2013 December

Pricing Transparency

Will pricing transparency reduce the cost of care?

Many people inside and outside the industry are grappling with this question. A recent Harvard study reports that pricing transparency does not lower cost and they are not sure why.

Having access to prices is important to patients required to shoulder more of the financial burden for their care. For the most part, patients were already able to get the cost or at least a reasonable estimate in advance of their services from outpatient providers. However, comparable information is generally not available to patients when medical services are more complex and unplanned. Those complex and unplanned services are the real cost drivers of healthcare.

However, there is more to pricing transparency than most realize. Let me shed some light on it for you.

Charges vs. Contracted Rates

There have been a lot of stories in the news sounding alarms about the high cost of care.  However, the stories are often comparing charges from one provider to the next or comparing charges to Medicare reimbursement.  There is some validity to making those comparisons but in reality neither comparison has much to do with cost to the consumer.

Medicare requires providers to set a uniform charge.  There are so many billing codes that many large provider organizations, including hospitals and medical groups, set charges as a multiple of Medicare reimbursement rates.  For many organizations, Medicare reimbursement reflects a payment floor, not their break-even point.  Adding a multiple to those rates allows the provider to comply with the Medicare requirement of a uniform charge and set a charge sufficiently high to allow for full reimbursement from all payers.  The contracted rate is the cost consumers pay for the service and for most providers, it is a fraction of their charge. 

Contracted Rates

Contracts with commercial insurers such as Blues, Aetna, Cigna, United etc. are given volume discounts by large providers. Physicians by in large have to accept the commercial rates to participate in the plan unless they are exceptional.  The contracted rates from one insurer to the next vary because the rates reflect the market power of the insurer.  The market power of the provider is built into all the commercial rates and therefore, has little to do with the variability experienced by consumers.

For the most part, the contracted rates in existence limit the reimbursement to providers [in other words, limit what consumers pay] because they are paid a group rate for the billing code(s).  Each of the commercial payers use different reimbursement methodologies for complex services and items routinely passed through such as high cost implants and supplies.  The variation in terms muddy the waters and make the payment for those services hard for even professionals to compare without repricing technology. 

Out-of-Network Providers

Out-of-network providers added to the variability in charges and in most cases, their charges became the high cost outliers.  The reimbursement rate to non-contracted providers is lower than that to contracted providers. Consequently, the non-contracted providers raised their charges billed to insurers to make up for the total reimbursed amount but at the same time, discounted the amount billed to patients.  Patients choosing a high cost, out-of-network provider were largely unaffected but insurers or employers of self-funded plans in the end paid a hefty price.

As payers limited out-of-network benefits, the out-of-network providers kept increasing their charges which is why few employers now offer plans with out-of-network benefits and why the outlier charges should soon disappear if they haven’t already. Access to out-of-network providers is limited under most plans and most patients will pay more now if they choose to continue using them. 

Closed Networks

We’re entering another period of closed networks designed at least in theory to better manage the health and healthcare of patients by coordinating care and increasing compliance with behaviors that lead to healthy living.  However, these networks will also help reduce cost by using primary care physicians to channel patients to a fewer number of providers in exchange for bigger discounts. The downside is that patients often give up choice and control which scares some people.

Higher Discounts

Employer groups and others are reporting savings from using reference pricing and package pricing, also referred to as a bundled payment, which yield bigger discounts from providers on high volume services. Bundled payments make it easier for healthcare consumers to understand the cost of complex services and reference pricing makes it easier for them to choose a low cost provider.

However like most large businesses, healthcare providers including hospitals thinks about cost and profitability at a much higher level than a specific service or the patient.  Large providers can change their allocation methodologies to discount certain services as long as they can make it somewhere else.

Deeper cost cutting for all services will take some time.  What many outside the industry do not fully appreciate are all the constraints on the main cost drivers for delivering healthcare.  For instance, labor is the most significant cost driver for provider organizations and it is constrained by regulatory guidelines, unions, geographical location and staffing shortages.

So in the short run, the cost of some services may decrease and others may increase as a result of pricing transparency. The impact on the total cost of care will depend largely on what happens with demand and other initiatives to align the interests of the healthcare delivery supply chain.

