Here’s a summary of the arguments on both sides of price transparency. You be the judge.

The future state of hospital economics sits on the desk of one DC District Court judge, and his industry-shifting verdict is expected by spring. The plaintiffs: the hospitals of America. The defendant: the federal government represented by Alex Azar of the Department of Health and Human Services (HHS), backed in the ring by President Trump.

Both sides have made their arguments plain and clear. The judge, Carl J. Nichols, must consider patient perspective, legal precedence, and industry economics in what has quietly become a bold effort to disrupt hospital economics.

Background on the Price Transparency Final Rule

On November 15th of last year, HHS issued a Final Rule (CMS-1717-F2) that would require hospitals to disclose their negotiated rates with insurance companies. The Final Rule was the manifestation of an unprecedented executive order from President Trump in June to promote price transparency in healthcare. Hospitals have never been required to disclose these rates, and per a lawsuit issued two weeks later in a DC District Court by a smattering of America’s biggest names in hospitals: they don’t intend to.

“The negotiated charges covered by the Final Rule are confidential and proprietary to both hospitals and commercial health insurers, and their public disclosure would effectively eliminate hospitals’ ability to negotiate pricing with insurers at arms’ length,” hospitals contend in the lawsuit.

As it stands, hospitals have filed a bitterly worded complaint against the defendant, Alex Azar of the HHS, who then issued an equally sharp response in defense of price transparency.

With the new law set to go into effect on January 1st, 2021, both sides have scrambled for a Motion for Summary Judgment, which would expeditiously strike down or uphold the law before hospitals must plan to accommodate it.

Let’s explore the arguments they make for and against price transparency in the lawsuit.

What Is the Definition of “Standard Charges?”

At the core of the hospitals’ argument is the definition of the term “standard charges.” Earlier in the decade, in Section 2718(e) of the Public Service Act, congress passed a law that granted HHS authority to require hospitals to disclose their standard charges publicly. HHS did just that in 2019 by requiring hospitals to post all of their chargemasters (the raw list of items and corresponding costs at hospitals, which are ultimately not the prices most patients pay).

Hospitals complied (and you can search many of the chargemasters on our website here).

However, these charges and messy, abbreviated descriptions did little to advance price transparency for patients.

As such, HHS went a step further last year by requiring hospitals to disclose the third party negotiated rates for these charges and 300 shoppable services. These are often critical variables in creating the patient cost calculation.

Hospitals’ stance: The private negotiated rates are anything but “standard.”

“But to state the obvious, negotiated charges are not “standard charges”...They are the opposite of standard, in fact, because they reflect the non-standard amount negotiated privately between a hospital and commercial health insurer.” - Hospitals’ complaint, page 3

In fact, the hospital argument goes as far as referring to Dictionary.com’s definition of “standard,” which demonstrates just how core this word is to the case.

HHS stance: “Standard” cannot just mean “chargemaster charges,” per congress’s original intent in the existing law.

“Congress did not define the term ‘standard charges’ anywhere in the PHS act...Congress unambiguously instructed hospitals to publish more than just their chargemaster rates. It required hospitals to publish rates for DRGs, which are not listed on chargemasters.” - HHS response, page 11

Because DRG rates are inherently packaged rates tied to third party agreements, HHS argues that standard charges - per congress - has never meant “just chargemaster charges.” Elsewhere, HHS also argues that these rates are already disclosed to patients in a piecemeal fashion through the Explanation of Benefits, so the “cat is already out of the bag.”

What will be the economic effect of price disclosure on the industry and patients?

Hospitals: Negotiated rates are trade secrets, and making them public could actually decrease competition and drive up patient costs.

Hospitals believe the confidentiality of negotiated rates is core to staying competitive economically. In general, hospitals are strategic about the volume of discounts they dole out to insurers based off anticipated patient volume or shifts in the payer market. Showing these cards would not only reveal their strategy to other insurers they must court, but also to other providers in the region. In fact, hospitals argue, doing so might drive up the rates for patients:

“Hospitals’ negotiated-rates data, the result of nonpublic competitive bargaining, are highly confidential and commercially sensitive, and constitute trade secrets...Making public proprietary negotiated-rates data would immediately wipe away all those legal protections, thereby threatening to stifle individual negotiations and dampen—rather than promote—price competition system-wide.” - Hospitals’ complaint, page 22

Hospitals also cite a similar attempt at regulation in the state of Minnesota, in which the FTC considered that rate disclosure could negatively impact competition. However, the complaint does not go into details or cite economic research to back it.

HHS: Basic economic theory (coupled with numerous cited studies) shows that increased price transparency leads to price competition.

