There are several common narratives about variations in health care prices: Uninsured consumers are dunned for full chargemaster prices, consumer advocates complain. Insurers with outsized market power drive down physician reimbursement, say the medical societies. Providers offer the best prices to payers with larger market shares who bring a high patient volume, doctors say.

Recent research exploiting hospital price disclosures has debunked these canards. As some health policy analysts already suspected, hospital prices available to individuals willing to pay cash can be lower than those negotiated by insurers. To summarize findings from data I collected for select medical services amenable to shopping, the cash prices reported by hospitals is lower than the highest insurer-negotiated price 87% of the time; lower than most major insurers’ negotiated prices 55% of the time; and lower than even the lowest insurer-negotiated price 43% of the time. Indeed, the payer with the highest market share sometime pays more than smaller insurers.

Findings published recently from an analysis of a more comprehensive dataset were not quite as dramatic, but were generally in accord with mine.


About one-quarter of workers’ overall earnings are diverted to health insurance plans that are supposed to be negotiating low prices on their behalf. If, in fact, workers could get better prices without their insurers’ help, then money that ought to be in paychecks is going to hospitals. How should stakeholders and policymakers react to these findings?

Unpacking cash prices

Hospital price transparency regulation defines discounted cash price as the amount “that applies to an individual who pays cash (or cash equivalent) for a hospital item or service.” In my experience as an attorney representing uninsured clients, such cash prices can result from settling a collection lawsuit by a hospital or settling a personal injury claim on which a hospital has a lien.


But there are some niche retail markets for hospital services, as when:

In a recent review of hospitals’ disclosed prices, nearly 1,000 hospitals listed cash prices. That comes as a surprise, and qualitative research will be needed to better flesh out what happens in this hidden marketplace.

What dynamics are at work?

Two hypotheses attempt to explain why cash prices can be lower.

The imperfect agent hypothesis holds that insurers and third-party administrators fail to zealously represent employer and consumer interests because — in its most simple formulation — they’re “negotiating with somebody else’s money.” A more cynical formulation holds that payers want health care to be expensive because “if medical services were cheap, we wouldn’t need … insurers to bear the cost for us.” Evidence supporting the imperfect agent hypothesis emerges each time an employer takes price negotiations into its own hands, or a group of employers does so, and secures a better deal.

The deep pocket hypothesis recognizes that an insurance pool has a greater ability to write large checks than an individual does, and can almost invisibly collect money directly from workers’ earnings. As such, providers expect a larger payment from insurers and employers, and payers conform to this expectation. The deep pocket concept comes from tort law, where it signifies a bias on the part of jurors to award more damages to plaintiffs they know are insured. It’s considered a bias because the cost of making an injured person whole is the same regardless of whether the defendant has insurance.

Overly generous prices result from an interplay of both factors. The bottom line is that hospital prices are higher than they should —and probably could — be. Emerging insights into pricing dynamics suggest an agenda for change.

Implications for stakeholders and policymakers

A cash transaction by an individual represents his or her decision-making in the face of finite resources and trade-offs against foregone expenditures on other necessities or luxuries. An insurer doesn’t consider whether a family is better off paying for a joint replacement for Mom or for a more reliable car. As such, the cash price of a procedure may be a purer estimate of its value than prices negotiated by insurers. To the extent that the cash price is lower, achieving that level of pricing should be a goal for payers and policymakers.

Here are some actions to consider:

Reference pricing is a cost-cutting technique that may be advanced by disclosing cash prices. With reference pricing, a health plan reimburses providers for a service at a fixed amount. The employer can’t always be sure whether a provider will accept that amount in full, setting up a potential impasse. But an employer that sends most of its workers to a hospital with lower cash prices could peg reimbursement to those prices. While it is by no means certain that the hospital would or must accept that price, its disclosure gives an employer significant new leverage to use this technique.

Compensation of insurers and third-party administrators needs to be restructured to align their incentives with lower negotiated prices. These entities should not be rewarded for negotiating a price higher than the one available to individuals. I have argued elsewhere that insurance regulators should use their rate-approval authority to pressure insurers to obtain better prices. Employers may want to tie the fees they pay to third-party administrators to their success in getting plan prices closer to cash prices.

Greater scrutiny of pharmacy benefit managers by payers is warranted by the hospital cash price phenomenon. Cash prices for pharmaceuticals in a given locale can be easily obtained from GoodRx and others while prices negotiated by pharmacy benefit managers remain obscured — at least for now. But payers that have had their pharmacy benefit managers audited should immediately check to see if any prices divulged are higher or lower than reported pharmacy cash prices.

All-payer rate setting by state authorities is controversial as a severe intrusion into markets. Such regimes mandate the prices hospitals charge to all patients. A potential middle-ground approach would be to cap the amounts insurers pay to hospitals — a sort of mandatory reference pricing. With this option, the rate-setting authority attempts to set payment for a service at an amount that negates any deep-pocket distortions while sufficing to cover the costs of an efficient provider. Financially vulnerable patients could be protected from lawsuits for a remaining balance through exemptions from debt collection, but providers would still have the option of charging a full price to those with the ability to pay it.

I never bought into the Trump administration’s rationale for price transparency — that it would empower consumers to negotiate prices — but I assumed that the disclosures would draw scrutiny toward insurers’ price negotiations. What I and others have learned from hospital price disclosures is that the process is even more flawed than we’d imagined, and badly in need of reforms.

Jackson Williams is vice president for public policy at Dialysis Patient Citizens. He previously worked on health care quality and payment reform issues at the Centers for Medicare Medicaid Services.