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Comparing Private Payer Prices to Medicare Rates

Private Payer Prices Relative to Medicare RatesTrust, but verify” is a memorable quote that President Ronald Reagan used while negotiating nuclear disarmament with the Soviet Union in the 1980s. According to Wikipedia, this quote was derived from a rhyming Russian proverb, Doveryai, no proveryai.

Trust, but verify” comes to mind in today’s healthcare environment, specifically as it relates to third-party price negotiations between commercial payers (insurance companies) and health providers. Since the prices we pay for non-government medical care are largely secretly negotiated in the backroom by insurers and providers, the TRUE payers (e.g. taxpayers, employers and consumers) often assume they are paying competitive prices for medical services. But they never really know just how much money is being left on the table – it’s anyone’s guess.

With a few exceptions, transparent medical pricing is virtually non-existent. For example, a family member of mine is scheduled to have a knee-replacement performed during this month, but despite our requests to learn the negotiated costs between our insurer and this provider, we were unable to obtain the true cost of the surgeon’s fee, in addition to many of the ancillary costs associated with this particular procedure. My mindset is quite simple: if we have to ask more than once about how much this will cost, then something is clearly not right with our supposedly ‘consumer-centric’ high-deductible health plan – supplemented by a health savings account. We have a $10,000 deductible, so we SHOULD know the true cost, right? But we don’t.

Additionally, we were offered the ‘choice’ between using the outpatient surgical center (owned by our surgeon’s group practice) versus having this procedure performed at a nearby West Des Moines hospital. When we asked the gracious office lady employed by the group practice about the price differential between the center and hospital, we received a blank stare that was followed with a promise that someone would be contacting us ‘soon’ with answers. Over two months later, we are still waiting for that promised phone call. But because we have insurance, our desire to become true ‘consumers’ is not that urgent. This will be fodder for future blogs!

To date, transparency-hype serves as a smokescreen to protect the status quo of pricing opaqueness. A great primer regarding opaqueness in healthcare pricing can be found at The Powers Report Podcast found here.

Linking Private Payment to Medicare Rates

In March of last year, I attended a conference in Indianapolis hosted by the Employers’ Forum of Indiana. The conference centered around a RAND Corp. research report that revealed a national employer-led initiative comparing private (commercial) reimbursements with known Medicare payments. In other words, how do privately-negotiated rates compare to the lower Medicare rates determined by our federal government? Claims data from almost 1,600 hospitals in 25 states were gathered and analyzed by RAND Corp. Iowa, by the way, was NOT represented in this study*.

Because there is little-to-no price transparency in the private/commercial payment sphere, RAND was forced to gather claims data from three types of data sources:

  1. Self-insured employers who chose to participate in the study.
  2. State-based, all-payer claims databases from Colorado and New Hampshire.
  3. Health plans (insurers) who chose to participate.

The key finding from the RAND study (comparing prices from 2015 to 2017) was that relative prices (which represent the allowed amount paid as a percentage of what Medicare would have paid for the same services) rose from 236 percent of Medicare rates in 2015 to 241 percent of Medicare rates in 2017. Put another way, assume that Medicare prices are at 100 percent, private reimbursements were well over double what Medicare pays hospitals for the same services.

Medicare payments are tied to average hospital costs. Some hospitals, due largely to efficient internal practices that result in lower costs, break even or make money on Medicare patients, while many less-efficient hospitals lose money.

The private reimbursement rates range widely from state-to-state, even when states are next to one another. For example, the RAND study found the average Michigan commercial payer price was 156 percent of Medicare rates, yet, their neighbor to the south, Indiana, was highest of all states with 311 percent of Medicare rates. Suffice it to say, Indiana employers in attendance at this conference where both shocked and upset about overpaying for care when compared to other employers outside Indiana.

