By DAVID INTROCASO & ADAM CUNNINGHAM
For over a decade, federal healthcare policy has operated on a foundational premise: if hospital prices are made visible, market discipline will inevitably follow. The push for price transparency—exemplified by federal disclosure rules and current legislative proposals such as the Lower Costs, More Transparency Act (H.R. 9393) and the Patients Deserve Price Tags Act (S. 2355)—aims to empower buyers and stimulate price competition. Yet, despite terabytes of disclosed price files, commercial hospital prices continue to escalate far out of proportion to underlying costs or quality improvements. The persistent failure of price transparency is not merely a problem of enforcement or compliance; it is a structural defect in market design. In highly concentrated hospital markets, publishing prices does not create market discipline because it leaves price-setting power entirely in the hands of the seller. To restrain further premium price growth, healthcare buyers or moreover ERISA plans must go beyond price transparency and restore or regain bargaining leverage.
The Illusions of Price Transparency and Internal Benchmarks
The inarguable limitation of hospital price transparency is that disclosure cannot alter the underlying power dynamics of a concentrated market. Hospitals are the price setters, plans the price takers. In approximately three out of four metropolitan statistical areas—and up to 97 percent of urban hospital markets—provider consolidation has erased competition. Commercial insurers and self-funded health plans cannot drop dominant, “must-have” hospital systems from their networks without breaching regulatory network-adequacy requirements. Knowing they cannot be excluded, consolidated health systems set prices based on bargaining leverage rather than operational cost. As a result, posting a chargemaster price or a negotiated rate publicly merely certifies what a captive buyer was forced to pay; it does not give the buyer the power to walk away.
Furthermore, recent empirical analyses demonstrate that disclosed price data remains functionally unworkable for market discipline. Hospital disclosure files are rife with noncompliance—full compliance has dropped to roughly one in five hospitals—and the posted figures lack a standardized unit of payment. Hospital contracts mix fixed dollar amounts, per diems, case rates, and percentage discounts off unlisted chargemasters, rendering the data noisy and incomparable.
When policymakers attempt to correct these market failures using internal benchmarks, the results routinely backfire:
- Statutory Caps: Capping commercial payments at a multiple of Medicare (such as 200 or 250 percent) creates a visible focal point. In Oregon, when state employee health plans instituted a payment cap, lower-priced hospitals gradually drifted upward toward the ceiling, forcing the legislature to institute additional “lesser-of” protections.
- Regional Medians: Calculating a regional commercial median rate simply averages the historical leverage of local dominant systems, converting past pricing power into a permanent floor.
- Internal Reference-Based Pricing: Unilateral reference pricing built on local claims distributions inherits the exact captured price levels it seeks to escape.
The Problem of Provenance: Who Sets the Number?
The root cause of inflated hospital bills lies in provenance—the origin of the price. In financial markets, benchmarks such as the London Interbank Offered Rate (LIBOR) were abandoned after submitters rigged self-reported figures; modern financial standards require rates anchored in arm’s-length, external transactions that submitters did not author. No party can simultaneously act as the priced and the pricer.
This principle is starkly illustrated on a single itemized American hospital bill. The professional fee (the surgeon’s work) is pegged to a standard national relative-value scale and remains in a tight band around 184 percent of Medicare. In contrast, the facility fee (the hospital’s charge) is written directly by the institution via its internal chargemaster, soaring to 254 percent of Medicare for inpatient care and 279 percent for outpatient care, with national spreads exceeding ninefold for identical procedures. The professional fee holds because it answers to an external yardstick the seller did not write; the facility fee escalates because it answers to no outside referent.
Recognizing that a captured domestic market cannot discipline itself, the U.S. government already turned to external benchmarking in pharmaceutical policy. Initiatives like the Most-Favored-Nation policy and the GLOBE model explicitly tied certain U.S. Medicare drug reimbursements to prices paid in peer nations, recognizing that domestic market numbers were fundamentally compromised by seller power. The same logic applies to hospital facility fees, where no research and development costs exist to justify the immense gap between U.S. commercial charges and international rates for identical surgical procedures.
Restoration of the Outside Option Through External Reference Pricing
Under bargaining models (such as the Nash-in-Nash framework), negotiated rates fall only as far as a buyer’s credible outside option allows. Consolidation removes that option. External reference pricing restores the buyer’s threat point by bringing a documented, external comparator to the negotiation table.
Importantly, external reference pricing is not a medical travel scheme, nor does it require mass patient movement. Instead, it serves as a contractual leverage tool. By establishing a clear benchmark—whether based on proven domestic Medicare-multiple bundles or provider-submitted international prices at Joint Commission International (JCI)-accredited facilities—the buyer establishes an objective standard of payment.
The empirical record confirms that the threat point alone achieves the vast majority of savings:
- CalPERS: When the California Public Employees’ Retirement System established a $30,000 reference price for hip and knee replacements, roughly 86 percent of total plan savings came from high-priced hospitals voluntarily slashing their rates (by an average of 34 percent) to remain below the threshold, while only 14 percent resulted from patients switching facilities.
- Hannaford Brothers: When the Maine supermarket chain introduced an accredited international surgical option into its health plan, local New England hospitals responded within weeks by offering 60 percent price discounts to retain the business. Not a single employee needed to travel abroad; the existence of a credible outside price changed the domestic negotiation.
Fiduciary Mandates and Administrative Execution
For self-funded plan sponsors, who cover over 60 percent of insured American workers and pay claims directly from company assets, external reference pricing is increasingly a legal imperative. Under ERISA Section 404, plan fiduciaries owe a strict duty of prudence to evaluate whether plan expenditures are reasonable. Recent federal court decisions, including Stern v. JPMorgan and Tiara Yachts v. Blue Cross Blue Shield, highlight that fiduciaries and asset-controlling administrators face legal exposure when paying excessive medical claims without documenting a prudent, comparative evaluation process.
To be effective and legally sound, an external reference price must be executed as a pre-negotiated, contracted rate incorporated directly into plan documents and underwritten by stop-loss insurance carriers. This distinguishes structured reference pricing from unconsented claim cuts, which expose patients to balance billing and create unassigned liabilities that stop-loss carriers refuse to cover.
Conclusion
Transparency alone merely forces buyers to view the price tag on an unavoidable bill. It makes the captured market’s demands visible without providing the means to resist them. External reference pricing addresses the core crisis of hospital spending by changing the price’s provenance. By anchoring negotiations to objective, externally sourced benchmarks that the seller did not author, self-funded plans can rebuild their walk-away leverage, fulfill their fiduciary duties, and compel consolidated health systems to accept fair, disciplined rates.
David Introcaso is a healthcare research and policy consultant based in Washington, D.C & Adam Cunningham, MBChB, is an Australian-trained physician and founder of Sylk Health
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