Impact of Health Care Price Transparency on Price Variation: The New Hampshire Experience

Issue Brief No. 128

November 2009

Ha T. Tu, Johanna Lauer

Despite the launch of the HealthCost price transparency initiative in New Hampshire in early 2007, price differences for medical procedures performed at hospital outpatient departments and freestanding facilities have not narrowed, according to joint research by the New Hampshire Insurance Department and the Center for Studying Health System Change (HSC). Stakeholders in the state pointed to limited provider competition as the primary explanation for this lack of effect. New Hampshire's hospital market features geographic segmentation in rural regions and relatively few competitors even in urban centers. Moreover, only about 5 percent of the state's privately insured population was enrolled in high-deductible plans in 2007, leaving most consumers with little financial motivation to shop based on price. That said, some observers noted that HealthCost -- together with other state transparency efforts -- has drawn greater attention from employers and policy makers to variations in provider pricing and may have prompted some hospitals to temper their demands for rate hikes.

Price Transparency Has Not Reduced Price Variation

In recent years, numerous states have launched programs to publicly report health care prices, aiming to encourage cost-conscious consumer behavior and, over time, promote competition and greater efficiency among providers. New Hampshire stood among the first states to roll out a price transparency program designed to help consumers compare costs for commonly used health services. The HealthCost website, launched in early 2007, reports the combined cost -- encompassing both physician and facility payments -- for approximately 30 routine health care services. The majority of these services take place in hospital outpatient settings and freestanding facilities. In contrast to most state transparency initiatives that only publish hospital charges, HealthCost provides provider-specific, insurer-specific median cost estimates derived from claims data submitted by health insurers.

Although price transparency has garnered significant policy attention, very little research has explored what impact, if any, the public reporting of prices has had on overall price levels or on price differences across health care providers. In theory, when prices become publicly known, cost disparities across providers should narrow, as lower-cost providers gain an incentive to raise their prices and higher-cost providers face pressure to bring theirs down. Whether transparency pushes overall prices up or down, however, remains uncertain and depends largely on how concentrated and powerful providers are relative to insurers.

Ideally, researchers would measure how a specific transparency program has influenced overall price levels. In practice, however, it is extremely difficult to compare prices before and after transparency and attribute any observed change to that particular program, because many external factors -- including market competition, technological change, and other policy developments -- also affect prices. No statistical model can fully isolate and quantify these outside influences.

Given the difficulty of correctly attributing price changes to any single initiative, this report concentrates on the effect of price transparency on price variation rather than price levels. The analysis employs a mix of quantitative and qualitative approaches.

New Hampshire HealthCost Program

In 2003, as part of its drive to make health care pricing more transparent, the New Hampshire Legislature required all commercial insurers in the state to submit claims data. The state used this data to build the New Hampshire Comprehensive Health Information System (NHCHIS) dataset, which in turn generated cost estimates for 31 commonly performed services at hospitals and other medical facilities. The HealthCost website -- the public portal for these estimates -- went live in February 2007. All but one of the listed services (childbirth being the exception) are outpatient procedures, and most involve imaging or surgery. For each service, HealthCost displays the estimated median total payment by both insurer and patient (i.e., the allowed amount), covering both facility and physician fees. The median is used instead of the mean (average) in order to limit the effect of outliers. Consumers can generate provider-specific cost estimates, filtered by geographic location, insurance status, insurance carrier, and product type.

In addition to the consumer-oriented HealthCost website, there is also a public-use-file version of the complete NHCHIS dataset. This file covers a comprehensive array of health services but does not identify insurers. It is not intended for consumers, as working with it requires advanced data analysis skills.

No Reduction in Price Variation Across Providers

The central finding of the New Hampshire Insurance Department's (NHID) quantitative analysis is that, during the post-transparency period, price variation did not decline for the services listed on the HealthCost website. The coefficient of variation -- the metric used to gauge the degree of price dispersion -- held essentially steady for most services between the pre-transparency years (2005, 2006) and the post-transparency year (2008). An NHID report details findings for each of the 30 services featured by HealthCost. For brevity, this Issue Brief focuses on five representative services: arthroscopic knee surgery; colonoscopy; MRI of the back; pregnancy ultrasound; and a medium-level emergency room visit. Results for these five -- which are consistent with the full set of 30 -- strongly suggest that in its first full year of operation, HealthCost had not yet affected price variation.

