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Health Insurance: increasing price transparency, decreasing asymmetry


The Trump administration released a rule such that “hospitals and insurers would be forced to disclose their secret negotiated rates for the first time” starting in 2021. These rates, whether facility fees or drug prices, are not publicized currently and held privately between hospitals and insurers through contracts and confidentiality agreements. Both policy makers and patients alike do not see these negotiated prices.

Inherently, there is asymmetric information that is part of the current working system. Buyers are consumers buying health insurance and sellers are the insurers. On one side, buyers know how healthy they might generally be, but the sellers have information shared with hospitals regarding pricing. Insurers have information that is valuable to them which is not shared with consumers because of private contracts. There is a lack of price transparency which buyers tolerate because they are ignorant of the information and/or have minimal choice in deciding where to buy insurance from. As a result, prices are probably higher than they would be if the Trump administration passes their plan for 2021. This is because with forced sharing of prices and where they originate, arbitrage would be discouraged (on public display), discounted negotiations between hospitals and insurers would change, etc. For example, if insurers and hospitals have the same information, they can see everyone’s pricing structures and negotiations and understand where they stand compared to competitors. For consumers and insurers, which providers are part of the network or not and why could also be apparent. There is speculation over the exact effects of this rule on the industry, but there is agreed sentiment that prices will change, whether the ranges narrow or widen. Hospitals, insurers, and consumers each have their own concerns with the new change if it passes. 

With buyers unable to distinguish between the quality of what they’re buying, the market with asymmetric information in the health insurance space persists. Moreover, this extends beyond making the market analogous to the market for lemons when considering the relationship between hospitals/providers and health insurers. With price transparency through this proposed disclosure rule, the information might be less asymmetric and thus, could change buyer expectations. While there will most likely not be a market failure, disturbing the existing system will have some consequential effects and time will tell if the health industry push back on the new rule will triumph or not.


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November 2019