Azar categorically dismisses the hospital argument that prices could actually increase:

“First, HHS established that there is extensive support for the economic theory underlying the Rule. That is true at a high level of abstraction—e.g., the theory that price transparency generally lowers costs in commercial markets.” - HHS response, page 32

Azar then goes on to cite numerous studies on price transparency  - which are notably absent from the hospital argument - with empirical evidence of lowered healthcare costs in states and employer groups:

“In New Hampshire, price transparency efforts resulted in lower out-of-pocket costs for medical-imaging procedures through two, interrelated mechanisms: First, patients who used New Hampshire’s price transparency website chose lower-cost options, which demonstrates that patients will indeed take advantage of price-transparency tools to make more informed healthcare choices. Second, the downward pressure those choices put on prices led to lower costs for patients throughout the state—including the ones who did not use the website.” - HHS response, page 33

Economic theory (backed by data from both the healthcare industry and others) supports HHS in that increased price transparency will increase price competition.

However, hospitals do have grounds to argue that undue price competition could hamper hospital quality, especially at hospitals that offer advanced services to underserved populations.

For hospitals to effectively manage how cost and quality ultimately reach the consumer-minded patient, they must have control of the data. See: Hospitals Can Choose Price Transparency Narrative or Let Others Choose for Them.

Will These Rates Truly Help Patients Understand Their Out of Pocket Costs?

The HHS Final Rule serves two substantial purposes: 1) to help patients understand the cost of care, and 2) to make these costs transparent in order to drive down the overall cost of healthcare in the United States.

But amidst a sea of deductibles, copays, coinsurances and out-of-pocket maximums, would the disclosure of negotiated rates actually help patients understand their costs of care?

Hospitals: The release of these rates will only serve to confuse patients further.

“The commercial health insurer negotiated rate does not tell you how much a patient covered by that insurance plan would pay out of pocket. Patients’ out-of-pocket costs are typically dictated by a variety of factors largely tied to their own contractual relationships with their insurers, including (i) whether the service is covered by the patient’s plan; (ii) whether the service is subject to cost-sharing; (iii) the amount of the patient’s per-visit co-insurance or copayment; (iv) the amount of the patient’s annual deductible, and how much of it has been used; (v) the amount of the patient’s per-family deductible, and how much of it has been used; (vi) whether the patient has hit the annual maximum out-of-pocket limit on cost-sharing; and (vii) whether the patient has acted in compliance with insurer-mandated requirements, such as obtaining pre-clearance for specified procedures or proof of medical necessity. As such, knowing the insurer-specific negotiated rate does not tell the patient anything about her own out-of-pocket costs.” (Emphasis added), Hospitals’ complaint, pages 11 and 12

In the above argument, hospitals correctly outline the algebraic complexities that many patients face in the United States and nowhere else in the developed world. This might be more of an implication of the insurance industry and the complexity of health plan design. Per HHS’s long term vision, the Final Rule targeting price transparency for providers will complement the Proposed Rule targeting transparency in coverage (insurers) to ultimately clear up the cost-sharing conundrum.

HHS: The data provides many patients with necessary cost sharing information. And this is much better than the status quo.

“The Rule does provide some patients (such as those without insurance or with high deductibles) the out-of-pocket rates they likely will be charged, and the Rule provides an even larger group of patients (those with more comprehensive insurance) information they need to determine these costs.” - HHS response, page 3

And later:

“To be sure, patients may have to make further calculations to arrive at an estimate of their out-of-pocket costs...But a system in which patients have to do some of the work to estimate their costs is less disorienting than the present one, where, if estimates are even possible, all of the work falls on patients.” - HHS response, page 30

Factually, both entities are correct for certain patient situations. Chronically ill patients will be more concerned with out-of-pocket maximums and coinsurance, while many relatively healthy families in America will only need to consider copays and deductibles. As with many issues of complex regulation, nothing is clear cut. Except one thing: this regulation would certainly provide more patients with their out-of-pocket picture than the status quo.

For example, read about a quick cost calculation scenario for a new patient consultation.

In both price transparency rules, HHS further argues that by revealing the complexity of cost sharing, all parties will feel pressure to devise more straightforward plans and agreements.

Perhaps the most quote-worthy text from HHS’s entire argument is this:

“At bottom, everyone agrees that consumers are fumbling in the dark for information about how much their hospital care will cost. HHS chose to shine light on the problem. Plaintiffs [hospitals] are quibbling over the agency’s choice of wattage.” - HHS response, page 3

What Is the True Economic Burden on Hospitals to Comply?

In the Final Rule, HHS estimates that the average financial burden on hospital compliance will be about $12,000 per hospital initially, and that this amount would decrease in following years. Hospitals contend that this burden is more significant than HHS lets on.

Hospitals: This will impose a direct financial burden in the tens of thousands of dollars and causes us to shift away critical labor resources.

“Hospitals will need to hire new or divert current personnel to begin the laborious process of manually gathering information responsive to the Final Rule—some of which either is not currently available to them, or requires extensive review of claims history to decipher—and then begin the onerous task of preparing the data for formatting, processing, uploading, and hosting. Many hospitals will be required to hire e-vendors to assist with that process, which will add additional time on the back end. All of that comes at a severe cost, and would be an unnecessary diversion of resources if the Final Rule is declared invalid. In order to avoid imposing a crushing burden on hospitals—especially smaller hospitals that are already operating with scarce resources and on thin margins—Plaintiffs respectfully request a decision on the merits well in advance of the Final Rule’s effective date.” Hospitals’ complaint, page 27

Elsewhere, the hospital complaint cites worries of having “hundreds of thousands of rows” in a spreadsheet, and concerns over data of this magnitude could “crash most standard computer systems.” It’s worth noting that the Final Rule requires a machine readable file, and that this file does not need to be a spreadsheet (despite hospitals’ interpretation as such).

