Abstract: In the market for health care services, consumers often do not know exact prices when choosing where to receive care. This makes it difficult to shop around for low price options, potentially reducing effective consumer price elasticity and leading to higher prices. How does price transparency affect equilibrium prices and welfare? To answer this question, this paper develops a demand model that separates underlying consumer preferences from consumer uncertainty about prices. Identification comes from quasi-experimental variation in price information resulting from the introduction of a website aimed at informing consumers. I then combine the model of demand with a model of bargaining between medical providers and insurers to examine how price transparency affects equilibrium prices. Using administrative data on medical imaging claims and website usage, model estimates and difference-in-differences estimates both imply that the website reduces health care spending by 3 to 4 percent. I then use the model to examine the effects of price transparency more generally. In counterfactual simulations, I find that price transparency would generate a substantial reduction in equilibrium prices if a larger fraction of consumers in the market were informed. Combining the price transparency website with high cost sharing would give individuals more incentive to use the price transparency tool, reducing health care spending by 18 percent.
Abstract: This paper examines whether information frictions in the market for radiology procedures lead to high prices in equilibrium. I use a unique dataset covering all private medical claims in a state to examine the introduction of a state-run website providing detailed information about the out-of-pocket cost of select medical procedures. The website could be used by all privately insured individuals in the state, potentially generating both demand- and supply-side effects. Exploiting plausibly exogenous variation across procedures available on the website as well as the timing of the introduction, I use a difference-in-differences estimator and find a 7 percent reduction in out-of-pocket costs for visits with information available on the website. I show that this is due in part to a shift to lower cost providers, especially for patients paying the highest proportion of costs. In particular, individuals incurring a deductible see a 14 percent reduction in out-of-pocket cost. Furthermore, supply-side effects play a significant role---there are lower negotiated prices in the long-run, benefiting all insured individuals even if they do not use the website. Supply-side effects reduce price dispersion and are especially relevant when medical providers operate in concentrated markets.