The recent 43-day federal government shutdown was driven most prominently by disagreements over healthcare affordability. The immediate impasse centered on expiring pandemic-era subsidies for health insurance in the Affordable Care Act (ACA) Health Insurance Exchanges. Without these enhanced subsidies, consumers in New Jersey and nationwide face a more than doubling of their insurance premiums, with many experiencing even greater increases. At the time of this writing, Congress is still debating whether to extend the subsides or replace them with what Republicans are calling “direct payments” to consumers. Such payments would involve depositing money into Health Savings Accounts (HSAs), which consumers can use to purchase health services and products on a tax-free basis. HSAs are often paired with high-deductible health plans and are part of an approach called consumer-driven healthcare.
The debate emerging in Congress is much larger than the specifics of ACA exchange subsidies. It reflects deep and long-held views about the nature of the health sector and the role of individual consumer decision-making. The consumer-driven view envisions incentives for patients to use their purchasing power to shop around for the best combination of price and quality of healthcare according to their own needs. According to Senator Bill Cassidy, a proponent of this approach, “when people are empowered to shop for their own care, they drive down prices.”
A key factor in driving down prices is the extent to which healthcare providers feel pressure to compete on price. For public programs like traditional Medicare, prices may be set directly by the government. In the private sector, the major source of pricing pressure comes from large health plans demanding lower prices in exchange for inclusion in plan networks. In response, providers, including hospitals and physician practices, have consolidated through mergers and acquisitions to improve their bargaining power (i.e., to raise prices). As we noted in a prior blog, this has led to substantial price increases, which are a key driver of rising healthcare costs overall nationally and in New Jersey. These developments raise clear antitrust concerns, but antitrust laws have some important limitations for regulating the health sector and it remains to be seen how vigorously federal and state governments will enforce these laws.
Even with stronger antitrust enforcement, consumers acting on their own are not well equipped to find or negotiate better deals than a health plan could. Indeed, there are longstanding debates about whether patient-consumers have the knowledge to make many important choices without substantial provider input. There is also considerable debate about the extent to which health services are “shoppable.” Moreover, research finds that consumer-driven health plans tend to enroll healthier and wealthier patients and are associated with reduced service utilization, but no change in prices.
There are ways, however, for patients and health insurance companies to work together in finding high-quality cost-effective options. An example is reference pricing where a health plan sets a reference price (e.g., $30,000) for a specific service (e.g., hip & knee replacement). Patients have more generous coverage for care at hospitals with negotiated prices below the reference price but must pay the difference at hospitals with prices above the reference price. A study of reference pricing in California found that high-price hospitals lost substantial market share and subsequently reduced their prices by more than 1/3. A task force convened by Governor Murphy recommended adopting reference pricing in the New Jersey state employee health plan in 2021.
A key element of California’s reference pricing plan is the breadth of resources that were devoted to ensuring patients were well equipped to make optimal choices for themselves. These include brochures, websites, and information phone lines to learn about out-of-pocket costs and quality indicators at hospitals that were designated as “value-based” with prices set below the reference price.
Overall, empowered consumers have the potential to find lower-priced high-quality healthcare. This empowerment, however, must include appropriate consumer decision incentives and supports as well as robust price-competitive markets that are not stifled by excessive monopoly power among providers. It will take much more than consumer price transparency to make real progress on healthcare affordability.