Price Transparency and Incomplete Contracts in Health Care

By Epstein, Wendy Netter | Emory Law Journal, January 1, 2017 | Go to article overview

Price Transparency and Incomplete Contracts in Health Care


Epstein, Wendy Netter, Emory Law Journal


INTRODUCTION

James, a sixty-five-year-old man, suffers from severe chest pain that is not improving with medication or lifestyle changes. His cardiologist tells him that he needs an angioplasty, a procedure in which a catheter widens a narrowed artery. After discussing the risks of the procedure, James agrees. He arrives at the hospital and signs a series of standard forms, one of which states that he "individually obligates himself . . . to pay the account of the Hospital in accordance with the regular rates and terms of the Hospital."1 He receives no information about the cost of the procedure, but by signing the form, he enters into a contract to pay whatever the charges end up being.

James later receives the bill for the angioplasty-$67,937. With his $5,000 insurance policy deductible and 20% copay, his portion of the bill amounts to $17,587. Ultimately, he must pay the out-of-pocket limit on his policy, $7,150 for 2017.2 Before receiving the bill, James had no idea how much the procedure would cost. He also did not know that an angioplasty at another hospital in the same city would have cost only $10,749-532% less. Had he had the procedure at the other hospital, James would have owed $6,150-less than half of what he paid.3 Indeed, large price differentials despite similar quality are common in the U.S. system.4

Although James is a hypothetical patient, most real patients who receive medical care in the United States do not know the cost of their care until they receive the bill.5 By that time, they have already legally committed to pay by entering into what contract scholars have termed "open price term" contracts. Imagine going to buy a car and telling the salesperson that you will take it regardless of the cost, or committing to pay for a hotel or rental car without knowing the cost. It sounds preposterous, but in health care, courts routinely enforce these contracts that lack a price term.

The absence of price transparency in patient-provider contracts is highly problematic.6 Patients suffer from both an imbalance of information and an imbalance of power. Providers have access to pricing information (working with insurers) and patients generally do not. Providers set prices. Patients have little room to negotiate.7

Patients can turn down unnecessary care or seek lower priced care. The industry is counting on them to do just that.8 There is a significant trend to make patients shoulder more of the economic burden of their health-care decisions-through higher deductibles, copays, and co-insurance9-in hopes that it will prompt patients to act more like traditional consumers.10 Indeed, consumer-driven medicine is certain to be a hallmark of any replacement of the Affordable Care Act (ACA).11

But it is hard for patients to price shop, reduce overtreatment, or even put pressure on the industry to justify pricing in relation to quality when patients do not know prices before they enter into binding contracts to pay.12 In a country where one in five Americans still struggles to pay medical bills and three in five bankruptcies are attributed to medical costs, it is troubling that patients lack necessary information to make smart financial decisions, when possible, about their care.13 Indeed, it is hard to imagine patients doing many of the things that advocates of consumer-driven health care hope they will do if patients have no visibility into price at decision-time.14 It is also hard to see how providers will be incented to compete on the value of care they offer absent transparency.

Questions concerning incomplete contracts-of which open price term contracts are one variant15-have dominated contracts scholarship for the last several decades.16 Scholars have pondered why incomplete contracts arise,17 whether they should be enforceable,18 and how courts should fill gaps left by the parties.19 There has also been much scholarly debate on the desirability of relative completeness in contract drafting. …

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