NHID carried out the price-variation analysis separately for hospitals and non-hospital providers (such as ambulatory surgery centers and imaging centers), because their cost structures differ too significantly to be combined. As average prices in the data show, the same procedure is consistently more expensive -- sometimes dramatically so -- at hospitals compared to other facilities.

One hoped-for outcome of price transparency is that higher-priced providers would lower their prices to stay competitive and avoid losing patients. To assess whether this has happened, it is useful not only to track hospital and non-hospital price variation over time individually, but also to examine whether the price gap between the two provider types has narrowed since public reporting began. A comparison of hospital-to-non-hospital price ratios before and after transparency shows that HealthCost has had no discernible effect on this gap. This pattern holds regardless of whether the analysis uses mean or median prices, and persists across the full range of HealthCost services.

As noted earlier, shifts in overall price levels cannot be attributed to any single transparency effort, since many external factors also drive prices. Nevertheless, given keen stakeholder interest in this question, a review of year-over-year price changes before and after HealthCost's launch is informative. No consistent pattern of price increases or decreases emerges in the post-transparency period -- a finding that holds for both the five highlighted services and the full set of 30 analyzed by NHID.

Limited Provider Competition

The quantitative results showing unchanged price variation were consistent with the perspectives of most health plan, hospital, and provider organization representatives interviewed about the HealthCost program. The majority said they had neither expected nor witnessed any meaningful effect of HealthCost on pricing or price disparities, primarily because of weak provider competition throughout New Hampshire.

One observer characterized New Hampshire as containing "three more or less separate health care markets": rural areas, the urban corridor, and the Seacoast region. In the rural areas, geographic segmentation means each hospital controls a distinct catchment area, making it -- in the words of one health plan executive -- "virtually impossible" for insurers to credibly threaten to exclude a hospital from their networks. Most rural hospitals carry critical access designations, receiving cost-based Medicare reimbursement; commercial insurers typically negotiate their rates as a percentage of these cost-based Medicare rates. Between geographic isolation and cost-based payment, the state's rural hospitals "don't really compete in any meaningful way," as one policy expert put it.

The southern urban corridor offers more provider competition than rural areas, but respondents observed that even in cities, the extent and intensity of hospital competition is constrained. For instance, Manchester and Nashua each have two hospitals in close proximity, but one is religiously affiliated and the other is not; many residents hold deep-rooted preferences for one over the other. Consequently, insurance plans that exclude either hospital in a given city will be unappealing to a sizable share of the population. This is especially true when employers offer only a single plan option, meaning that plan must have broad consumer appeal.

Provider capacity limitations further restrict insurers' ability to narrow their networks. One hospital executive pointed out that if Anthem Blue Cross and Blue Shield -- the dominant insurer holding roughly half the commercial market -- were to drop one of the urban hospitals from its network, the remaining hospital in that city would lack the capacity to absorb all of Anthem's enrollees. Because both sides recognize these constraints, hospital competition is limited and hospitals maintain strong leverage over insurers, according to multiple respondents.

The Seacoast area in eastern New Hampshire has four hospitals within a 30-mile radius -- conditions that should foster reasonable competition. Yet, Seacoast hospitals are among those that have historically secured the highest payment rates in the state, according to several observers. Respondents attributed this to a combination of factors, including more aggressive negotiating by Seacoast hospitals; the for-profit status of one facility; and the affluent, loyal patient base in parts of the Seacoast. Exeter Hospital, widely acknowledged as the most expensive hospital in the state, is situated in the greater Seacoast area. Several respondents considered it effectively shielded from pressure to cut rates by its prestigious standing in a prosperous and loyal community. One health plan reported it was "unable to generate any purchaser interest" in a network that excluded Exeter.

Consumers Lack Strong Incentives to Compare Prices

In addition to limited hospital competition, nearly all respondents identified another major reason HealthCost has not influenced price variation: most consumers have minimal financial incentive to comparison shop for health services. Although high-deductible health plans have been growing in New Hampshire, they still represent a very small fraction of the commercial insurance base. The share of privately insured residents in high-deductible plans rose from 1.5 percent in 2006 to 5.3 percent in 2007. Many respondents noted that without meaningful "skin in the game," consumers have little reason to seek out the lowest-priced provider. Apart from choosing whichever provider is most conveniently located, patients typically follow their physicians' recommendations about where to receive medical procedures, according to numerous health plan and hospital executives.

