Improving Price Transparency in Labs and Beyond

By Matt Phillion

Despite improved pricing transparency regulations that went into effect in 2021, healthcare—and hospitals in particular—still have a transparency problem. This lack of transparency extends to laboratory services as well, where pricing can vary depending on location of service.

With the Clinical Laboratory Price Transparency Act, which includes the Lower Cost, More Transparency Act, passed in December 2023, clinical labs are now required to disclose their prices up front, which offers patients a clearer understanding of their healthcare expenses before undergoing treatment.

But how do we better educate patients about the importance of understanding their own healthcare costs, and empowering them to interpret prices and develop a strategy for managing expenses related to the testing required for their own healthcare?

“One of the bigger issues we have is that neither the provider nor the payers want to do it. Right off the bat, we have unwilling participants in price transparency, which creates a challenge,” says Bill Kerr, MD, CEO of Avalon Healthcare Solutions. “Secondly, what information patients want to know to help their decision making can be very complicated.”

Stepping back from lab pricing, Kerr points out that if you are in need of an elective surgery like knee replacement, the patient would want to know what the price would be with a specific orthopedic surgeon at a specific location versus other options. But the costs of an elective surgery have multiple players and multiple unknowns.

“There’s the unit cost, which stakeholders typically don’t want to disclose, but then there’s the total cost—including diagnostic imaging, anesthesia, and other factors that make it very hard to answer the question of cost.”

Add on top of this the question the patient wants to understand their out-of-pocket cost, and what the insurance is not going to pay, and answering this question gets even harder.

“It requires information across so many players that answering the question of what’s the impact on the patient adds up,” says Kerr.

Labs have a head start

Labs, however, have somewhat of a head start in addressing transparency, as unit price correlates more closely with total cost.

“You don’t have multiple players in lab testing,” says Kerr. “This makes it a little more straightforward to be able to get to price transparency and patient impact with labs.”

There are unique challenges, naturally. The volume of tests being run can vary as can variables like in-house test order menus, or test panels that aggregate labs together.

“Labs tend to control the panel. Some may have, for example, thyroid panels that have five or seven tests, but by in large, unit prices correlate to total costs in labs more closely than in episodic care,” says Kerr. “One of the things that’s promising about labs is that they have the same complexity as other parts of the industry, but some of the solutions are simpler to implement. It starts us out on a good path.”

Still, almost no player in the space on either the provider or payer side wants to disclose what they perceive as a competitive advantage when it comes to pricing. This means other forces have to come into play, such as pressure from the government.

“You’re starting to see the sharing of information play out at the federal level. There are some interesting things happening,” says Kerr. “There are site-of-service differentials that are obvious with lab testing or other areas like diagnostic imaging, even infusing drugs or professional services. It would be easy for us to make it obvious to patients that there are different cost structures depending on where they go for treatment or service.”

Kerr points out that the different between hospital-owned lab services and independent labs can have a huge swing in pricing.

“In our analysis, across the country, if you get a test at an outpatient hospital lab versus an independent lab, it will be four to five times more at the hospital site of service,” says Kerr. “I see an independent center across the street and know there’s a hospital-owned lab down the street, but I know that if I go to the independent lab center for routing testing for my annual exam, it’ll be a fourth or a fifth of the cost. Same test, same reagent, very often the same techs reading the results. But the hospital has negotiated a higher cost with the health plan for testing. The same happens with MRIs and CT scans.”

Add to this, Kerr notes, when healthcare systems buy up physician practices. The systems will often add a facility charge considering the office is now part of the hospital facility, the same way an urgent care center or ED is.

“It would not be hard to educate the patient up front about critical price variations, but the industry is doing a bad job at making these things clear,” says Kerr.

Part of the challenge is making sure that patients know what the cost on the back end will be.

“I have a deductible, I have coinsurance, I know I’ll pay a percentage of the total, but I don’t have any idea what that is,” says Kerr.

We have evidence that clarity and education work, though, specifically with generic drugs.

“The industry saw a difference in generic versus name-brand drugs, with offering zero out of pocket costs for generic drugs. You could do something like this for site of service lab testing. Personally, I’d love to see this take off,” says Kerr. “To help patients know before they get a lab test done, when they’re talking to their provider the cost difference based on location of lab testing.”

Once it became obvious to patients that they could save money, the industry saw an uptick in generic drugs. Kerr sees the potential for this kind of shift in lab testing as well.

“I do believe there are tools we could place in front of consumers before they decide where to get care, and we’d see the same change in behavior,” he says. “And frankly, we’d see hospitals decide there’s no longer a competitive advantage to extract a premium pricing structure, but rather make it so the patients want to go to their labs.”

Putting the right incentives in place

This sort of change can be daunting, Kerr notes, because of the existing incentives for how the industry directs patients to care.

“The incentive structures in this industry fly against the patient knowing,” says Kerr. “As systems are purchasing practices, we’ve seen things change, like restructuring the office as a facility. Site of service raises cost, and we also know from discussions with physicians that hospitals will ask them to refer their imaging and testing to the hospital instead of independent labs. Patients have little visibility that this is occurring.”

This creates an internal struggle, Kerr notes.

“It’s an awkward situation: few patients want to be in the exam room asking if their provider is making a decision off financial incentives,” he says. “This is awkward even for those of us in the industry. That’s not the dynamic we’re after.”

The industry is getting better about disclosing things like risks in procedures, Kerr points out: why not also get better at disclosing financial tradeoffs?

“We’re putting a lot of the decision on the patient, and we should talk about costs as much as benefits,” Kerr says.

Cost has downstream benefits to the patient beyond financial, as well.

“There’s an adherence risk to the patient. If the last time I got a lab ordered, it was a $150 test, I might not follow through next time,” he says.

And yet, there’s limited incentive right now to disclose the cost, despite, Kerr says, it not being a huge reach to develop data decision tools to help in this regard.

“The method by which pricing data has been disclosed with has been less than ideal, and it’s been hard to manage, often published in PDFs and not manageable tables,” he says. “I think continuing down the transparency mandate, disclosing the data in more manageable structures will allow a focus on consumer decision making and developing tools to help with that.”

Were the data easier to parse out and utilize, Kerr envisions apps that help locate testing centers or drug filling options that are less expensive to the patient.

“It’s been a data dump until now, and it’s been hard to use outside the industry,” he says.

Labs are an interesting starting point with a lot of potential to see incentives ripple through the industry, Kerr notes.

“The ideal situation is, in my opinion, to get unit costs exposed in a way that can be managed by consumer-oriented technology companies to present patients with decisions at the point of care, so they have some sense of their out-of-pocket cost,” says Kerr. “Episodic may be too hard, but if the patients at least knows that a lab test is cheaper than the one at the hospital-owned lab, they can at least make a decision that makes sense to them.”

That kid of shift will require national incentives to get the entire industry on board, however.

“Conceptually, it’s not hard to solve, but the industry doesn’t have the incentive to change. We have the capacity but not the will,” says Kerr.

Matt Phillion is a freelance writer covering healthcare, cybersecurity, and more. He can be reached at matthew.phillion@gmail.com.