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Healthcare Price Transparency? Its Time Has Finally Come

NOTE: Given the latest hospital price transparency developments, this blog enhances the one I published last March,  A Potential Game Changer – Making ‘Secretly-Negotiated’ Medical Prices Public.

The insurance card that you carry represents lost wages and financial bonuses that have been unnecessarily diverted to pay exorbitant healthcare fees to others.

From our 2019 research, the average annual Iowa employer premiums were $7,017 for single and $19,335 for family. Since 1999, these premiums have increased by 240 percent and 251 percent, respectively. Additionally, largely under the push for ‘healthcare consumerism,’ Iowa employees have been asked to pay much higher deductibles – now at $2,200 for single and $4,000 for family coverages.

The escalating prices we pay for healthcare services operate in a black box. Whether for hospitals, doctors, pharmacy or other healthcare providers, we have no idea what the negotiated prices actually are between insurers and health providers, at least until sometime AFTER the services have been rendered. Such opaqueness is intentional. To paraphrase noted economist Uwe Reinhardt, where there’s mysteries in pricing, there’s larger-than-normal margin to be had. In healthcare, obscene money is made when it is allowed to operate in a dark room of denial and obfuscation.

On November 15, the Centers for Medicare and Medicaid Services (CMS) issued a final rule that requires hospitals to disclose the rates they negotiate with insurers. This hospital price transparency rule, set to begin in 2021, requires hospitals to disclose the standard charges for all items and services, including supplies, facility fees and professional charges for employed physicians and other practitioners. The final

Additionally, the final rule requires hospitals to post payer-specific negotiated rates online in a searchable and consumer-friendly manner for 300 of the most popular services shopped by patients.

Under a separate CMS proposal, health insurers will be required to disclose on a public website their negotiated rates for in-network providers and allowed amounts paid for out-of-network providers. Health insurers will need to offer a transparency tool to provide covered members with personalized out-of-pocket cost information to all covered services in advance. The language for this proposed rule can be found here.

Negotiated prices are largely bound by confidentiality agreements between healthcare providers and insurance companies, and are so closely guarded that even mega-sized employers are not allowed to penetrate this veil of secrecy.

It is revealing that the American Hospital Association (AHA) and the Federation of American Hospitals are exploring legal options to argue that transparent pricing will constrain private contract negotiations.

Two influential insurance organizations have revealed their opposition to price transparency – America’s Health Insurance Plans and the Blue Cross and Blue Shield Association. A spokesperson from the BC/BS Association indicated these rules “will not help consumers better understand what health services will cost them and may not advance the broader goal of lowering healthcare costs.” The argument made is that price transparency can actually increase prices because clinicians and medical facilities will bid up prices, rather than lower rates.

Despite these self-serving arguments, the status quo only works for hospitals and insurers, but not for those who actually pay for healthcare. This must change.

By itself, real prices made public will not solve the inherent problems that persist throughout the healthcare system, but price transparency is a good first-step to have. Clearly, it is not the sole remedy to a ‘system’ that requires massive incremental fixes.

Admittedly, the push for healthcare ‘consumerism’ has been relatively slow. However, it is likely that consumerism will find new legs due to third-party entrepreneurs and technology companies who will find disruptive ways to make pricing a relevant decision-making tool for many patients. All purchasers want the best value in the healthcare being purchased.

Regardless of political party affiliation, price transparency in healthcare should be widely accepted by Iowans and all Americans.

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Estimated Waste in Iowa Employer Health Premiums:
$2,400 Single/$6,600 Family

Imagine walking into a restaurant and being seated. Sometime after your meal, you receive the check and find an additional charge that was not indicated on the menu or previously mentioned by your waiter. The charge – before your gratuity is determined – is a 34 percent markup simply labeled, ‘Surcharge.’ After prodding the waiter, the sheepish but honest response is whispered to you: “The restaurant industry is bloated and inefficient requiring additional costs, and because of this, we must pass on this surcharge to our patrons.”