Employers, specifically self-insured employers, have a fiduciary responsibility to spend prudently and are justifiably frustrated with ever-escalating healthcare costs that do not add value to their bottom line. Because of this, the RAND report is causing a snowballing effect with employers who wish to take a much more active role in directly negotiating and contracting with medical providers for better, more reliable and effective care. Employers are hoping to narrow the large gap between commercial and Medicare payment rates.

According to RAND, the implications of knowing this information allows employers new “opportunities to redesign their health benefits to better align hospital prices with the value of care provided. Employers can exert pressure on their health plans and hospitals to shift from discounted charge contracts to contracts based on a multiple of Medicare or other prospective case rates.”

What About Iowa Commercial Rates?

Because there were no self-insured employers from Iowa participating with RAND during the 2015 and 2017 studies, there is no information on how commercial payments in Iowa compare to Medicare rates and to other states. This, however, can certainly change if a few large, self-insured Iowa employers would voluntarily share their claims data with RAND* for future analysis. Sharing such data would provide proof that the commercial rates being paid in Iowa are competitive (or not) with other states when using Medicare rates as the measuring stick. Very large national organizations participating with RAND evidently trust that their claims data are highly guarded by RAND and will not be compromised due to HIPAA privacy concerns, etc.

In a perfect world, having completely transparent negotiated rates between commercial payers and providers would eventually become a game-changer on knowing just how competitive the prices are in Iowa and elsewhere. It is telling that research is necessary in order to learn whether or not the prices we pay to our healthcare providers are trusted to be appropriate. As President Reagan indicated a few decades ago, verification is a sound strategy.

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*Self-insured Iowa employers, if interested, can become part of the RAND Hospital Price Transparency Project for 2020-2021.

Five Myths about Expanding Tort Reform in Iowa

Five Myths about Expanding Tort Reform in IowaPublic discussion is gearing up on a very contentious healthcare topic: Medical tort reform. In a span of two days last week, there were two opposing viewpoints in the Des Moines Register opinion section on whether or not tort reform should expand in Iowa.  A Waterloo OB/Gyn wrote a piece supporting expansion, while I penned an opposing view one day earlier.

In Iowa, two bills are in the legislature, HSB 596 and SSB 3085. Both are being pushed by the healthcare provider community to ensure their medical-malpractice premiums are held in check by hard-capping ‘non-economic damages,’ at $250,000 – damages that “arise from pain, suffering, inconvenience, physical impairment, mental anguish, emotional pain and suffering, loss of chance, loss of consortium, or any other nonpecuniary damages.”

The specific argument being made by the Iowa Medical Society and others who support this legislation is that “Iowa’s health care crisis” has experienced five lawsuits since 2017 – whereby Iowa juries awarded plaintiffs more than $63 million for “non-economic damages.” The argument being made is that physician’s malpractice insurance policies have a $1 million – $2 million limit, while hospitals also have policy limits. Consequently, when juries award a large amount beyond these limits, the doctors and hospitals are forced to pay the rest out-of-pocket.

According to an article written by the Iowa Clinic in the February 14 edition of the Des Moines Business Record, the ‘simple solution’ is for the Iowa legislature to place a firm dollar hard cap of $250,000 on “non-economic damages,” but patients could still receive unlimited “economic damages” to cover treatment costs and lost wages. By placing a “reasonable” limit on “non-economic” damages, lawmakers, not juries, can ensure “fair awards” for plaintiffs, providers and hospitals “while keeping costs down for all Iowans.”

There you have it. Can we assume that hard-capping “non-economic” damages will miraculously eliminate “Iowa’s health care crisis” as we know it?  The quick answer is “NO.” But to better understand why Iowa’s on-going healthcare crisis will not be remotely solved by these bills, it is helpful to know the pertinent facts conveniently left unshared by the Iowa medical establishment.

There are five myths that the medical establishment would like for lawmakers (and key health payers) to believe. I will summarily refute each myth with some verifiable facts.

