Price Transparency

The real demon causing healthcare costs to soar is the complete lack of price transparency in the system. The Cato Institute hints at this but fails to fully grasp what the causes are and how to cure them. In his seminal article in Time Magazine, Steven Brill expends a great deal of ink writing about chargemasters and the disparity between what hospitals charge and what most people, or their insurers, actually pay. The article presents a litany of questionable hospital charges such as a 55-cent diabetes test strip selling for $18 at one hospital. In her New-York-Times article, Nina Bernstein explains how six 86-cent saline IV bags can sell for as much as $546 at another hospital. She goes on to explain that one patient’s HMO settled a $2,168 bill for a mere $119.
So it’s no secret that there’s little or no relationship between what third-party payers pay and what providers charge. Further, many large insurers are simply price agnostic. They may negotiate discounts with providers, but in the end, they’ll merely pass along rising costs to their policyholders in the form of increased premiums. And it doesn’t help negative public perceptions that many hospital systems have expended a great deal of capital building entryways and waiting rooms that look more like the lobby of a Ritz Carlton in an exotic destination than the gateway to a lifesaving treatment.
The Affordable Care Act has taken at least one baby step to increase price transparency. Section 2718 of the Act requires that hospitals publish a list of standard charges for certain items and make them public each year—but insofar as the Act doesn’t require hospitals to publish their complete chargemasters, it’s more bark than bite. In May, CMS published a list of charges and payments for certain procedures at thousands of hospitals around the country for 2011. The list received a great deal of attention in the press, which focused on comparing the disparity in charges between similarly situated hospitals within the same locale. Dozens of state legislatures have enacted laws that require some level of pricing transparency. But these laws are a hodgepodge that range from merely requiring hospitals to provide patients with an itemized bill upon discharge—after the horse has already left the barn—or require reporting of average charges for common procedures.
All this data can be useful, and a number of companies have been providing consumer-oriented comparison tools or have rolled out these tools in recent months and years. But this information has limited value in the hands of consumers and is particularly ineffective in emergency situations. It must be a rare occurrence indeed that a patient riding in an ambulance would say, “Take me to Hospital X because it’s cheaper than Hospital Y.” Rarer still because patients generally have no say in which hospital an ambulance may take them to. This, in fact, can create a very difficult situation for patients because they may wind up receiving extremely expensive emergency care in a hospital that is not part of their coverage network. The end result is often that a patient winds up being responsible for a large portion of “out-of-network” hospital and physician charges.

New Requirements for Nonprofit Hospitals

Most hospitals in the United States operate as 501(c)(3) nonprofit entities. Section 9007 of the Affordable Care Act created a new Section 501(r) in the tax code. This new provision in the tax code requires that nonprofit hospitals complete a “community health needs assessment” every three years and create a plan to meet the needs uncovered in that assessment.
But where Section 501(r) has some real bite is in its strict limits on what hospitals can actually charge uninsured or underinsured patients and limits it imposes on collection activities hospitals may engage in for those patients. Under Section 501(r), hospitals may not charge more than either (1) what Medicare would pay, or (2) what Medicare would pay averaged with what commercial insurance would pay. Many hospitals charge as much as 600 to 800% of what Medicare pays. So this provision of the Affordable Care Act is designed to stop the nightmare scenario where only the uninsured or underinsured are required to pay what a hospital charges.
But this provision of the Affordable Care Act applies only to uninsured or underinsured patients, which represent a small minority of patients treated in nonprofit hospitals. Further, it does nothing to help these patients with high charges in for-profit hospital settings or with physician charges. Yet it does begin to signal the way to what may be a more wide-ranging solution in the healthcare market: Medicare Reference-Based Pricing.

Medicare Reference-Based Pricing

Almost 60% of enrollees in employer-sponsored insurance plans belong to self-insured plans. These plans typically belong to PPO networks that have negotiated discounts with providers. But these discounts often fall in the range of 20% to 40% of charges. If a hospital charges 800% of Medicare rates for certain services, then a 20% discount means that a self-insured plan will still have to pay 640% of what Medicare would pay.
Almost every acute-care facility in the United States is enrolled in the Medicare system (4,830 of them at last count). Each of these facilities must file a yearly cost report that documents “facility characteristics, utilization data, cost and charges by cost center (in total and for Medicare), Medicare settlement data, and financial statement data.” The Centers for Medicare & Medicaid Services has the daunting task of doing all the actuarial work based on that data and coming up with a payment system that works for every Medicare facility.
In December 2010, the American Hospital Association (AHA) published a fact sheet stating that Medicare payment covers only 90% of actual hospital costs and that 56% of all care hospitals provide goes to Medicare patients. The letter notes that hospitals that want to maintain their nonprofit status must take Medicare. But the reduced tax burden of maintaining nonprofit status was not part of the AHA’s calculus in determining that Medicare pays only 90% of actual costs. Nonetheless, simply taking these numbers at face value means that hospitals somehow have to make up 5.6% of their costs by shifting it to the remaining 44% of patients. To do that, hospitals would need to receive at least 112% of the Medicare rates for treating their non-Medicare patients. Take into account that hospitals spend around 5.9% of their revenue on uncompensated care and that percentage jumps to roughly 125% of Medicare rates. Given all this, it’s hard to understand why a commercial reimbursement of 600 to 800% of Medicare is reasonable. On the physician side of the equation, the average physician receives around 112% in annual compensation according to a recent MedPAC report. This seems much more reasonable. So why would that be? Consider that physician billing is much more discrete and transparent to begin with. Physicians bill separately from hospitals even when they perform procedures in a hospital setting. And while large physician groups may have significant bargaining power with insurers and PPO networks, they don’t have near the clout of a hospital system that dominates a particular geographic area.
All this points the way to what may be at least one viable solution—particularly for self-insured employers. That is, pricing based on Medicare rates. Many employers are already using “NoPPO” systems that simply pay providers some percentage of Medicare rates. These are usually very generous—in the range of 140 to 160% of Medicare. These rates are more than enough to help hospitals make up any shortfalls for treating Medicare, Medicaid, and uninsured patients. And as a recently decided federal-court case in the Middle District of Georgia shows, providers arguing that this type of compensation is not reasonable have been “unable to point the [courts] to any precedent in support of [this] novel argument.” And because physicians are already accustomed to receiving an average of 112% of Medicare rates in total compensation, a Medicare-Plus pricing plan could well be very appealing to them.
This kind of program would bring real market forces to bear on hospital pricing while still providing hospitals with the resources they need to provide critical services to their communities. A lone patient sitting at a hospital admissions desk or on a treatment bed in an emergency room has no bargaining power to make this happen. But employers have the market strength to be more equal counterparts to hospitals at the negotiating table. There is some risk involved. And it will take fortitude to make it happen. But the end result could be that employers can still offer good, comprehensive coverage to their employees at rates that truly are affordable.