Truth be known, we are all paying this ‘surcharge’ in the healthcare that we purchase, as it is baked into our health insurance premiums and the out-of-pocket expenses we incur and pay. What is different from the hypothetical restaurant example, however, is there’s no transparency on how much these costs add up in healthcare. Opaqueness of this information allows this surcharge to be included on the final price tag – and the purchaser is no wiser.

In healthcare, it’s buyer beware – on steroids.

Healthcare Waste in the U.S.

To begin, defining healthcare ‘waste’ is somewhat tricky, but nonetheless important. Waste is defined by many in the industry to be resources that are expended in services, money, time, and/or personnel that do not add value for the patient, family or community. In fact, this non-value waste can actually harm patients, which adds more cost to the system.

I recently watched an Institute for Healthcare Improvement (IHI) webcast, “Let’s Get to Work on Waste in Health Care.” In addition to a wonderful Call to Action’ piece, IHI provided great examples of healthcare waste within the ‘Trillion Dollar Checkbook.’ The IHI used ‘trillion’ in this piece because the healthcare industry in the U.S. is about one-fifth of the nation’s economy (and growing), and the annual spend in healthcare during 2018 was $3.65 trillion. Healthcare waste in the U.S. is generally believed to be a comfortable one-third of the total spend – roughly one trillion dollars – about the size of Mexico’s economy. Click here for the audio and video of this webcast.

The IHI referred to a JAMA article published in 2012 by Dr. Donald Berwick, a highly-respected physician and health policy expert, and Andrew Hackbarth of the RAND Corporation. The article, “Eliminating Waste in US Health Care,” aptly describes that escalating healthcare costs is debilitating other worthy government programs, erodes wages, and undermines the competitiveness of the overall U.S. industry. The percentage of waste that is built into healthcare costs, according to this paper, ranges from 21 percent to 47 percent, with 34 percent being the midpoint.

‘Litter Box’ of Healthcare Waste

So what healthcare waste is found in the litter box hidden from the public?  Plenty. A ‘less harmful strategy’ described by the JAMA authors would be to reduce waste that does not add value to care. They cite six categories of waste briefly summarized below, beginning with the largest estimated waste to the smallest:

  1. Administrative complexity – Government, private payers, and others create inefficient or misguided rules for providers. By comparison, in 2015, the U.S. spending on healthcare administration dwarfs the OECD countries. One example is that payers fail to standardize forms, consuming limited physician time in having to deal with onerous billing procedures. Multiple payers do not coordinate their efforts with those providing care. Estimated waste in 2011: Between $107 billion and $389 billion.
  2. Overtreatment – Subjecting patients to care that cannot possibly help them – based on sound science and patient preferences. This care is “rooted in outmoded habits, supply-driven behaviors, and ignoring good science by providing excessive and inappropriate care. Examples include using excessive antibiotics and opioids, performing surgery when watchful waiting makes better sense, and unwanted intensive care at end-of-life for patients who don’t want this. Estimated waste in 2011: Between $158 billion and $226 billion.
  3. Fraud and abuse – Issuing fake bills and running scams to get paid by government and private payers. Estimated waste in 2011: Between $82 billion and $272 billion.
  4. Pricing failures – Well-functioning markets produce reasonable prices that come from actual costs of production plus a fair profit. In healthcare, due to lack of transparency and competition, prices are several times more than identical procedures in other countries. Pricing failure includes payer-based health services pricing, medication pricing, in addition to laboratory-based and ambulatory pricing. Estimated waste in 2011: Between 84 billion and $178 billion.
  5. Care delivery failures – This includes poor execution and lack of widespread adoption of known best care processes, such as for patient safety systems and preventive care practices and are known to be effective. Better care saves money. Estimated waste in 2011: Between $102 billion and $154 billion.
  6. Care coordination failures – Care in the U.S. is fragmented, meaning that patients fall through the cracks, resulting in complications, hospital readmissions, and declines in functional status requiring increased dependency. Estimated waste in 2011: Between $25 billion and $45 billion.

