Dr. HSA

News & Views on the Rise of Medical Consumerism

Transparency Around Pricing An Earshot Away

September 2005 - Vol. 4

Pricing is the Achilles heel of healthcare and competition is the cure.  In order for consumerism to succeed in the U.S., we need to change our reimbursement system.  Most Americans don't know there's a difference between a medical provider's price (i.e., gross charge) and actual payment for services (I.e., reimbursement rate) by insurance companies.  This column looks at the problem from a historical perspective and what's currently being done between various stakeholders to improve transparency around pricing.

"Dr. HSA": David Harris, National Healthcare Revenue Cycle Partner, PricewaterhouseCoopers LLP, NY, NY © 2005 All rights reserved.

Are Medical Providers to Blame?  If there was a Consumers Guide® for purchasing healthcare like there is for automobiles, it would be larger than the Britannica Encyclopedia®. One reason for this nuance is the Medicare rules related to reimbursement. The Centers for Medicare and Medicaid Services (CMS) mandates that medical providers cannot charge Medicare patients "less or more" than other payers (a most favored nation's clause). This generally results in one charge structure for all payers - including the uninsured (i.e., self-pay) who often don't have the financial resources to pay for healthcare.

This doesn't mean all providers use the same charge structure - even though some politicians on the left-hand of the isle would favor a nationalized or fixed pricing model. Each provider has the ability to determine their own charges in a free-market fashion. However, these charge structures are not really based on actual cost-of-goods-sold like other businesses, but on slick financial models that maximize overall reimbursement. In order for medical providers to take advantage of charge-based payers - insurance companies that pay providers as a percent of their gross charges versus negotiated reimbursement amounts or rates - they often inflate charges.

This is part of a defensive strategy to optimize collections from third party carriers, and is not related to actual costs per se.  So follow the policy dynamic here:  hospitals charge the government a retail rate that the government then discounts (a "contractual allowance"); that fee, however, must be charged to all other hospital users - third party carriers and patients.  Ultimately, the uninsured patient is charged full retail rates.

It is important to note that many providers derive over 40% of their revenues from Medicare, so they either abide by these rules or compromise Medicare funds.  As a result, patients without insurance receive bills that may not be representative of real costs for care, creating contention in the industry.  It's almost like the government regulations are stacked against the consumer; and in a consumer-directed environment, that's a real challenge for all healthcare stakeholders.

Bear in mind that if the government didn't develop a defensive posture for purchasing healthcare, providers could shift costs for their operations to Medicare.  So there is a balancing act of sorts in a third-party reimbursement world that competes against the kind of transparent pricing that is required in a first-party payment or consumer-driven world.

Are Employers and Insurance Companies to Blame?  There is as much confusion around health insurance as there is around pricing. Most working folk do not understand that their employer is self-insured and pays for the healthcare of its employees and their families. The average benefit spend of employers is around 30 cents on every dollar of salary - give or take a few cents. The amount employers spend on benefits for their employees is offset by the monthly premiums they charge their employees for healthcare, dental, life insurance, etc.  Some employers such as GM and Ford pay 100% of healthcare for their unionized employees and mid-size companies shift up to 50% of their healthcare spend through monthly premiums. Smaller companies still rely on an insurance model where premiums are based on their associated risk pool.

High Deductible Health Plans (HDHPs), by virtue of their high out-of-pocket spend, have lower premiums than indemnity and managed care products. With the advent of tax-advantaged accounts, such as the Health Savings Account (HSA), employers and employees alike are opting for the HSA-approved HDHPs to reduce their annual healthcare spend, as well as put some "tax-free" money away for the future when they retire.  As a result, they begin to have an appreciation for the role of insurance companies today - which is acting as "payer" on behalf of the employers and their members.

Insurance companies spend a significant amount of resources negotiating payment rates with medical providers. For example, a hospital may negotiate a per diem rate with an insurer in their market for inpatient care. Once an agreement is negotiated, the medical provider becomes part of the insurance company's preferred network. Understanding provider networks is very important when it comes time to pay for medical care - especially if you are covered by a HDHP. If you have a HDHP with a $2,500 deductible and $5,000 out-of-pocket maximum, you should select providers within your insurance carrier's preferred network. As long as you stay within network, you can often save up to 20%. Once you go out of network, you pay more because the insurance company does not have negotiated rates with those medical providers and chances are you will pay the full price or "gross charges", as some call it. Either way, work closely with your insurance carrier to fully understand the ins and outs of your HDHP.

Is Government to Blame?  Medicare is often considered the best payer while state governments are thought of as the worst payers.  Medicare pays for inpatient services based on DRGs (Diagnoses Related Groups) and ambulatory services based on APCs (Ambulatory Product Categories). These prospective payment reimbursement models are designed to make providers more efficient by bearing the burden of excessive and/or underutilized resources, plant and equipment. Many state Medicaid programs reimburse providers as a percent of the Medicare DRG and outpatient fee schedule. The DRG and APC reimbursement system appear to be working for Medicare, but penalizes providers for other payers like Medicaid, that typically pay below Medicare's rates.

