Looking Past The Issue Of Price Transparency In Health Care

Law360 Publication
Author(s): Kristin Oto Jenkins

This article originally appeared on Law360 and is republished with permission.

Barely a day goes by without a report about a new initiative, analysis, concern or legislative enactment seeking to address “price transparency” in the delivery of health care services. Many describe “price transparency” as the solution to what is wrong with health care.

But “transparency” is a mechanism to fix one problem, so purchasers know what something actually costs. It does not provide a solution to the underlying issue — the perception that health care simply “costs too much.” And whether addressing transparency is sufficient to address the health care cost issue remains to be seen. It may be that, while many of the efforts to address price transparency — be it information transparency, transparency with respect to the pricing ostensibly being charged, or the “actual cost” to the end user — will make the pricing and charging process more visible, the reality may well be that the real goal of “transparency” is not an end, but only a stepping stone to actual price controls.

Recent events illustrate the range of avenues being pursued. First, the Centers for Medicare and Medicaid Services published a final rule implementing section 2718(e) of the Public Health Service Act enacted by the Affordable Care Act, which requires hospitals to make its standard charges for services, including for diagnosis-related groups, available to the public. Second, a local legislative initiative that directly attacked hospital charges to consumers suggests that proposed solutions that involve health care pricing itself may be closer than many think. Third, recently introduced legislation in Congress shows that the topic remains one of interest there, although no specific solution is realistically on the table.

CMS Final Rule: Price Transparency for Hospital Charges

In its own effort to attack the price transparency challenge, CMS’ FY 2019 Medicare Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Long-Term Care Hospitals, or IPPS, final rule updated its guidelines in accordance with section 2718(e) of the PHS act enacted by the Affordable Care Act. Effective Jan. 1, 2019, CMS will require hospitals to make a list of their current standard charges for all items and services provided by the hospital available via the internet. In response to a commenter’s observation that the definition of “standard charges” is unclear as hospitals may have many negotiated rates for the same service, CMS replied that it would not require payer-specific information at this time.[1] The list must be in machine readable format and updated at least annually or more as appropriate to reflect current charges. In adopting this rule, CMS indicated that it was concerned that the “challenges continue to exist for patients due to insufficient price transparency,”[2] and that these guidelines will help patients shop for health care services, particularly when they can be scheduled in advance.[3] CMS’ stated goal in creating these guidelines for charge information was to improve the accessibility and usability of the charge information that hospitals are required to disclose under the PHS act.

A “Local Approach” to Charges to Consumers Takes Root in California

While a great deal of publicity surrounds federal or state initiatives involving pricing transparency, for example in the form of “surprise billing” legislation or the requirement to publish charges set forth in the recently adopted CMS guidance set forth in the FY 2019 Medicare Hospital IPPS final rule,[4] it may be that local initiatives, if successful, have the potential to have the greatest and most immediate impact. The recently adopted initiatives put on the ballot in a number of cities in California, including Palo Alto, home to Stanford and its health system, underscore this point.

The local effort, in the form of the Palo Alto Accountable and Affordable Care Initiative, sponsored by the Service Employees International Union – United Healthcare Workers West, would cap hospital bills at 115 percent of treatment costs. Specifically, the initiative mandates that beginning Jan. 1, 2019, hospitals, medical clinics and other specified providers must annually issue a rebate and a reduction in the amounts billed to a payer (excluding Medicare or any other federal, state, county, city or local government payer) or patient for money paid or billed for services provided in excess of 115 percent of costs for direct patient care and the pro rata health care quality improvement cost.

Health care quality improvement costs as defined in the Initiative include costs the provider pays that are necessary to support health information technologies, train personnel and provide patient education and counseling. Providers may petition for other costs not specified to be considered as a part of allowable improvement costs. Fines of up to 10 percent of the rebate or reduction will be imposed for noncompliance. That notwithstanding, the fine cannot be less than $100 or more than $1000. In addition, a provider may petition the city’s administrative services department for variances from the 115 percent cap with respect to that provider.

Facing the considerable impact of such an initiative becoming law, the Stanford Health System initiated litigation to prevent the initiative from going forward. It was joined in that effort by the American Hospital Association, appearing as an amicus. In a recent ruling, the Superior Court of California held that the initiative will stay on the city’s November 2018 ballot. In doing so, the court rejected provider arguments that the initiative would be preempted because they conflict with comprehensive state and federal regulation of health care and that the initiative violated due process because the initiative provides no support for its selection of 115 percent cap on certain costs and is void for vagueness. The AHA further argued that the initiative targets hospitals and forces them to pay rebates to payers — a mechanism that patients may never benefit from — and grants “standardless discretion” in the hands of the city ‘s administrative services department to provide variances from the 115 percent cap. The AHA otherwise noted that: (1) a municipality imposing price controls on hospitals would be unprecedented; (2) growth in hospital spending is dramatically lower than before, so this initiative is not justified as a curative measure; (3) many other states’ price control experiments have failed to work as anticipated; and (4) the absence of current federal support for hospital rate-setting is illustrated by the ACA’s alternative means of controlling prices through imposing price controls for payers, not providers,[5] and hospital price transparency measures.