New JAMA Study Released about Waste

A new study published in JAMA finds that roughly 20 to 25 percent of American healthcare spending is wasteful. Although this finding is slightly less than findings mentioned above, the estimated waste is considered to be an astounding $760 billion to $935 billion per year – comparable to government spending on Medicare. This waste exceeds national military spending and total primary and secondary education spending. This study also addresses the same six categories of waste explained earlier.

Waste in Iowa Employer Health Insurance Premiums

In our recent 2019 Iowa Employer Benefits Study©, we found the average annual single and family health insurance premiums are now $7,017 and $19,335, respectively. Using the midpoint of 34 percent waste (a number from the Berwick study), the annual waste built into the Iowa single and family premiums are $2,386 and $6,574, respectively. This estimated waste reflects the amount employers and their employees overpay which generates income for providers, healthcare industry vendors, health systems, and health plans.

Applying the midpoint for each of the above six categories of waste, I was able to estimate each of the six cost components for the health insurance premiums paid by Iowa employers and their employees. Below is a graphic that depicts the total estimated waste found in both the single and family premiums based on the six waste categories described earlier.

Summary

By tolerating waste, we unknowingly create and sustain a rising burden of out-of-pocket expenses, suppressed take-home pay, delays of care and other side-effects that harm our care and well-being. As mentioned in the IHI’s ‘Call to Action,’ “…it’s not just money that’s being wasted. The most precious resources – the workforce’s time, spirit and joy – are being unnecessarily drained by wasteful processes every day…No matter how many medical breakthroughs achieved…if we don’t remove waste in health care, our health systems cannot thrive.”

Healthcare waste comes from many different sources, which require multiple strategies to reduce at least a fraction of waste described above. Berwick believes that healthcare waste must be attacked through political means, such as simplification of administrative services and pushing back on irrational pricing. Others believe that enhancing regulation of healthcare monopolies can also greatly help.

Frankly, too many ‘insiders’ are afraid to speak critically about their wasteful piece of the healthcare system, fearing loss of promotion, employment or obtaining lucrative consulting contracts. This fear allows the status quo to remain largely unchallenged.

Whatever the solutions, we must begin to have an honest national discussion about the massive waste we pay to others who see this as their revenue and income. A logical start is for voters to ask candidates how they propose to cut waste and simplify our healthcare system.

With 20 to 47 percent of our health insurance premium and out-of-pocket costs considered to be ‘wasteful’, I’m ready to have this discussion.  Are you?

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Is it Time for All-Payer Rate Setting?

Iowans – heck, all Americans – are tired of exorbitant medical costs that equate to receding take-home pay due to runaway health premiums. Mainstream media, including a recent CBS News’ three-part series on ‘Medical Price Roulette,’ demonstrates national outrage about medical costs. Add in surprise medical bills, a complex health system impossible for patients to coherently navigate, predatory pricing by greedy actors who can get away with this egregious behavior, and we find a full-blown mess of a problem that is sucking the life from all budgets.

Contrary to arguments made by the medical establishment that bloated healthcare equates to more local jobs and serves as a multiplier-effect for local economies, growing our medical industrial complex just does not fit the true narrative of having thriving economies.

The frustration for this writer is that it is much simpler to describe the ill-effects of a bad healthcare ‘system’ than it is to offer up actual solutions to remedy it. However, I would strongly argue that anyone who claims to have a ‘silver bullet’ solution for an exceedingly complex Rubik’s Cube, is most likely the new, 21st century version of PT Barnum. Yet, repeating the over-used phrase, “Healthcare is complicated,” shouldn’t be an excuse to not pursue viable solutions. Opaqueness in healthcare happens not by accident – but deliberately – it is working as intended. Any remedy to fix this, however, is wrought with both intentional and unintentional consequences.

