In a little-noticed ruling, the traditional gag clauses in healthcare contracts that prohibit disclosure of pricing agreements have been outlawed by regulation by the Departments of Labor, Health and Human Services and the Treasury.

While at first glance this might look like an arcane footnote important only to a very few healthcare entities, it’s actually a potential step toward reducing health costs for many millions of people and thousands of employers.

Here’s why. The longstanding practice in healthcare has been this: A hospital and an insurance company sign a contract stipulating what the insurer will pay the hospital. The gag clause prohibits either side from releasing that pricing information. Secrecy of pricing information makes it difficult to negotiate lower prices — as would be possible, for example, in an open marketplace like a grocery store, where the prices of tomatoes and asparagus are publicly available. Because the actual payment rate has long been a secret, the purchaser of insurance — an employer — has been in the dark about whether the rates paid on its behalf are high, low or something else. Here’s more detail about who gets paid what in healthcare.

The rule abolishing gag clauses was issued as part of the Consolidated Appropriations Act of 2021, and explained in a recent “Frequently Asked Questions” document.

The ruling says that the C.A.A. modified the Employee Retirement Income and Security Act (ERISA) and the Public Health Service Act by prohibiting “group health plans and health insurance issuers offering group health insurance coverage from entering into an agreement with a health care provider, network or association of providers, third-party
administrator (TPA), or other service provider offering access to a network of providers that
would directly or indirectly restrict a plan or issuer from—

“(1) providing provider-specific cost or quality of care information or data, through a
consumer engagement tool or any other means, to referring providers, the plan sponsor,
participants, beneficiaries, or enrollees, or individuals eligible to become participants,
beneficiaries, or enrollees of the plan or coverage. …”

‘This is a big deal’ for insurance contracts

To explain the significance, I turned to Julie Selesnick, senior counsel in the healthcare and benefits law group at Berger Montague, P.C., in Washington D.C., who has expertise on fiduciary issues in ERISA-covered health insurance plans and transparency issues in all group health insurance plans.

“This is a big deal,” she said. “The employer has always been a fiduciary, but now they are on the hook to actually act like a fiduciary. Now they have the tools to find out what they are paying.”

The employers’ fiduciary responsibility means they are mandated to run plans in the interests of the participants and beneficiaries, for the sole purpose of providing them benefits and paying plan expenses. They cannot pursue other goals, like keeping money for themselves, and they must act prudently and diversify and do anything else to minimize the risk of large losses.

This is nearly impossible if the employer doesn’t have information about what is being paid. For example, a colonoscopy could cost $500 or $5,000 — but if the employer has no visibility about prices, then they can easily say they’ve done the best they can and who can challenge them?

Now, though, the release of payment data by hospitals, insurers and employers has been mandated in several steps — Jan. 1, 2021 for hospital payment data, and July 1, 2022, for insurer and employer data, the employers are no longer able to plead ignorance, Selesnick said.

How the secrets of insurance contracts work

The data releases make the gag clauses inoperative, she said. Both insurers and hospitals like gag clauses, but for different reasons, she explained.

“Insurance companies make these global agreements and commit to give hospitals a certain amount of business overall, annually,” she said. “They don’t want the community to know that, or the people coming in to know that.

“Insurance companies are more into the gag clauses than hospitals. The hospitals like them, because they’re required to follow them. But they do like some of the provisions that promise them certain amount — they have these crazy deals with Cigna, and with Anthem, and Blue Cross, and sometimes they even pay more than the billed rate, depending on what it is. Things like that just don’t look good in the community — when it becomes known that the chargemaster already has an absurdly high price, but we got an agreement out of these two carriers to pay this much. Both sides have an interest in keeping it private.”

An employer or another group plan, if it knew that others were getting a lower rate, could use that as leverage for reducing its payouts, she pointed out.

Massive amounts of health cost data

Of course there are other barriers to knowledge, which is common in healthcare. For example, the data releases have come in huge amounts, she added. “They’re so unusable — the Anthem one will crash your computer,” she said. “I saw this graphic on a subreddit, that the Anthem machine-readable file — those JSON files have more information than all of Wikipedia combined. That’s by design completely unusable.” But tech companies are taking the data and analyzing it, she said, to see what’s missing or wrong. “The assumption is it will take years for anyone to get through it and even be able to push back and say, ‘Oh, we made a mistake,'” she said.

