This article is a collaborative effort by Sarun Charumilind, Katherine Han, Jeff Ruff, Amit Shah, and Isaac Swaiman, representing views from McKinsey’s Healthcare Practice.
This article puts price transparency rules in context and explores their implications, including:
Price transparency can help address two factors that limit the relationship between price and quality in US healthcare. First, price transparency helps resolve asymmetry in rate information by requiring payers and hospitals to publish rates and requiring payers to provide portals that patients can access to estimate out-of-pocket expenses.
Second, patients today have limited incentives to shop for healthcare because they bear only a partial share of cost-of-care differentials; the average patient enrolled in an employer-sponsored plan pays 16 to 19 percent of the total cost of care via copays, coinsurance, and deductibles, with the rest being paid by the employer and payer. 7 Paul Fronstin and Jake Spiegel, “Recent trends in patient out-of-pocket cost sharing,” Employee Benefit Research Institute Issue Brief, July 28, 2022, Number 564. Additionally, because the designs of health insurance benefits are complex, patients do not always share in the financial benefits when they make high-value, low-cost choices (for example, receiving eligible care in an alternative care setting, such as at home, rather than in traditional facility-based settings).
Although much of the discussion about federal price transparency rules has focused on disclosure of contracted rates between payers and care delivery organizations, several clauses specifically promote transparency for consumers. Examples include the following:
However, price transparency fails to address other factors, including the following:
Achieving greater efficiency in US healthcare markets would require addressing these persistent factors in addition to striving for greater price transparency.
US healthcare prices vary widely; on average, prices for the same healthcare services differ by 40 to 50 percent within a given US metropolitan statistical area (Exhibit 1). This means substantial economic value is at stake in commercial rate negotiations between care delivery organizations and payers. Given that annual spending for commercial healthcare claims is roughly $1.1 trillion, every increase or decrease of 1 percent in commercial reimbursement rates leads to an increase or decrease of about $11 billion in national healthcare claims spend. 10 Based on 2022 national health expenditure (NHE) estimate of private healthcare expenditures totaling $1.3 billion and assuming that, on average, 85 percent of private healthcare expenditures are spent on healthcare claims. NHE reports are available at “NHE fact sheet,” CMS, updated December 13, 2023.
Although price transparency may not be sufficient to transform the US healthcare market overall, individual care delivery organizations and payers could use the information in rate negotiations to bring rates more in line with each other’s respective value.
Currently available price transparency data is incomplete and imperfect, but organizations could use it in several practical ways. For example, care delivery organizations that are charging premium rates for undifferentiated services may need to reevaluate or redefine their value propositions or prepare for margin compression. At the same time, high-performing care delivery organizations whose rates do not reflect their value and quality will be better equipped to engage payers with identifiable data substantiating that current rates are not competitive, helping to align rates with their true value. While price transparency data is incomplete and should not be used in isolation, the nature of price transparency data—published by payers themselves and published on a payer–provider identifiable basis—makes price transparency data a unique and valuable complement to traditional claims-based benchmarking methods.
In addition to using price transparency data to optimize current contracts, organizations can also use it to increase the accuracy of performance assumptions, market analysis, and strategic value in evaluating potential organic and inorganic growth opportunities.
In the meantime, technological advancements in recent years now make it possible for payers to offer members easy-to-use, personalized healthcare-shopping support similar to what they commonly experience with e-commerce, financial services, and airline travel. Our May 2023 survey of consumers revealed that patients trust cost estimates published by payers more than those published by other healthcare organizations, including care delivery organizations. Additionally, affordability is a top concern, with 89 percent expressing interest in shopping for at least one category of care if given the option and 33 to 52 percent of consumers willing to switch providers (for example, choosing a different physician or health system) in return for cash rebates of $25 to $100. 15 McKinsey consumer survey, May 2023. These results (as displayed in Exhibits 2, 3, and 4) indicate that members may respond well to payer-led efforts to increase access to this information.
Specifically, this consumer research implies that new price transparency rules, which encourage payers to offer information and cash rebates to members, could push patient-driven healthcare shopping over the tipping point. For example, payers could do the following to encourage shopping for at least some categories of care:
The timing of payers’ offers of these recommendations and incentives is particularly important. As research on cascades of care has shown, making the right care decision at the beginning of a patient’s care journey can help improve affordability of an overall care pathway or episode of care. 16 Carrie H. Colla et al., “Cascades of care after incidental findings in a US national survey of physicians,” JAMA Network Open, October 16, 2019, Volume 2, Number 10. Critically, consumer survey results indicate that consumers are particularly willing to shop for care at the beginning of care journeys, such as when selecting a primary care physician or specialist. Because these decisions can have a substantial effect on downstream costs and quality of care, providing consumers with the incentives and information to shop for care at even a few key inflection points could generate meaningful benefits for patients.
Personalization of incentives and care recommendations will also likely be important. For example, our May 2023 consumer survey found that provider quality was the most important provider selection factor (15 percent of respondents). Other critical factors included the provider’s location (10 percent) and days or times available for appointments (tied for importance with estimated out-of-pocket costs at 9 percent). As a result, incentives that address these types of consumer preferences may be more likely to encourage shopping behavior. Because federal price transparency rules do not specify the form incentives must take, payers could experiment with a variety of incentives to determine how best to promote consumer empowerment and satisfaction.
In total, we estimate roughly 73 percent of commercial claims spend occurs for care that is shoppable to some degree.
An increase in patient-driven healthcare with support from these types of personalized shopping experiences could substantially influence US healthcare profit pools. In total, we estimate roughly 73 percent of commercial claims spend occurs for care that is shoppable to some degree (Exhibit 5). 17 Based on analysis of 2021 Truven Health Analytics Commercial claims data. For this analysis, we define “shoppable” care as nonemergency medical care for which a patient can make a choice of physician, health system, or care setting (such as facility-based or at-home care). We also consider retail pharmacy spend on drugs for which therapeutic equivalents are available.
If roughly one in three commercial insurance members begin to shop for this care—something our surveys indicate is possible with the right information and incentives—then patients could reasonably shop for care for about 20 to 25 percent of all commercial claims spend. Because commercial claims account for the majority of care delivery organization profit pools in the United States, this level of shopping would have substantial implications for organizations across the care continuum.
Achieving this potential will not be easy. A new age of healthcare shopping would represent a paradigm shift for payers, care delivery organizations, pharmaceutical companies, and consumers. Uptake may be faster in certain care categories (such as physician appointments) than others (such as scheduled surgeries). And payers would need to make meaningful investments in consumer-facing analytics and digital experience to empower widespread adoption of shopping platforms.
However, our research makes two things clear: substantial consumer demand for healthcare shopping exists, and the reward for organizations that meet that demand could be dramatic. If price transparency rules help catalyze a new wave of innovation to meet this consumer demand, the impact of these rules could be profound—even if they are not a panacea for all the market inefficiencies in US healthcare.
Sarun Charumilind is a partner in McKinsey’s Philadelphia office; Katherine Han is a partner in the New York office, where Amit Shah is a senior partner; Jeff Ruff is an associate partner in the Washington, DC, office; and Isaac Swaiman is a senior expert in the Minneapolis office.
The authors wish to thank Avnav Anand, Akshat Bansal, Jenny Cordina, Tarun Dalwani, Rustin Fakheri, Shawn Fan, Nawaf Felemban, Alek Gozman, Marina Ivanenko, Vipul Khanna, Eric Levin, Jayden Liu, Rob May, Aditya Nangia, Ankur Pathak, Sabrina Clark Rohde, Nikhil Sahni, Shubham Singhal, and Sunuri Subramoney for their contributions to this article.