1. Iowa malpractice premiums are greatly increasing

Overall, insurance is a risk tool that is predicated on the experience of those being insured. If claims go up, the premiums will also move up. As is often the case, insureds are encouraged to mitigate the inherent risks within their organizations to keep the premiums affordable. The same principle applies to physicians and hospitals. If ‘safety’ and ‘best practices’ that help avoid preventable medical errors are widely pursued, adopted and implemented as the new culture of a medical organization, claims and, consequently, med-mal premiums would indeed go down.

For some Iowa physicians and hospitals, it is true that med-mal premiums are increasing. Much of this will depend on the actual claims experience for each physician practice and hospital. Here is what we currently know about med-mal premiums in Iowa:

  • Over the last 10 years, the medical liability insurance industry has taken in $709 million in premiums from the Iowa medical profession, and paid out just $308 million in combined losses and expenses. Stated another way, the med-mal insurance industry has $401 million in surplus premiums. (Source: NAIC Countrywide Summary of Medical Professional Liability Insurance – Calendar Years 2009 – 2018)
  • The average Iowa medical malpractice insurance premiums have increased 0% for Iowa doctors over the last 10 years. (Source: Annual Rate Survey, Medical Liability Monitor, October 2009-2018)
  • Over a 20-year period (1990 – 2010)*, only 1.73 percent of Iowa physicians were responsible for one-half of all the money paid out for medical malpractice in Iowa. Most of these physicians had multiple malpractice payments. If this small proportion of physicians were either ‘re-trained’ or ‘restricted’ from practicing in this same pattern of behavior, the claims could be cut in half. But only 16 percent of these doctors had reportable action – not even a slap on the wrist reprimand – by the Iowa Board of Medicine. About 10 percent had any reportable action taken against their clinical privileges by an Iowa hospital. Consequently, only about one-sixth of the 1.73 percent of physicians have had any action taken against their licenses – and only one-tenth of them have had any action taken against their clinical privileges. (Source: Robert E. Oshel, Ph.D., retired Associate Director for Research and Disputes for the National Practitioner Data Bank at the U.S. Dept. of Health and Human Services.)

*This calculation was made by Dr. Oshel in 2010 for each state, but has only been repeated since then on a national level only. The calculation is Dr. Oshel’s own independent, unpublished research using the NPDB Public Use File for reports information from www.statehealthfacts.org for the number of physicians in the state. This data was last updated using June 2019 data. According to Dr. Oshel, “the results for this almost 30-year period were very similar to what they have been for the 20-year period using the 2010 data. I would expect 30-year Iowa data also to be very similar.”

2. Tort reform reduces medical errors

The tort reform push in Iowa does nothing to address the root causes of why preventable medical errors occur in the first place. The medical establishment wishes to use hard caps to mitigate their claims and hold down their insurance premiums, but hard caps do not address or incent physicians and hospitals to provide safe care more effectively, through best practices.

After Texas implemented a hard-cap tort reform (passed in 2003), a University of Texas School of Law report years later (authored by Silver, Hyman and Black) stated that “Using standard patient safety measures, we find evidence that hospitals made more avoidable errors after the adoption of HB4 (name of reform).” This report, by the way, does an excellent job of detailing the actual subsequent outcomes of malpractice claims, healthcare costs, influx or exodus of physicians due to tort reform, and other issues that refute many of the arguments made by hard cap supporters.

A study by Black & Zabinski examined five states that enacted caps during 2003-2005 used standard Patient Safety Indicators (PSIs) that were available for at least two years prior to caps being implemented in each state allowing for comparisons later. When comparing data in the five states (Florida, Georgia, Illinois, South Carolina and Texas) to PSIs from previous years, and with other ‘control’ states, the authors determined:

  • “Consistent evidence that patient safety generally falls” after caps are passed.
  • “We find a gradual rise in rates for most PSIs after [caps were passed], consistent with a gradual relaxation of care, or failure to reinforce care standards over time.”
  • “We find evidence that reduced risk of med mal litigation, due to state adoption of damage caps, leads to higher rates of preventable adverse events in hospitals.”

