The state of California enacted price transparency legislation requiring hospitals to provide requesting uninsured patients with information on prices for hospital services and charity care. In our study, we found that only 28% of California hospitals responded to such a request from a hypothetical uninsured patient. The few estimates we received did not allow us to make an “apples to apples” comparison as only some hospitals included specified physician fees. Less than half of responding hospitals included charity care policy information as required by law. Moreover, despite legislation that limits the amount hospitals can charge a poor, uninsured patient, the price estimates offered averaged twice what Medicare reimburses for the procedure. Our findings raise serious questions about the effectiveness of these laws to allow uninsured patients to shop for care and protect them from price discrimination.
Fundamental Limitations of Hospital Price Transparency Legislation
Our study also underscores some fundamental limitations of this type of price transparency legislation. First, shopping for care is limited to elective procedures. Second, health care costs are often difficult to predict. Based on a simple letter, or even a patient visit, it would be difficult for hospitals to prospectively estimate the price for a procedure. The law does not state what information a patient is required to provide. Our letters indicated that the patient was healthy and took no medications, but this would be rare. This uncertainty likely explains why many hospitals only provided an “estimate” or a price range. From the consumer’s vantage, the hospital ideally would provide patients with a single price, and it would honor this price to allow patients to compare hospitals and budget accordingly.
Third, there was marked heterogeneity in what care was covered by the price estimate. Some estimates explicitly included physician fees, some did not, and sometimes it was unclear. This heterogeneity reflects the division of hospital and physician reimbursement. From the consumer’s perspective this division is artificial because to shop effectively the consumer needs the total cost of care. Indeed, the true total cost to the patient would also include pre-procedure and post-procedure care. Proposals to bundle inpatient hospital, physician payments, and post-discharge care would make it easier for patients to shop for care.
Does Price Transparency Prevent Price Gouging?
Proponents hope that transparency will protect the uninsured from paying more than health plans11
. California law limits the price that hospitals can charge to patients who live below 350% of the poverty line. Yet, consistent with prior work,4
we found that the price estimates received were, on average, twice the median Medicare reimbursement for the same procedures. Because the letter of request did not include the patient’s income, hospitals were technically compliant. But in light of the spirit of the law and how we framed our letter, it is notable that few hospitals quoted a price lower than Medicare. None of the hospitals requested the patient’s income or stated that if the patient’s income was below a particular threshold he or she would be charged less.
We hypothesize the majority of hospitals based their price estimate on what they charge third-party payers, not what they receive from those payers in reimbursement. But healthcare “charges” often bear no relation to the actual cost of a good or service12
Finally, it is unclear whether hospitals have any incentive to compete on price to attract uninsured patients. Some hospitals may prefer to avoid uninsured patients. We found that investor-owned hospitals were less likely to respond to the request and to provide charity-care information. This differential response may signal that transparent price disclosure to the uninsured is a losing financial proposition.
Improvements to the Law
Despite the fundamental limitations discussed above, the variation in estimates suggests that the uninsured could save money by shopping under a more comprehensive price transparency law. Though addressing some barriers requires larger policy interventions, there are several short-term steps that can be taken to improve legislation. As California has already done, each hospital could publicly list a contact person who would handle requests for price estimates.
To aid the hospital in providing an estimate, a standard patient information form could be developed. This would also protect the patient by precluding hospitals from requesting information not readily available to the patient such as a CPT code, as was done by several hospitals in our study. Further, the state could standardize which services (e.g. physician, pre-procedure) need to be included in an estimate.
In California there are currently no financial penalties for non-compliance. The low response rate might be because many hospital representatives are simply unaware of the law. If hospital non-compliance were adequately monitored and penalized, the laws might be more effective.
What is the Optimal Approach to Price Transparency?
A larger question is whether the type of price transparency legislation enacted by California is the best policy lever to increase competition and prevent price discrimination. The primary approach taken by California, and advocated by some experts,1
is to have the uninsured patient shop for care by requesting a price estimate. Another strategy is to mandate that hospitals charge the uninsured the Medicare reimbursement for equivalent care plus some percentage set legislatively11
. California’s cap on the price estimate is a variation of this strategy. A third approach would be a publicly available list of hospital prices (not charges) for the entire hospitalization for common procedures. Such lists could include what the hospital will charge the uninsured or the hospital’s Medicare reimbursement. Consistent with this policy, California enacted another law requiring hospitals to list their charges
for the common inpatient hospitalizations and outpatient procedures. If it included actual prices or reimbursement,
it might be easier for patients to quickly compare prices. Nonetheless the law does not include all procedures. Also, it has been suggested that this type of legislation could have the unintended consequence of increasing prices for the poor1
. A last approach would be to eliminate differential pricing and mandate hospitals charge the same price to all patients and make these prices publicly available12
Limitations to the Research
This study has several important limitations. The law does not specify a timeframe in which the hospital is required to respond. We assumed that two months was a reasonable period for a “shopping consumer” to wait for an estimate. Further, the letters were addressed to “Whom it May Concern” and sent to the “Billing Department” of each hospital. Therefore, some letters may not have been directed to the appropriate hospital representative. If this were the case, however, one would expect larger hospitals to respond less frequently or more slowly than smaller hospitals. In fact, there was no difference in response rate or time by bed size. It is also not clear to whom an uninsured person should address such a request; the billing department seems as reasonable a choice as any other.
Though our findings were consistent across the three procedures, it is unknown whether our experience is applicable to other types of hospital care or to other states with similar legislation13
. When we calculated Medicare reimbursement, we did not account for indirect medical education or DSH status, though it is unlikely that these would explain the large differences we observed between prices quoted and Medicare reimbursement. DSH hospital status was not related to likelihood to respond to the request for an estimate (Table ). Our letters were mailed from the San Francisco Bay Area and the response rate among hospitals in this area was higher than the rest of the state (42% vs. 25%). Although our letter stated, “Although I don’t currently live near your hospital, I am willing to travel to save some money,” it is possible that hospital representatives were more responsive to a local address or this difference could be driven by some other difference among Bay Area hospitals. Lastly, we do not know if any hospital representatives had suspicions that the letter was part of a research study. Whether this would have made them more or less likely to respond is unknown.