In April 2018, the Centers for Medicare and Medicaid Services (CMS – Medicare) issued a draft rule intended, generally, to nudge health systems toward several initiatives. These included improving the use of electronic health records and IT interoperability, providing greater price transparency of services, and empowering physicians to spend more time with their patients. This mandate went live on January 1 of this year.
Tucked into the rule is the instruction that hospitals publish their prices online for consumers. The price lists must be updated annually and in an “electronic” format. This laudable goal seeks to enhance patient-centric healthcare empowering consumers to craft smart healthcare purchases and reward doctors for delivering low-cost, high-quality care with repeatable outcomes.
There’s been a hue and cry in healthcare of late to offer consumers more pricing information about the healthcare they are purchasing. Greater insight into the cost borne by consumers would add significant value to the delivery of care, lower costs (via increased competition), and empower consumers to make more informed buying decisions. This is a step in the right direction. The U.S. healthcare system is a $ 3.5+ trillion per year industry that has morphed into a severely fragmented behemoth with varying entities competing, in many instances, to differing ends.
But there exists a larger issue endemic to our fragmented healthcare system. To wit, the ability for consumers to obtain relevant and accurate pricing information for the services they receive. Below we’ll dig into some of the reasons why “price transparency” will, in the near term, be the illusive unicorn.
Misnomers and Semantics
Many of the definitions of the cost component in healthcare differ. Prices, charges and payments/reimbursements have different connotations within different segments of the U.S. healthcare system at large. So, understanding (via transparency) what a hospital charges or what its “prices” are for a particular procedure has little impact on what the patient will ultimately pay for that service; likewise for doctors’ practices. In other words, what you are charged and what you pay often have little bearing on one another.
For instance, let’s say you need Procedure X performed. Hospitals 1 and 2 in your neighborhood offer Procedure X. In Figure 1, Hospital 1 charges $ 10,000 for Procedure X and Hospital 2 charges $ 2,000. If you’re a patient price shopping Procedure X, Hospital 2 sounds like a bargain, right? But what if the allowable (payment the insurance company agrees is fair to the hospital) amount for Procedure X for Hospital 1 is $ 1,000 where Hospital 2 gets $ 1,700. In this case, the “lower priced” hospital (based on charges) may end up costing the patient more.
Hospitals and doctors negotiate with insurance companies to determine what they will be paid for a particular service. Your hospital or doctor might have a contract with Insurance Company 1, Insurance Company 2, and Insurance Company 3 as indicated in Figure 2. As you can see, the insurance companies may pay different rates for Procedure X depending on multiple market-driven variables.
In Figure 2 we examine a hypothetical hospital system’s reimbursement rate for Procedure X (remember, hospitals and physician offices will have agreed upon “expected payments” or allowables for every procedure they perform).
Here the hospital performs Procedure X. It charges $ 100 for the procedure. However, Insurance Companies 1, 2, and 3 will “allow” $ 85, $ 80, and $ 70, respectively, in reimbursement for that service. Why would the “expected payment” vary? There are several factors including, but not limited to:
- each insurance company’s need for the hospital in their network,
- the specialists and level of care at the hospital (e.g. a tertiary hospital or Level 1 trauma center),
- the hospital’s competitive “hold” on the market.
Many of these decisions are supply/demand and economic decisions for the insurance company. A key element to the “expected payment” amount; that is a combination of what the patient will owe and the insurance company will pay but is, on the aggregate, what the system expects to collect for Procedure X.
You might visit your doctor for a simple office visit. That alone may be hard to quantify depending on how the visit is coded (e.g. documented for severity and then submitted to the insurance company), in terms of price. But if you require other services while at your visit, say, a blood draw and EKG, understanding your share of the cost might be a challenge. (That said, theoretically your doctor should, based on your insurance, be able to give you a rough “guesstimate” of what your piece of the financial puzzle will be.)
Charges and Payment
As noted previously, what your doctor or hospital charges seldom aligns with what the patient’s cost is or what the doctor is paid.
Hospitals and doctors deal with a variety of different insurance companies. What they are paid can vary from plan to plan even with the same insurance company based on their ability to negotiate, their market leverage, physician numbers, and geographic footprint (to name a few components).
Remember, different patients have different insurance. Some obtain insurance via the Affordable Care Act (ACA), some through their employers, some through group co-ops, and others are uninsured. This means what is collected from each patient will vary depending on plan for the same procedure (e.g. Procedure X).
In Figure 3 we examine variation. Three patients, Suzy Q, Jim J, and Fred R are uninsured, has a commercial PPO, and is on Medicaid, respectively.
As indicated here, each patient has Procedure X performed. The hospital charges the insurance company $ 100. However, Suzy Q has no insurance. In theory, the hospital should expect to be paid what it charges. But charges are often artificially inflated. So, the hospital offers Suzy Q a 50% ($ 50) discount indicating she should pay $ 50 for Procedure X.
Jim J has a commercial PPO. The charge for Procedure X is $ 100 and the hospital has negotiated an $ 80 payment rate for the procedure. Jim J’s PPO is an 80/20 plan where the insurance company will pay 80% of the “Expected Payment” (the “allowable”) or $ 64 and Jim J will pony up $ 16. Remember, the “Expected Payment” is derived from the insurance company’s payment and the dollars due from the patient.
Fred R has Medicaid. Medicaid is a low-income insurance product funded by state and federal agencies. The charge remains $ 100 and Medicaid reimburses the hospital $ 50 for this procedure. The patient must pay a nominal $ 3 co-payment and Medicaid pays the remainder.
Cost of Care
Many doctors and hospitals do not know what it costs them to deliver their “product.” The delivery of healthcare is not one-dimensional; you’re not buying a gallon of gas or a loaf of bread. There is variability. This of course differs from more standardized industries. For example, McDonald’s can probably tell you precisely what it costs to deliver a Big Mac or a Quarter Pounder with Cheese. They measure and monitor the various inputs and fixed costs and understand the cost to deliver the product.
All of these issues notwithstanding, the goal of transparency is a terrific first step in recognizing the issue and a first bite at consumer-driven healthcare. Consumers would do well to research based on what the doctor or hospital will be paid for the services performed, not what their charges are.
While a sound move forward, transparency, as currently contemplated, is a long way from solving the issue. We have started to crawl in what will be a marathon.