(Source: Bernard S. Black and Zenon Zabinski, “The Deterrent Effect of Tort Law: Evidence from Medical Malpractice Reform,” Northwestern University Law & Economics Research Paper No. 13-09 (July 2014). http://ssrn.com/abstract=2161362.).

The ultimate question that Iowa lawmakers must answer is whether hard caps will reduce medical errors. Unfortunately, rehabilitation of health providers to provide better and safer care is not baked into this tort reform, and other states consistently prove this point. Eliminating financial deterrents for medical providers will only shield them from having accountability to their patients.

3. Tort reform will reduce healthcare costs

The Texas report does confirm one key initiative that physicians and hospitals supporters wish to have:  Hard caps through tort reform greatly reduces the frequency of paid med mal claims, in addition to sharply reducing total payouts.

But implementing hard caps will do little-to-nothing toward curtailing healthcare costs. Various national sources indicate that between 21 – 47 percent of healthcare costs are considered to be waste. This waste, which represents about $1 trillion in the U.S., comes from six categories:

  1. Administrative Complexity
  2. Overtreatment – includes excessive and inappropriate care
  3. Fraud and Abuse
  4. Pricing Failures
  5. Care Delivery Failures
  6. Care Coordination Failures

Many of the above problems exist due to inefficiencies in a poorly-functioning healthcare system. Tort caps are nothing but a small band aid to a much larger systemic problem that the medical establishment fails to meaningfully address. When using this information, the estimated annual waste in Iowa employer health premiums is $2,400 for single and $6,600 for family coverages.

A 2014 study by Black, Hyman and Paik, examined healthcare spending trends in nine states that enacted caps during the period, 2002-2005, and compared this with data from other ‘control’ states. The authors found:

  • “Damage caps have no significant impact on Medicare Part A (hospital) spending, but lead to 4-5 percent higher Medicare Part B (physician) spending.”
  • “[O]ne policy conclusion is straightforward: There is no evidence that limiting med mal lawsuits will bend the healthcare cost curve, except perhaps in the wrong direction. Policymakers seeking a way to address rising healthcare spending should look elsewhere.”

(Source: Bernard S. Black, David A. Hyman and Myungho Paik, “Do Doctors Practice Defensive Medicine, Revisited,” Northwestern University Law & Economics Research Paper No. 13-20; Illinois Program in Law, Behavior and Social Science Paper No. LBSS14-21 (October 2014), http://ssrn.com/abstract=2110656.)

The Texas study mentioned earlier found that “tort reform is unlikely to reduce overall healthcare spending, and could even lead to higher spending…that overall (healthcare) growth is driven primarily by rapidly rising costs for prescription drugs, and by healthcare providers, especially hospitals, charging ever-higher prices for doing much the same things as before.” The report found that “Doctors who fear liability may sometimes do more (conduct more defensive tests and procedures) but they may also sometimes do less (avoid risky procedures). Texas was among the higher spending states per capita before (tort) reform, and is among the higher spending states today.”

4. Tort reform will increase physicians in our state

If tort reform in Iowa is the solution to attract and retain physicians, we can learn from Texas and other states that have already implemented these reforms. A major finding from the Texas study revealed that “neither an exodus of physicians before the passage of HB4 nor an influx thereafter…Texas had a lower ratio of physicians to population than most other states before reform, and has a lower ratio today.”

Another study by Black, Hyman and Paik, examined physician supply in nine states that enacted caps during 2002-2005, and compared this data to other “control” states. The authors found:

  • “No evidence that cap adoption predicts an increase in total patient care physicians, in specialties that face high med mal risk (except plastic surgeons), or in rural physicians.”
  • “[W]e find no evidence that the adoption of damage caps increased physician supply in nine new-cap states, relative to twenty no-cap states.”
  • “Physician supply does not seem elastic to med mal risk. Thus, the states that want to attract more physicians should look elsewhere.”

