Court Ruling on Price Transparency Unsettles Hospital Stocks

On Jun 23, the Federal court verdict upheld The U.S. Department of Health and Human Services (HHS)  plan on Improving Price and Quality Transparency in American Healthcare, which went against the American Hospital Association (AHA).

The essence of the ruling is to disclose publicly the prices negotiated between hospitals and insurers in order to promote competition and reduce costs.

The Rules at a Glance

The set of rules requires hospitals to make the negotiated rates they charge insurers for medical services and prescription drugs available in the public domain. It also directs hospitals to make prices for healthcare services, such as common tests and procedures, available online beginning 2021. Hospitals will display the price band of shoppable services as a total package in an easy-to-read, consumer-friendly format.

The proposal also requires insurance companies offering group and individual coverage to provide cost estimates for enrollees up front so that patients are able to take an informed decision about their healthcare spending. It wants insurers to maintain transparency in the rates negotiated with in-network providers as well as in expected payments to out-of-network providers.

Reasons for the Proposed Rules

At present, a complex billing structure, resulting in invoices from multiple providers, makes it difficult for patients to understand the real price and the value of care provided to them.

Both the final and the drafted rule aim at adding more clarity to healthcare prices than ever before. The idea is to lift the veil on the operations of health insurers and hospitals under which both parties collaborate to provide healthcare services at inflated prices.

Per the government, this systematic inefficiency has over time made industry giants rich at the expense of patients. This is also evident from the fact that despite an increase in the cost of healthcare in the United States, the healthcare outcomes of patients undergoing treatment remain mediocre. Also, the government projects healthcare spending to consume almost 20% of the economy by 2027, one of the reasons being the visible lack of transparency in pricing.

These rules are expected to intensify competition between hospitals and insurers, thereby lowering the healthcare cost and improving its quality.

Resistance From Hospital Group

Melinda Hutton, general counsel for the hospital association, said that the trade group is disappointed with the upholding of the rule, which she called a “flawed” policy. She also stated that complying with the rule will supplement costs amid the coronavirus pandemic, which anyways hampered the hospital companies business.

Per American Hospital Association, mandating the disclosure of negotiated rates between insurers and hospitals is a wrong approach as it violates the First Amendment by compelling the public exposure of individual rates negotiated between hospitals and insurers. This will confuse patients and unduly burden hospitals, limit the choices available to patient parties in the private market and fuel anti-competitive behavior amid commercial health insurers in a highly concentrated insurance industry.

Stocks Down

Following the court ruling, stocks of most hospital companies, namely  Tenet Healthcare Corp. THC, Community Health Systems Inc. CYH and Universal Health Services, Inc. UHS have lost 4.4%, 2.5% and 0.6%, respectively. However, HCA Healthcare Inc. HCA rose 0.77%.

Year to date, the Zacks Hospital industry has plunged 34% compared with the  Zacks S&P 500 composite’s  decline of 3.2%.

Among the stocks mentioned above, Community Health Systems, HCA Healthcare and Universal Health Services currently carry a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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