With that said, pricing transparency is a good thing for everyone including healthcare providers. It is much easier to collect money for services rendered when people understand what they owe and know that they will receive good care in return.

Before a diamond shows its brilliancy and prismatic colors it has to stand a good deal of cutting and smoothing.

– Unknown Author


About the Author: Shannon Smith is a healthcare strategist with over fifteen years of experience helping companies achieve greater success.

Culture Change

Changing the culture of the healthcare industry is no easy task but progress is being made.

Think about the last time the leadership at your company announced a big change. Did you get onboard the first time you heard the presentation or did you have reservations? Most people have reservations especially if they haven’t been involved in understanding the issues and formulating the strategy supporting the change.

Many in the healthcare industry understand that the cost of care is increasing faster than the economy can support and that we need to be part of the solution. The challenge is that no one has had a clear picture of the future or a clear understanding of how it will impact them. Consequently, many have felt the same reservation as when a company tries to undergoes a culture change. Complicating the culture change required to support Accountable Care are past failures to integrate the healthcare system and sustain health maintenance organizations (HMOs). Many HMOs were not financially viable over the long term which makes many professionals wonder what is different this time. However, it is becoming more clear with the policy changes rolled out with the health exchanges.

The main difference are the incentives and penalties that are impacting everyone one way or another. There are only two levers left for insurers to play with to make coverage affordable. The two levers are the deductible and the out-of-pocket maximum. If insurance remains a requirement for all Americans, there will be more and more pressure on the healthcare system to figure out how to get the broader population to live healthier and to provide cheaper care.

The stages of a culture change make it easier to see the process underway towards achieving healthcare consumerism.

Getting Started
Change starts with establishing new behaviors. The Affordable Care Act gave the industry the incentives needed to start changing how providers work. Gone, in large part, are the paper charts. Most providers are using an information system referred to as an electronic medical record to capture and share medical information.

People outside of the industry probably forget what it was like when their industry first automated because it has been so long. I remember the first applications that we adopted for work paper documentation in public accounting and internal audit. We had similar gripes and issues with those systems as the providers have with the systems that are being implemented now. They slowed us down because they were difficult navigate and use. Given our tight deadlines, many opted to continue on paper rather than take the time needed to master the new flow.

The difference in healthcare is that most providers don’t have a choice. The penalties for not using an electronic medical record are too punitive for the organization so clinicians have to persevere and master the new workflows or persuade someone to replace the system.

Making Progress
Progress makes people happy. It is hard to measure the mood of an industry but happy might be a stretch at this point. There seems to be more of an acceptance for the new methods and processes of documentation. Clinicians are finding ways to deal with the negative affect on their time at least in the short run while the rest of us scramble to develop solutions that make it easier for them to get their job done and provide meaningful insights about patient populations.

The other factor contributing to our progress as an industry is the constant messaging from our political leaders about the importance and need to achieve affordable care. That constant messaging is in essence teaching us a new language. Words like value, accountable care, lean, electronic medical records, health information, big data are becoming part of our everyday language. The mindset of healthcare consumerism is reinforced as more people learn the language and use it in their every day conversations.

Earning Support
When you tell people your goal and they can see your commitment you will get the support needed to achieve it.  I can honestly say that having people rally around you in support of your goal is one of the most inspiring and rewarding experiences that I have ever felt. How this level of support manifests in the industry is yet to be determined. However, it all has to start with the individual whether you want to refer to them as a patient or a healthcare consumer.

The patient engagement systems that reward individuals for healthy behavior offer potential. The systems now are essentially rewarding and encouraging healthy people for doing what they already find personally rewarding. To really impact the cost of care we have to figure out how to engage the people that would benefit the most and get them on the path to healthy living. While we might be looking for the “silver bullet” as we routinely do when faced with a big challenge the solution is probably multifaceted. Whatever the right solution is for the individual, healthcare providers are in the best position to keep their patients engaged in the journey that will reward us all.

“Change is hard because people overestimate the value of what they have—and underestimate the value of what they may gain by giving that up.”

James Belasco and Ralph Stayer
Flight of the Buffalo (1994)

About the Author: Shannon Smith is a healthcare strategist with over fifteen years of experience helping companies achieve greater success. She has successfully led the transformation of ASCs and hospitals, helped technology and device companies with product and customer development and advised other professional firms on transactions.