So Who's to Blame?  Americans have come to view healthcare more as right than a blessing. Our expectations are out of balance with reality and that is just one reason why the cost of healthcare has risen more than the rate of inflation. Many of us spend less than 30 minutes a year selecting the type of healthcare coverage for ourselves and/or our families. This level of complacency has resulted in a very complex reimbursement system based on Medicare. With the advent of consumerism, we have a chance to get more involved and understand the price of healthcare. Once consumers understand the price and less on reimbursement because consumers will be shopping for healthcare the same way they do for automobiles. Who knows...some day we may have a Consumers Guide® for healthcare that is also linked to quality of care.

Best-in-class Examples of Transparency

Aetna Insurance Company announced August 18, 2005, that it is launching a pilot program to offer consumers online pricing information on physicians in their network. The program is designed to help Aetna members better understand their out-of-pocket expenses, according to the Hartford, Connecticut-based company. Starting in the Cincinnati region, the payer will offer access to actual negotiated rates for about 600 common office-based services offered by 5,000 physicians and specialists in the area. According to Aetna, consumers can access the pricing information through the Aetna Navigator website. Click on "DocFind" to search for specific physicians, then click on "View Rates" for Aetna members. This form of price transparency is leading edge and Aetna is an early adopter within the payer community. Living in the Northeast, the author of this column hasn't see this website but looks forward to the day when this initiative is rolled out across the country.

Members of Congress are also introducing legislation to promote transparency. Representatives Daniel Lipinski (D-Illinois) and Representative Robert Inglis (R-South Carolina) introduced legislation that will require hospitals to submit their prices for a variety of medical procedures to the Department of Health and Human Services (DHHS). DHHS would then post the prices on the Internet. If passed, hospitals will have to report their pricing for their 25 most commonly performed inpatient procedures, 25 most commonly performed ambulatory procedures, as well as the 50 most frequently administered medications. This type of legislation will have a significant impact on specialty hospitals due to the nature of their business. Patients and/or their family members already spend a significant amount of time researching orthopedic procedures, cancer treatments and pediatrics illnesses on the Internet. Once pricing information is readily available through the Internet, financial considerations will be ranked along with quality of care. Transparency around quality is another topic, but it should be noted that more than 270 hospitals are participating in CMS's Premier Hospital Quality Incentive Demonstration project - making publicly available 34 quality measures for inpatient procedures associated with heart disease, pneumonia, and artificial hip/knee replacements.

Piedmont Medical Center, a tenet hospital, has a program that offers discount rates to all uninsured patients who receive treatment at their hospital, regardless of their income level.  The program is called the "Compact with Uninsured Patients" and is offered in conjunction with the hospital's financial counseling service.  Patient and/or their guarantors are offered discounted pricing for medical care at rates equivalent to the hospitals' managed are "negotiated" rates - which are substantially lower than the hospital's "gross" charges.  This is an innovative solution to a very complex issue and Tenet is rolling out this program to all Tenet owned and operated facilities.

In closing, hospitals have the most to lose if they don't get their act together soon.  Smaller and more agile physician-owned ambulatory surgery centers will start to list price at or below negotiated reimbursement rates - depending on the service - to lure patients away from hospitals to their facilities.  As people start to convert from HMOs and preferred provider organizations (PPOs) to HSA HDHPs, 80% of the average healthcare spend will come from the consumer's pocket and price will become a factor in purchasing medical care.

Physicians have been competing with each other for elective and cosmetic surgeries for years and know how to compete in today's marketplace.  As hospitals begin to lose their valuable ambulatory surgeries to independent surgery centers and emergency room visits to community-based surgi-centers, the current charge structure will be viewed as turning away business.  Given the levers of changes in the marketplace (i.e., hospitals filing bankruptcy protection, wholesale conversion to IT-driven strategies as a result of HIPAA and a new "medical internet", medical consumerism movement), the time is now for providers to think about transparency around pricing and the effect it will have on their business model.

>> What's your point of view? Email Dr. HSA. We look forward to hearing from you!

Related:

Aetna Shares Physicians 'Price Tag' with Members - click here

Members of Congress Promote Transparency - click here

Piedmont's "Compact with Uninsured Patients" - click here

About the author...

David Harris is a Partner with the Healthcare Advisory Practice in PricewaterhouseCoopers' New York office. He has over twenty years industry experience in the health care and information systems field. David is the National Partner for PwC's revenue cycle practice that specializes in, payer, hospital and physician revenue cycle operations improvement, operation turnarounds/workouts, process redesign and business office integration, as well as denial management. He is responsible for the thought leadership, products and methodologies used by PwC's more than 100 revenue cycle professionals with in-depth knowledge of patient access, clinical documentation, health information management, inpatient and ambulatory coding, billing, claim adjudication, collections, A/R management and information systems. David also leads the Medical Banking Project's HSA Workgroup as part of a new consumer-focused effort being developed at the Project.