Provider Responses to Online Price Transparency

Price transparency initiatives have recently emerged as a solution to the substantial dispersion in health care prices and an absence of price information available to consumers. Previous studies document consumer responses to price transparency and find large effects for homogenous services but smaller effects for highly differentiated services (Wu et al. 2014; Whaley et al. 2014; Lieber 2015; Whaley 2015). How providers respond to consumer use and responses to price information has not been studied. Because only a small portion of eligible consumers use price transparency information, understanding provider responses is an important piece of understanding the overall effects of health care price transparency.

This paper uses the staggered and nationwide diffusion of a leading internet-based price transparency platform to estimate the effect of price transparency on the negotiated prices between providers and insurers. Despite concerns that price transparency information will lead to tacit collusion, I find that providers competitively respond to the diffusion of the price transparency platform by lowering their prices. Consistent with the consumer responses, the provider price responses are much larger for lab test providers than they are for physicians.

My results imply that consumer access to the price transparency platform led to a 3.4% reduction in laboratory test provider prices, which at the mean price translates into a reduction of $1.76 per lab test. Across all lab tests in the sample, this reduction equates to a $4.8 million reduction in 2014 medical spending. I also show that nearly all of the financial savings come from provider price reductions rather than consumers switching to less expensive providers. In combination with the consumer analysis, this paper demonstrates how reducing consumer search costs spurs firm price competition.