(Source: Bernard S. Black, David A. Hyman and Myungho Paik, “Does Medical Malpractice Reform Increase Physician Supply? Evidence from the Third Reform Wave,” Northwestern University Law & Economics Research Paper No. 14-11; University of Illinois Program in Law, Behavior and Social Science Research Paper No. LBSS 14-36 (July 2014) http://ssrn.com/abstract=2470370.)

A suggestion to Iowa lawmakers would be to find new approaches to support effective strategies ensuring the Iowa Board of Medicine has all the resources it needs to take action when confronted with physicians who repeatedly have malpractice claims and payments brought against them. Self-policing of doctors can be effective when appropriate culture allows for this to happen. Additionally, Iowa hospitals should be encouraged to ensure that peer reviewers take needed actions. As mentioned earlier by Dr. Oshel, restricting or retraining this small proportion of physicians would be most beneficial to patients and other doctors practicing within Iowa.

Another issue that was raised by the OB/Gyn physician who wrote the DMR Op-Ed is rural communities and their hospitals. It is true that rural hospitals are financially struggling. Rural providers are not seeing as many patients as they have in the past, and because of an older patient mix, they are increasingly being paid at reduced amounts by public payers, such as Medicaid and Medicare. This requires a host of other difficult decisions and solutions, but this discussion and any subsequent solutions goes well beyond med mal issues. This is not only an Iowa problem, it is a national concern.

5. Tort reform reduces defensive medicine

It is true that defensive medicine – a practice by which physicians and hospitals perform additional tests to help mitigate potential lawsuits – is a problem. But as mentioned earlier, there are six primary categories that are extremely wasteful in our healthcare system that require major reform.

A 2010 paper by Mello et al. attempted to determine the cost of defensive medicine in the U.S. The authors took great effort to review other reports on this topic, but conveyed language from the U.S. Congress Office of Technology Assessement, stating, “that defensive medicine is highly prevalent, [but] reliable estimates of its cost are notoriously difficult to obtain.” Mello et al. ventured to estimate that the overall health system cost of defensive medicine to be $55.6 billion in 2008 dollars, approximately 2.4 percent of total national healthcare spending in 2008.

The argument that defensive medicine is expensive has merit, but we must not be led to believe that it makes up a large component of high healthcare costs – it does not. It is important to keep our eye on the true drivers of healthcare costs and the associated waste.

Summary

I do not support unwarranted lawsuits that result in large payouts. But I will say, especially with this particular issue, there are two sides to this story. Much too often, the lobbyists who represent the medical establishment are powerful, vocal – and extremely well-financed – to promote their own self-interests at the public’s expense. They will use this particular issue to leverage the argument about why we have skyrocketing health costs in our state and country. I wish it were that easy.

Iowa and the U.S. does indeed have a “health care crisis.” But it is not because of malpractice costs…which is merely a symptom of a much larger issue. Medical errors are the third-leading cause of death in the U.S.  Based on my analysis in 2016, “Silently Harmed’ in Iowa,” using Iowa and national hospital data, an estimated 2,400 Iowans die and 85,000 are harmed in Iowa hospitals by preventable medical errors each year. Even if the actual numbers were a quarter of these estimates, we would still have an absolute crisis on how care is performed in our state and country. It must be said that estimates are necessary because medical providers often fail to report medical errors, which would be a useful process to gauge future improvement initiatives.

True reform should not come in the form of med mal caps, but rather, how Iowa medical organizations practice and behave in the delivery of medical care. Additionally, the small proportion of Iowa physicians who make up about half of malpractice costs must be held accountable, primarily through the authority and appropriate action of the Iowa Board of Medicine.

Former Senator Daniel Patrick Moynihan said it quite well, “Everyone is entitled to his own opinion, but not to his own facts.” This discussion represents the other side of what we are being led to believe as truth.

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Paid Parental Leave – Gaining Traction?