Ultimately, the Superior Court exercised caution in intervening in the public’s initiative power, and found that pre-election removal of the initiative was not appropriate. Key to its decision was that the initiative was on the ballot through procedurally proper means and that the providers’ challenges on substantive grounds, including preemption and due process, were more appropriate for after the election. In response to the providers’ preemption challenges, the Superior Court found that the providers did not meet their burden of demonstrating that the initiative was preempted by state or federal law. In particular, the court called out the providers’ arguments that the initiative was preempted by the Knox-Keene Act, when that statute pertains to the regulation of health care service plans, not providers. Lastly, the court rejected providers’ due process challenges, stating that the lack of support for the initiative’s selection to limit prices to 115 percent of certain costs is not an appropriate basis for removing the initiative from the ballot, and that the determination as to whether the initiative will be confiscatory “can be determined only after the election.” Moreover, the court found that the initiative was not vague because it “provides guidelines and regulations to clarify any uncertainty” and allows providers to petition the city to increase the cap under certain conditions.

It’s worth repeating that unlike the ACA limitations on payer charges, the initiative imposes a price ceiling on providers in favor of payers, while the ACA imposed cost controls on payers.[6] In addition, as discussed above, the ACA leveraged the price transparency mechanism — rather than direct price limitations on providers — as a way to address the cost of health care by requiring hospitals to publish a list of its standard charges for items and services.[7]

Potential Additional Congressional Action

While Congress did enact section 2718(e), legislators have been interested in going further. Perhaps the furthest proposal was made in the introduction of HR 4808 in January 2018. In the proposed “Transparent Health Care Pricing Act of 2018,” the proposal was made to require “transparency in all health care pricing.” What this means would be that health care providers and suppliers “that offer or furnish health care related items, products, services or procedures … for sale to the public disclose, on a continuous basis, all prices for such items, products, services, or procedures … in an open and conspicuous manner, … at the point of purchase, in print, and on the Internet; and include all … such prices the …[providers and suppliers] accept as payment in full…” for what they furnish to “individual consumers.”

This particular bill has not gone far, and it not expected to. But, what has followed was a bipartisan effort among five senators to focus on the transparency question by seeking feedback on a variety of transparency-related issues. This included an inquiry about just what information was available, what role should the “cash price” play in the price transparency discussion, and a request for feedback with respect to the various approaches taken by some of the leading states (Colorado, Kentucky, Virginia and Maryland). Where this effort will ultimately go remains unclear.

Another bipartisan bill recently introduced by Senators Tina Smith, D-Minn., and Bill Cassidy, R-La., would amend the PHS act and is aimed at lowering health care costs through reducing administrative burdens and "establishing a goal of reducing unnecessary costs ... by at least half over a period of 10 years." The bill directs the secretary to develop strategies and recommendations to meet the cost reduction goal, and provides for grants to at least 15 states to administer private-public commissions.

In addition, there have been more focused efforts in a number of areas. Perhaps the leading example is in the pharmacy arena with an effort to end so-called “gag clauses” that allegedly prevent pharmacists from discussing pricing from patients at the pharmacy counter (S. 2553 and S. 2554), and the “Affordable Medications Act of 2018” (S. 3411)). The Affordable Medications Act of 2018, introduced in early September, requires drug manufacturers to report expenses incurred for each product, including marketing and research and development expenses, to the Secretary of the U.S. Department of Health and Human Services. The secretary is given the authority to require additional information. The Medications act also directs the secretary to negotiate Medicare Part D drug prices.


There are a number of troubling trends for providers. First, the notion that municipalities can regulate hospital pricing could create significant problems. While Medicare reimbursement and Medicaid reimbursement would not be affected, there is a great potential to wreak havoc on the commercial pricing, which in many hospitals allows the hospital to survive in the face of those reimbursement programs. Second, at the federal legislative level, it appears that the topic is gaining more traction, and that traction is likely to end in some sort of controls as well. One need only look to the ACA payment limits, or the greatest-of-three rule, to see the challenges legislation can bring.

[1] 83 Fed. Reg. 41144, 41687 (Aug. 17, 2018).

[2] Id. at 41686.

[3] Id. at 41687.

[4] Id. at 41686-88.

[5] The ACA generally requires insurers to spend at least 80 percent of premiums on health care costs and quality improvement activities, or else provide a rebate to the enrollee. 42 U.S.C. § 300gg-18(b). This is often referred to as the “80/20 rule.”

[6] The U.S. Departments of Labor, Health and Human Services, and the Treasury promulgated what is known as the “Greatest of Three” rule — a plan or issuer satisfies the copayment and coinsurance limitations in section 2719A of the PHS act enacted by the ACA if it provides benefits for out-of-network emergency services in an amount equal to the greatest of three possible amounts: (1) the amount negotiated with in-network providers; (2) the amount calculated using the same method the plan generally uses for out-of-network services but using in-network cost-sharing provisions; or (3) the amount that would be paid under Medicare.

[7] 42 U.S.C. § 300gg-18.

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