Price Transparency in Healthcare: Apply with Caution

Abstract

There’s a widespread perception that transparent pricing would push healthcare prices downward. While this may be true in certain markets, in many others, it would have little price impact or could even push prices upward via tacit collusion. Under perfect competition, prices are universally known and vary little across buyers and sellers. Such conditions are absent in many or most American healthcare markets. The industrial organization and antitrust literatures suggest that when the number of sellers in a market is small and barriers to entry for new sellers are high—as is true of most healthcare services—public knowledge of prices can lead to tacit collusion. In such cases, sellers act on price information as though they are conspiring to restrict supply and raise prices, without any actual conspiracy, while consumers cannot or do not use prices to change their behavior. Aside from tacit collusion, providers have better information on health and care than patients do. Emergency patients can’t price-shop. Third-party payers, not patients, reap most of the benefits of price-shopping. Even when patients are provided with price-shopping tools, they fail to compare prices. These cautions do not imply a blanket condemnation of price transparency, but they do suggest that policymakers should be highly selective in issuing transparency mandates.