(Our analysis of the New York City hospital pricing data released by hospitals found a lot of gaps and errors in hospital price reporting, betraying an almost complete lack of quality assessment. What we chose to do: Use the data that we found credible, and not use the rest.)

Selesnick said the hospitals and insurers both benefit from secrecy. Yet the landscape now shows that the hospitals are suffering more globally from economic headwinds, she pointed out — with the pandemic being a huge factor. The insurance companies, though, “are posting record profits.”

Selesnick noted that several court cases have been filed under the C.A.A. seeking claims data in pursuit of reducing prices. One case, she noted in an email, “that isn’t necessarily the same, but might provide some context on just how damaging this claims data must be – it is the Saginaw Chippewa case, where Blue Cross Blue Shield of Michigan defied a court order rather than produce claims data.”

Other cases she described:

  1. Clancy v. UnitedHealthCare – this is a summary judgment motion brought by a bankruptcy trustee discussing how UnitedHealthCare spent years denying the plan access to its claims data and that is because it made $20M+ worth of “mistakes” adjudicating the claims. “Highlights the fact that there isn’t just willfully bad behavior involved, but also some measure of incompetence/inability to properly process claims,” she wrote.
  2. Owens & Minor v. Anthem – just filed in Eastern District of Virginia last week – filed by a Texas and Ohio firm against Anthem arguing that they won’t provide claims data and that the data will show claims handling errors.
  3. Trustees of International Union of Bricklayers &  Allied Craftworkers Local 1 et al. v. Anthem et al. – “my group filed this class action lawsuit against all Elevance companies (f/k/a Anthem) selling self-funded plans in the country alleging (1) a refusal to provide the plans with their own claims data despite contractual and legal obligations to do so (2) not repricing claims in the manner set forth in the underlying agreements and (3) not applying the negotiated rates set forth on the hospital websites.”

What about enforcement?

Will the end to gag clauses and the increased court activity on the topic of ERISA fiduciary compliance result in immediate help for employers and patients suffering the ill effects of high prices?

Enforcement rests on the Employee Benefits Security Agency, a subdivision of the Department of Labor, a small agency, she noted. The focus at E.B.S.A. and elsewhere is mental health now, she said, and she thinks that the ERISA issues with gag clauses will take a back seat in this thinly staffed agency. She expects the Department of Labor to support enforcement by filing amicus briefs in court cases, she said, and possibly support legislation. The department is unlikely to spearhead efforts, though.

“Plans are being told that they are obligated to report noncompliance to the D.O.L.,” she said. “So what will happen is, that plan probably won’t report it because they’re more afraid of the insurance carrier than they are of the D.O.L. But the first time that the D.O.L. files an enforcement action, they’re not going to go after the insurance company or hospital, they’re going to go after the plan for failing to monitor the service providers they hire. This is sort of how it unfolded on the 401(k) side. When that happens, that makes all the other plans very nervous, and they become much more compliant after that. So really, enforcement is less on the government agency side. But once that happens a little bit, it sort of snaps other plans into compliance.

“The bigger threat is ERISA, litigation and class action litigation. There’s likely to be more brave plans stepping up. It’s been a hard road, because the way the market works, now, a plan is told, ‘We will drop you if you keep pushing — you’re just not going to have access to this network.’ And that makes it difficult to recruit and retain employees, if you’re not going to have a Blue Cross symbol or UnitedHealthCare symbol on the front of your card. That is a big negative for recruiting.

“Hopefully this will unfold in a somewhat similar fashion to the way it unfolded on the 401(k) pension side, where a couple of lawsuits with big judgments against insurance carriers and then against plans themselves, were coupled with vigorous voluntary compliance action through the Department of Labor and then select enforcement in certain areas. All of those do work together. It’s not going to happen instantly.

“But five years from now, I would say the climate will be very different.”

Jeanne Pinder

Jeanne Pinder  is the founder and CEO of ClearHealthCosts. She worked at The New York Times for almost 25 years as a reporter, editor and human resources executive, then volunteered for a buyout and founded...