Number: RL34101
Title: Does Price Transparency Improve Market Efficiency? Implications of Empirical Evidence in Other Markets for the Health Sector
Authors: D. Andrew Austin and Jane G. Gravelle, Government and Finance Division 
Abstract: The first section of this paper briefly reviews the empirical studies of the effect of changes in price transparency on prices and quality of goods in a variety of industries. Most of this evidence relates to markets where buyers are the final end users of the good, and the bulk of evidence suggests that more transparent prices lead to lower prices and transactions costs. This section includes examples of direct effects of price transparency acting through normal market mechanisms (as in the case of lifting advertising restrictions or reducing search costs) as well as instances in which publicity about pricing strategies altered firms' behavior. (An appendix contains a more detailed discussion.) The second section addresses the extent to which this evidence might be applicable to the health care market. It addresses certain special characteristics of the health care market which may reduce the importance of prices as signals, for example, the complicated nature of health care, the intermediation of physicians in making health care choices including choosing hospitals, and the presence of third party payment (e.g., insurance companies). The third section then turns to a closer examination of how prices are actually set by hospitals and the evidence that exists on price dispersion both across hospitals and across patient categories. The fourth section discusses some initiatives undertaken by governments, insurers, and interest groups to improve information about prices and to regulate price discrimination. The final section draws the pieces together, suggesting that while it is difficult to determine the consequences of greater consumer price transparency, it is reasonable to believe that greater transparency would improve outcomes.
Pages: 48
Date: April 29, 2008