Paid Parental Leave - Gaining TractionOne important employee benefit that I increasingly hear about, both in Iowa and nationally, relates to paid parental leave.

This topic made headlines this past December when paid leave was included for federal civilian workers in the National Defense Authorization Act for Fiscal Year 2020. This Act provides up to 12 weeks of paid parental leave in connection with the birth, adoption, or foster care placement of a child for employees covered by the Family and Medical Leave Act (FMLA). This new law applies to leave taken in connection with a birth or placement occurring on or after October 1, 2020.

Paid Parental Leave Offered by Private Employers

The United States is the only industrialized country without a nationwide guarantee of paid parental leave. Private employers in the U.S. can voluntarily offer paid leave benefits. One national survey found that 40 percent of employers offered a standalone paid parental leave plan for employees, and of those, 63 percent offered full wages during the entire leave duration.

As of March 2019, the U.S. Bureau of Labor Statistics reported that 18 percent of all workers have access to paid family leave while 35 percent of the highest wage earners have access. Part-time employees are less likely to enjoy this benefit. Additionally, larger organizations with over 500 employees and certain industries are more likely to offer access to paid family leave.

Paid Leave in Iowa?

In Iowa, data about the prevalence of paid parental leave offered by private Iowa employers is seemingly difficult to find. Perhaps it is available, but this information does not appear to be easily accessible. Overall results from our 2019 Iowa Employer Benefits Study© revealed that 73 percent of Iowa employers offered ‘maternity leave’ while 51 percent offered ‘paternity leave.’ However, the survey questions did not specifically relate to whether or not these benefits were ‘paid’ by employers – so clarifying research is needed. (More about this at the end of this blog)

Only a few states mandate paid maternity leave. Iowa is not one of them. For women employees in the state of Iowa, Iowa law (Chapter 216 of the Iowa Code) prohibits employers with four or more employees from denying a woman’s request for up to eight weeks of unpaid leave to address a physical disability due to pregnancy, childbirth or related medical outcomes. There is no requirement that a woman works a previous amount of time or hours prior to unpaid leave. Again, employers can voluntarily pay for this leave.

The Family and Medical Leave Act (FMLA)

The FMLA requires covered employers with at least 50 covered employees (among other criteria) to provide up to 12 work weeks of unpaid leave in a 12-month period for new parents after the birth or adoption of a child. The focus is on job protection, not income replacement. The FMLA is gender neutral, but in order to qualify, the employee must meet certain requirements.

An estimated 60 percent of employees have access to leave under FMLA. Generally, employees who work for employers with under 50 employees or work part-time schedules do not have access to FMLA. But in Iowa, as mentioned earlier, covered employees have unpaid coverage up to eight weeks if employed by employers with four-plus employees.

Proponents of Paid Leave

Proponents of paid leave believe that the new federal employee law should serve as a guide to private employers. However, federal employees do not receive paid leave while caring for a sick family member or recovering from a serious illness. Advocates for paid leave desire a broader approach to include both paid family and medical leave that would cover time off for illness and caregiving.

Proponents argue that paid leave boosts morale and productivity, in addition to labor force attachment to the employer. Mothers who receive maternity leave return to their employers and are more likely to stay. Having a paid parental leave policy can be a powerful tool to attract job seekers, especially when a majority of employers do not currently offer paid leave. Currently, paid family leave on a national basis is gathering interest by both Republicans and Democrats, specifically through the House Ways and Means Committee on Capital Hill. The big stumbling block, however, is how such a program would be financed.

Summary

Because paid parental leave remains a mainstream discussion that employers wish to learn more about, and given the lack of Iowa-specific data on the prevalence of this important benefit, our upcoming 2020 Iowa Employer Benefits Study© will address this topic with Iowa employers. From this, we will learn how popular (or not) this benefit is, and about the many components found within paid leave, such as the number of weeks offered and percentage of pay. Additionally, we also hope to discover why employers may not consider offering paid parental leave in the future.

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