Mark Cuban is right. American healthcare suffers from transparency problems. Let’s be clear, though: Transparency problems are actually euphemisms for information asymmetry problems. Information asymmetry is one of several built-in business models for American healthcare. Insurers have information that employers don’t. PBMs have information that employers and patients don’t. Hospitals have information that patients don’t. Drug manufacturers cut deals consumers are unaware of. Consultants, brokers, specialty pharmacies, GPOs, and other intermediaries can get between buyers and the true economics of a healthcare transaction. And at pretty much every step along the way, somebody can turn that information advantage into a profit.
Healthcare Doesn’t Operate Like a Normal Market
Consider the process of purchasing a vehicle. You can look up the invoice price online, shop around at different dealerships, secure financing in advance, research trade-in values, and simply walk away if you don’t like the offer. Now imagine purchasing a car but without knowing what it costs. The dealer quotes you a monthly payment, but won’t disclose how much the vehicle actually costs. Your employer pays for most of it. Another entity determines how much your dealer is paid. A third party gets a rebate from the manufacturer. No one will tell you how large a rebate they get or who ultimately benefits. Months later, you find out that you could have purchased the same car for thousands less through another program. Sounds ridiculous? These are some of the variations of events that occur regularly in health care.
Employers Have a Particularly Serious Problem
Employers pay for most American health care. However, most employers have opaque visibility into what they are purchasing. An employer may know that healthcare costs rose 8% or 10%. But why did they go up? Was it due to higher utilization? Higher hospital prices? Specialty drugs? Site of care differences? Provider contracts that weren’t adequately negotiated? Pharmacy Benefit Manager spread pricing? Retained rebates or other pharmacy revenue? Higher-cost alternatives being chosen over lower-net-cost alternatives?
The people writing the checks may actually know less about the economics of their health plan than the companies administering it. That is astounding. It also creates a serious principal-agent problem: the entity making decisions on your behalf may know significantly more about those decisions than you.
PBMs May Be the Clearest Example
Pharmacy benefit managers were originally designed to serve health plans by managing drug costs. The PBM industry today involves rebates, administrative fees, formulary payments, specialty-pharmacy payment models, spread pricing, manufacturer discounts, kickbacks, and other ways to generate revenue. Let’s start with one of the most basic questions an employer should be able to answer: How much did this prescription cost? Figuring that out can be challenging. You’ll discover a manufacturer’s list price. A discounted pharmacy price. Copayment amount. PBM reimbursement. A rebate. Other payments from the manufacturer. Administrative fees. And a net cost to you, the employer. Each of those numbers can vary widely. The complexity itself is valuable. Whoever understands the entire transaction has the power over the party paying for it.
Hospitals Have Their Own Information Advantage
Ask how much a medical procedure will cost you before you get it. Despite federal requirements around price transparency, figuring out the actual financial implications of care can still be insanely hard. The hospital has its negotiated contracts. The insurer has its negotiated rate. The employer usually doesn’t. And until an explanation of benefits or bill shows up, the patient might know nothing at all. Prices for similar services can vary wildly from provider to provider with no clear distinction in quality. In most markets that kind of price variation would lead savvy consumers to flock to lower-cost providers. Health care prevents that by making the information you need to make that choice difficult to come by, overly complex, or simply arriving too late.
Drug Pricing Adds Another Layer
Drug pricing shows you how far healthcare can go in obscuring price from economics. There’s a list price. There can be rebates. Discounts. Formulary deals. Specialty-pharmacy payment arrangements. Secret negotiated net prices. One of the weirder results: The consumer has the least information about how it’s priced. Patients see a copay or coinsurance amount. Behind their backs, everyone else might be negotiating.
Complexity Isn’t Always Accidental
Health care is complex. Medical science is complex. Insurance is actuarially complex. Getting drugs to people is complex. But clinical complexity is not the same thing as financial complexity that enriches companies.
Financial complexity shields margins. If an employer cannot know the true net cost of a medication, they cannot compare PBMs. If a patient cannot compare the price of a hospital stay to another hospital, there is less competition on price. If a plan sponsor cannot readily audit claims and contracts, then there is more opportunity for revenue to be skimmed along the way. If contracts are filled with vague language that obscures what “rebates,” “discounts,” “fees,” or “pass-through pricing” really mean, then the party with the most resources can come out on top. Let me put it another way:
Opacity isn’t merely inconvenient. It can have economic value.
Transparency Changes Who Has Power
This is why healthcare price transparency matters far beyond publishing hospital prices on a website. True transparency means employers and patients can understand the economics of a transaction before—or at least immediately after—it occurs. Employers should be able to determine:
- What was billed?
- What was actually paid?
- What did the provider receive?
- What did the PBM or other intermediary retain?
- What rebates, discounts, credits, or fees were generated?
- Who received them?
- What was the final net cost?
- Was a lower-cost clinically appropriate alternative available?
- How does the price compare with relevant market benchmarks?
- Is the intermediary being compensated in ways that could conflict with the employer’s interests?
If those questions cannot be answered, the purchaser doesn’t truly understand what it is purchasing.
Employers Need to Stop Being Passive Buyers
Employers have spent decades treating healthcare largely as an employee benefit to be administered. That mindset has to change. For many organizations, healthcare is one of their largest operating expenses.
A company spending $20 million, $50 million, or $100 million annually on healthcare should apply procurement and financial controls comparable to those it applies to other major expenditures.
Imagine telling a CFO:
“We’re spending $50 million with these vendors, but we don’t completely understand their margins, can’t independently verify every transaction, don’t know all the compensation they receive from third parties, and can’t easily determine whether we’re getting the best available price.”
That would be unacceptable almost anywhere else in the company. Yet variations of that arrangement persist in healthcare.
Follow the Money
The debate around healthcare reform has largely centered on who should pay. Government? Employers? Insurers? Patients? While that question matters, we should also ask where the money goes.
Until employers, patients, and policymakers can track healthcare dollars from the point of initial payment through every intermediary and gross-to-net calculation to the final recipient, we will continue to reward organizations that game the system better than the people who pay them. Information asymmetry is not responsible for every evil in American healthcare. But it does help explain how an industry can become incredibly proficient at moving money around without being able to explain what anything actually costs.
The next phase of healthcare cost control should not start with another rebate. It should start with transparency. Show the list price. Show the contract. Show the rebate. Show the fee. Show the spread. Show the net. Because when buyers have access to the same information as sellers and intermediaries, magic happens.
They can finally start behaving like buyers.