HHS: The costs of complying are negligible in the overall landscape of provider reimbursement.

“HHS found that the average hospital will face a cost of $11,898.60 for complying with the Rule in its first year, and a cost of $3,610.88 in subsequent years. Plaintiffs do not offer a single argument contesting that assessment, perhaps because HHS has already taken account of hospitals’ concerns by increasing its cost estimate from what was in the Proposed Rule. See id. at 65,593. And to put that figure in perspective, the average cost of complying with the Rule—in its first and most “burdensome” year—is roughly the same as the list price of one vial of the anti-cancer medication Bortezomib on plaintiff Providence Holy Cross Medical Center’s 2019 chargemaster.” - HHS response, page 38

Again, both parties make a factual case for certain hospital scenarios. The burden on larger hospitals with more third party negotiated rates and more complex negotiated rates will be higher than small hospitals with simpler rate structures. Many hospitals will likely need to hire outside help. We have built several of these pricing systems from the ground up, and our assessment is more in line with the $12,000 quoted by CMS.

For more on our perspective, see: How Much Does the Price Transparency Final Rule Really Cost Providers?

Practically, When Could This Law Go Into Effect?

Per the updated schedule of the district case viewable on Court Listener, the Motion for Summary Judgment sought in this case should be decided by this spring. In all likelihood, the losing party would appeal to the DC Circuit and ultimately to the Supreme Court, which could add at least a year if not more to the final verdict on price transparency.

In the meantime, what does this mean for the practical implementation of price transparency?

Scenario 1: HHS wins this case and hospitals appeal.

In this scenario, we’ll likely see a handful of hospitals comply with the Final Rule by 1/1/21 while a vast majority of hospitals hold out for a final verdict. In effect, this Rule would stand as law, and some hospitals would see this as a release from gag clauses that currently restrict them from revealing these rates.

If a critical mass of pricing data floods a certain geographic region, one might see third party pricing tools pop up that economically pressure non-participating hospitals to join the price transparency fray. For example, Sutter Health in California has released a thorough price transparency tool, even without waiting for the law to pass. Will more hospitals in Northern California feel economic pressure to do the same?

Scenario 2: HHS loses this case and appeals to a higher court.

In this event, the HHS rule on price transparency (and tied to it, President Trump’s Executive Order on price transparency), would hit a legal quagmire of delays. No hospital would comply with the requirement unless consumer pressures naturally drove for it outside of legal requirements.

However, price transparency is a largely bipartisan issue that has found its way to the stump speeches of several members of the federal congress, not to mention state congresses (see Alaska Senate Bill 135).

HR 5566, “The Patient Fairness Act” is a federal bill sponsored by Rep. Davidson (R-OH) that would codify President Trump’s executive order and thus the HHS requirements. It would render the hospitals’ argument over the term “standard charges” moot, because congress would more clearly define this term by passing the law.

The passage of the act in congress would be more difficult for hospitals to fight, and by this time, more hospitals would be implementing the changes rather than hoping for the law to be overturned.

Scenario 3: Natural market forces drive price transparency as tools emerge that allow patients to experience free market healthcare.

Due to the press attention on price transparency for prescription drugs, surprise bills and hospital care, more third parties like us are working to develop tools to accommodate price transparency, alleviating the burden on a provider’s IT department. Our white-labelable Price Transparency Tool, and the data ingestion workflow that goes with it, is ready to use and gets a hospital compliant in a matter of days - not months.

Providers also increasingly recognize the market opportunity to listen to their patients, as well as the chance to attract more patient volume by providing a familiar shopping experience.

The concept of healthcare price transparency may have already hit a critical mass of media attention. Citizen awareness might mean the push towards full price transparency is inevitable. What remains to be seen is whether these tools will allow patients to truly shop across providers and insurance plans, or if each tool merely attempts to keep the patient loyal to one provider and one payer. (For example, imagine if Amazon only showed you one brand of laptop to buy).

If you were DC District Judge Carl J. Nichols, and the fate of hospital market opacity sat on your desk, who would you side with? We would love to hear your thoughts - send us an email at chris@arcosta.co.


Disclosure: Arcosta provides a price transparency tool that any hospital can place on its website to show patients the prices of shoppable services.

The full text of both arguments are relatively free of legal jargon and available below:

The full text of the hospitals’ official complaint is 31 pages and can be found here:

Plaintiff Complaint: The American Hospital Association, et al vs. Alex M. Azar II, Director of HHS

The full text of the HHS response is 54 pages and can be found here:

HHS Response in The American Hospital Association, et al vs. Alex M. Azar II, Director of HHS