resources. When expending their own money, they have a powerful incentive to minimize their spending. In health care, people don’t need to “shop,” as they are spending other people’s money, not their own. Transparent prices will not change their purchasing behavior, as they have little reason to choose less expensive care.

There is a second problem with price transparency. Most people translate their experience in other markets to health care and assume the advertised price is what will be paid. This is not true in health care.

For example, say a hospital establishes a charge of $5,000 for a hernia repair. Price transparency will list “Inguinal hernia repair, one side, $5,000.” The hospital will use the billing code K40.90.

The hospital has contracts with various health plans, and each plan may have a slightly different negotiated discount for code K40.90 based on Medicare’s Allowable Reimbursement Schedule. That schedule predetermines what the government will pay for any billing code. The allowable reimbursement (government language for payment) ranges from 95 percent of charges to less than 5 percent and is typically around 40 percent of charges. When a health plan adds its own discount, actual payments are often 25 percent of charges or less.

Thus, price transparency will give the public a greatly inflated idea of what is actually being paid. People see $5,000 for hernia repair and think the doctor is getting $5,000, when he or she may be getting only $1,250 — or much less.

Before retirement, I did cardiac catheterization procedures in critically ill babies with congenital heart disease, billing code 93454. The charge ranged from $1,500 to as much as $10,000 if a device had to be used. Medicaid paid the maximum allowable reimbursement: $387.

Medical price transparency in a third-party payment system cannot work to lower prices because people have no price-driven incentive to economize. In addition, price transparency will give patients a false and greatly exaggerated impression of what is being paid to their care providers.

When price transparency fails, as it will, the public will either blame Trump (some believe he can do no right) or point the finger at greedy doctors and predatory hospitals for all the money they are supposedly making off the misery of others (which they aren't). Both will be wrong.

Deane Waldman, M.D., MBA is professor emeritus of Pediatrics, Pathology and Decision Science, former director of the Center for Health care Policy at Texas Public Policy Foundation, former Director of New Mexico Health Insurance Exchange and author of 12 books, including, “Curing the Cancer in U.S. Healthcare: StatesCare and Market-Based Medicine.”