However, since HealthCost's debut, representatives from ambulatory surgery centers (ASCs) and imaging centers reported a modest but perceptible uptick in new patients who cited the facility's lower costs as a factor in their decision. In some instances, these patients found the facility through HealthCost directly (sometimes after hearing about the program via word of mouth or media coverage); in others, a health plan steered them toward the facility based on its lower price profile.

Some observers predicted that consumer incentives to shop for health care prices may grow substantially in the near future. Most private employers in New Hampshire are small firms that are highly price-sensitive when purchasing insurance, making it probable that high-deductible plans will continue gaining market share. As more consumers face greater out-of-pocket exposure, their motivation to use comparison-shopping tools such as HealthCost should rise correspondingly.

New Hampshire's large public employers have historically offered generous health benefits with low patient cost sharing. Facing rising health costs and tight budgets, however, they have joined forces to create the New Hampshire Purchasers Group on Health. This coalition has begun leveraging provider cost data to explore tiered-provider benefit structures that would give consumers financial reasons to use lower-cost providers.

Minimal Effect on Hospital-Insurer Rate Negotiations

Despite holding a relatively weak negotiating position, most of New Hampshire's major insurers reported trying to use HealthCost data to secure rate concessions from hospitals -- mostly without success. When insurers cited HealthCost data as evidence of high costs, hospitals typically countered that the data were not current enough to reflect present rates; the data were not precise enough to capture true rates; and/or the data presented an incomplete, misleading picture since HealthCost covers only a limited subset of hospital services. Insurers also reported that some hospitals attempted to use HealthCost data selectively to "push up" their rates.

Because most hospitals reportedly fall above the median on some services and below it on others, neither insurers nor hospitals have been able to wield HealthCost data effectively at the bargaining table, according to multiple respondents. As one hospital executive explained: "If they try to point out that I'm an outlier for a particular MRI, I'll show them other services where I'm well below the median. It goes both ways... two can play that game. In the end, we both agreed to put the data aside and negotiate the way we always have."

Hospitals have consistently resisted efforts by insurers and policy makers to compare hospital costs with the considerably lower prices charged by ASCs or imaging centers. Hospital executives maintained that such comparisons are unfair because hospitals cannot selectively treat only the most profitable patients or offer only the most profitable services: "We must accept all patients... including Medicaid and uninsured," and "we have to subsidize across payers and services." Hospitals argued that the need to use commercial revenues to offset inadequate Medicaid reimbursement has become even more pressing since late 2008, when the state -- confronting severe budget shortfalls -- reportedly reduced Medicaid rates to Prospective Payment System hospitals by 33 percent for outpatient services and 10 percent for inpatient services.

Encouraging Signs for the Future of Price Transparency

Although the prevailing view was that HealthCost has not yet altered prices, this assessment was not unanimous. Some respondents suggested that HealthCost -- in combination with other New Hampshire transparency efforts -- may have restrained provider demands for steep rate increases. According to one policy analyst: "It's hard to measure, but some of these hospitals might have requested double-digit increases, were it not for the comparative cost data being publicly available. Most don't want to be perceived as price-gougers." A health plan executive concurred, noting: "Many hospital boards are conscious of their reputation in the community... and don't want their institutions seen as the costliest ones." However, if higher-cost hospitals have in fact moderated their rate demands, this change should have appeared as a reduction in price variation in the NHID's quantitative analysis. As noted, the analysis found no such reduction.

Since HealthCost's introduction, additional public and private transparency initiatives have appeared in New Hampshire. One notable private effort was Anthem's rollout of its Care Comparison online tool, enabling enrollees to compare hospitals and other facilities on quality and cost indicators for roughly 40 inpatient and outpatient services. At least one other insurer has taken a different path, opting to direct its enrollees to the HealthCost website rather than building its own comparison tools.

On the public side, several respondents highlighted the New Hampshire Hospital Scorecard, sponsored by the New Hampshire Purchasers Group on Health, as a promising complement to HealthCost in focusing attention on hospital cost variation. The scorecard pairs Centers for Medicare and Medicaid Services quality measures with a cost index for each hospital. The cost index is displayed as a range of one to four dollar signs and was calculated by NHID using NHCHIS data, based on a market basket of inpatient and outpatient services.

Beyond the hospital scorecard, the state's large public employers have started engaging directly with high-cost hospitals to discuss ways of controlling or moderating cost growth. These employers have also been using HealthCost and other comparative cost data to explore tiered-provider-network benefit designs. Reportedly, the state university system was the first employer to introduce such a product in its benefits offerings.

