Thanks to the ongoing rollout of the new Transparency in Coverage Rule, a change to Obamacare that was pushed by the Trump Administration and continued by the Biden Administration our federal government has taken a big step towards a more market-based system.
This change will have a dramatic impact on how consumers assess health care choices. Thanks to this change, 212 million consumers will be given ready, geolocated access to the prices of virtually every medical test and procedure so they can decide for themselves whether to spend $800 for an MRI of the lower back or $6,000. An MRI of the same quality can be that dramatically different, within a 10 miles radius—or less.
The goal of transparency is to provide consumers with the actual price of a procedure, much like a consumer would get when they purchase a car or buy a home. In our crazy system, someone getting hernia surgery in Boston or any city in the United States might be paying $5,000, while another person across town might be paying $15,000. A blood test in Dallas might cost $30 at one location and $300 another next door.
Think about buying for your car. You see $3.50 per gallon on one side of the street and $4.00 per gallon on the other side. The choice is easy.
A reasonable person might wonder how these massive price discrepancies could exist when health insurance companies should be shopping for the lowest rates for medical services and passing the savings along to subscribers in the form of the lowest possible premiums. The answer is that an unreasonable federal rule has introduced bizarre market forces into the health insurance business. This toxic rule, called the 80/20 Rule, can make insurers want to pay more, not less, for health care services and then pass the inflated cost along to consumers in the form of higher monthly premiums.
The rule sounds reasonable on its face, yet the rule provides a perverse incentive for the payers of health care services to run up costs. Insurance companies are required to spend at least 80% of the revenue they generate from premiums on health care costs and quality improvement activities. The other 20% can be used for administrative, overhead, and marketing costs, including advertising campaigns and salaries of executives.
Insurance companies serving large businesses must spend at least 85 percent of premiums on care and quality improvement, with the remaining 15 percent being theirs to spend as they wish. That means there’s only one way to make the 15-20 percent of discretionary money a bigger number. And that’s to make sure more is spent on health care services, not less, because 20 percent of $2B is $400M, but 20 percent of $4B is $800M. That’s a very big incentive to run up cost.
The unrestricted corporate money in the health care insurance business can only grow if the prices paid for health care services grow. And since the higher costs are just covered by subscribers via higher premiums, health care insurance companies have zero incentive to aggressively negotiate the lowest possible prices for a blood test or an MRI or cardiac surgery. Creating an incentive to run up cost is the opposite of what public policy makers strive for when creating health care rules.
Mark Galvin, the Founder and CEO of TALON, the company that developed the healthcare price technology transparency platform that was used as the model for the federal Transparency in Coverage Rule, put it this way, “the 80/20 Rule and similar laws that state legislators have enacted in the past should be viewed as a type of industry price fixing that should actually be illegal.” Galvin makes the point that “once consumers or employers paying health care bills have transparent price information and immediate incentives to care about price, along with quality, there should be no reason to try to limit health insurance company profits.” He is correct to point out that consumers are better watchdogs when they get to take a walk from excessively priced services.
Those incentives include fines for employers who don’t arm their employees with platforms like TALON that give them comprehensive, transparent, easily accessible competitive pricing. In fact, as of January 1, 2023, employers can be fined $100 per health plan member per day. Since each employee, on average, represents 2.2 members (due to family plans), that’s an average of $220 per day, per employee.
Galvin points out that the health care system needs true reform to make it resemble a market without the distortion of the 80/20 rule. He argues that “free markets, especially mass markets, with competition and with more access to information upon which to make informed decisions, will improve quality and lower costs in the $4.7 trillion healthcare marketplace.”
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