Does Price Transparency Lower All Prices? Not Necessarily

This paper examines the effect of price transparency on prices paid to hospitals by private insurers. In 2007, New Hampshire launched a public website on which consumers and providers could search for price information for a range of common hospital outpatient procedures. The effect of such price transparency initiatives on equilibrium prices is theoretically ambiguous. Advocates for price transparency hope that it will improve consumers' ability to select lower-priced health care providers and ultimately drive down negotiated prices. However, price transparency also has the potential to raise prices by facilitating tacit collusion among providers, particularly if only a small fraction of providers belong to systems. We examine negotiated prices between hospitals and private insurers in New Hampshire starting prior to the 2007 price transparency tool and following several updates to the tool over time. We compare utilization and prices for procedures that were listed on the transparency tool against other health care services, whose prices remained opaque to consumers and other providers. Prior to the introduction of price transparency, the largest insurers paid markedly lower prices than their competitors with small market shares. Following the introduction of price transparency, the largest insurers' prices for the lowest-price hospitals rise to levels comparable to insurers with smaller market shares. Meanwhile, price patterns in the neighboring state of Maine, which had no contemporaneous regulatory changes, remain similar over time. These preliminary results are consistent with low-priced hospitals learning that the largest insurers' willingness-to-pay is higher than previously thought, or with hospitals being no longer willing to give the largest insurers a large discount because it will now be observable to other insurers, therefore undermining the hospital's negotiating credibility.