Some policy experts who were optimistic about price transparency's potential argued that these efforts simply need more time to show results. As one observer pointed out, HealthCost launched only recently -- in early 2007 -- and many hospital-insurer contracts in New Hampshire run for two or three years, meaning a substantial lag is to be expected before any transparency program can influence negotiated rates. In the interim, according to several policy experts, HealthCost has achieved a valuable outcome in directing attention -- particularly among state legislators and employers -- to the wide price disparities that exist across health care providers.

Policy Implications

Many New Hampshire stakeholders noted that the effectiveness of price transparency has been dulled by limited provider competition in the state, even in urban markets. Several suggested that a program like HealthCost could exert a stronger influence if deployed in a health care market with many competing providers and comparatively weak provider bargaining power. A few respondents specifically cited Los Angeles -- where hospitals are plentiful and many are not affiliated with a dominant health system -- as a market where price transparency holds greater promise of lowering prices and reducing cross-provider price gaps.

Regardless of the degree of provider competition in a given market, transparency initiatives are unlikely to drive meaningful consumer price shopping as long as insurance benefit designs continue to give consumers little reason to prefer lower-cost providers. In New Hampshire and across the country, financial pressures on both public and private employers may lead to wider adoption of high-deductible plans, tiered-provider networks, and other benefit structures intended to make consumers more cost-aware when choosing providers. As employers increasingly pursue such strategies, more consumers will have reason to turn to price transparency tools like HealthCost.

That said, there are limits to how much increased patient cost sharing can be expected to spur active price shopping. Some New Hampshire stakeholders proposed expanding HealthCost to include more high-cost procedures like heart bypass surgery and hip replacements. However, the prices for such expensive services often exceed a patient's deductible even under a high-deductible plan, which would diminish the incentive to shop on price; in some cases, the price may exceed a patient's annual out-of-pocket maximum, eliminating the incentive entirely.

Furthermore, the more complex a procedure, the harder it becomes to adequately adjust for differences in patient mix so that prices can be fairly compared across providers. And, beyond the most commonly performed services, insurer claims volume may not be large enough to generate reliable provider-specific, insurer-specific price estimates. Due to all of these factors, expanding public price reporting beyond the relatively common and inexpensive outpatient services already featured on HealthCost is likely to prove challenging.

Data Source and Funding Acknowledgement

A combination of quantitative and qualitative methods was employed to study the effect of price transparency on price variation. The NHID conducted the quantitative analysis using claims data from all New Hampshire commercial insurers through the NHCHIS dataset. Three years of claims data are presented: two pre-transparency periods (January 2005 through September 2005, and October 2005 through September 2006) and one post-transparency period (October 2007 through September 2008). For ease of presentation, these are referred to as 2005, 2006, and 2008 in this report. The NHID calculated prices using the mean (average) rate rather than the median, since the mean is more responsive to changes in payment levels. The NHID also isolated technical fees paid to hospitals or non-hospital providers rather than using bundled rates, in order to determine whether negotiated rates for these providers were affected by public price reporting.

The qualitative analysis was performed by HSC researchers. A total of 17 interviews were carried out between May and July 2009 with New Hampshire insurers, hospitals, ambulatory surgery centers, imaging centers, and policy experts to gather their perspectives on the HealthCost program's impact. Each interview was conducted by a two-person research team; notes were transcribed and reviewed jointly for quality assurance. All interview data were coded and analyzed using Atlas.ti, a qualitative software program.

This research was funded by the California HealthCare Foundation, based in Oakland, California.

Sources and Further Reading

CMS: Hospital Price Transparency — Federal requirements for hospitals to make pricing information publicly available, building on the state-level transparency efforts examined in this research.

Health Affairs: Price Transparency Research — Peer-reviewed studies on the effects of healthcare price transparency on consumer behavior, provider competition, and price variation across markets.

KFF: Health Care Costs and Price Transparency — Analysis of consumer price sensitivity, high-deductible plan enrollment trends, and the role of benefit design in encouraging cost-conscious healthcare decisions.

AHRQ: Health Care Costs and Utilization — Federal research on healthcare cost variation, provider pricing patterns, and the effectiveness of consumer-oriented price comparison tools.

The Commonwealth Fund: Health Care Price Transparency Initiatives — Evaluation of state and federal price transparency programs and their impact on hospital pricing, insurer negotiations, and consumer shopping behavior.