The Problem

Through a government rate-setting method, Medicare controls what it pays to hospitals, physicians, and other providers by using 745 hospital diagnostic-related groups (DRGs), over 8,000 HCPCS/CPT codes, and many other categories of service to keep medical costs manageable. However, Medicare does not control what providers charge for non-Medicare patients covered by a private plan – which include employer-sponsored health plans, and individual (non-Medicare and non-Medicaid) coverages. Private healthcare markets have clearly failed in reining in extraordinarily-high medical prices, beckoning some type of involvement of price regulation by government authorities.

The problem for private payers? According to a 2019 report by RAND, they pay more than double the amount paid by Medicare for identical healthcare services. Much of this occurs due to cost-shifting – providers charge more to commercial insurers to make up for ‘low rates’ paid by government payers. How much is due to cost-shifting is debateable, however.

As the ‘true’ purchasers of care, employees and their surrogates (employers), use third-party contractors – better known as insurance companies – to negotiate the best ‘deals’ with the provider community. These ‘deals,’ however, are secretly-negotiated without the true payers knowing what the arrangements entail. Insurers often remind purchasers about how ‘deep’ these discounts are off of highly-inflated hospital chargemasters. But that discussion is disingenuous, as chargemasters are irrelevant to the true cost of care.

All-Payer Rate Setting

One strategy to help contain and equalize the pricing arrangement between medical providers and ALL payers – including Medicare, Medicaid, private commercial insurance companies and large self-insured employer plans – is to implement an all-payer rate approach.

“All-payer” rate payments are the same for all patients who receive the same service or treatment from the same medical provider.  All-payers include private health insurance plans, large employer self-funded plans, and Medicaid and Medicare (under an approved waiver from the federal government). Uninsured patients can also possibly be included under the all-payer rate method.

There are two types of all-payer rate programs, state-determined rates and provider-set rates. As mentioned, for Medicare to be included, the state must seek a waiver from the federal government.

  1. State-Determined Rates

Under this arrangement, a state authority will set rates, most often for hospital services. This process is somewhat akin to public utility regulation.

  1. Provider-Set Rates

This approach allows providers to set their own rates, but requires rates to be the same for all payers. In this way, the state can establish rate-setting parameters but does not set the actual rates.

The intent of both approaches is to contain healthcare costs by fostering price competition and reducing or eliminating the cost to negotiate and administer multiple reimbursement schedules with multiple payers. When it comes to dominant health provider concentration, primarily resulting from mergers and acquisitions, the all-payer rate setting can help address adverse consequences derived from large providers in local markets. Dominant insurance companies may also pose different risks to unsuspecting purchasers – such as controlling how their products are distributed within the markets they serve.

Due to a myriad of payers requiring a multitude of quality metrics for doctors and hospitals to comply (costing around $15 billion annually to report results to the government), quality improvement must attack the ‘appropriateness’ of care, whether that particular care was needed in the first place.

Maryland is the only state with an all-payer system of hospital services, which is overseen by its’ state-based Health Services Cost Review Commission. In 2018, Maryland Gov. Larry Hogan signed a contract with the federal government to establish an all-payer health care model, hoping to create incentives to improve care while saving money. This new contract is expected to provide a total $1 billion of savings by the year 2023. Whether this plan works, however, remains to be seen.

Conclusion

Strategies to curb rising health costs and make them more transparent over time is not impossible, it just requires the grit to succeed. Secret negotiations that portray the ‘best’ deals is no longer in vogue, and rightfully so. The inability (or unwillingness) of the private markets to ‘right the ship’ in costs and make them more transparent continues to nudge enthusiasm for various payment initiatives, such as ‘Medicare for all,’ public-plan options, all-payer systems (Maryland), global budgeting (Massachusetts), regulating what insurers pay providers, as well as other approaches.

A warning to those who support the ‘status quo’ in our current healthcare ‘system’ – look for more transparent opportunities to reveal true healthcare prices and make the system less onerous for patients, providers and budgets. Otherwise, stand aside, and be prepared to become this century’s version of the buggy whip.

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