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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, cheap drugs, 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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Three Key Health Plan Comparisons Between Iowa and U.S.

Three important health plan components that are first and foremost on the minds of employers when assessing their annual plan offerings, include: health premiums, employee health coverage contribution and deductibles employees are required to pay. It is natural, therefore, to compare Iowa averages to national norms, thanks largely to the Kaiser Family Foundation’s Employer Health Benefits Survey, which was just released on September 25. Kaiser Family Foundation (KFF) is a nonprofit organization based in San Francisco, CA.

Brief Survey Background

Since the year 1999, the KFF has been performing their national survey of employer health plans, the same year that we began our Iowa Employer Benefits Study©. For the record, there was no particular reason that 1999 was the base year used by KFF and our organization, but speaking for myself, I’m happy that we can use the annual KFF study as a measuring stick to our statewide annual results.

Before I share the graphic comparisons, I must comment that surveys can vary from one another using slightly different methodologies, and there is no exception with the two studies being compared in this blog. The largest difference is that KFF is a national survey, which in 2019, randomly-selected 2,012 non-federal public and private organizations with three or more employees. Additionally, KFF asked another 2,383 organizations a single question about offering health coverage.

The Iowa Employer Benefits Study© is a statewide-only survey. Each year, we seek to have at least 1,000 organizations participate.  These organizations are randomly-selected to ensure that results will reflect the overall population of organizations within Iowa. Although we survey employers with at least two employees, we do not actively randomly-select organizations with 2 to 10 employees. During the survey process, however, if respondents fall into this size category due to downsizing, we will include their data within our report.

It is important to note that Iowa organizations can also be surveyed by KFF, but the number is considerably fewer than our goal of 1,000 organizations. In 2019, for example, KFF surveyed 612 organizations in 12 midwestern states, including Iowa, which averages out to 51 organizations for each state. This Midwest average is consistent with prior KFF surveys.

Health Plan Premiums

Since we released our study in early August, we learned that Iowa employer-sponsored health premiums increased by 7.1 percent during the past year, which is slightly higher than the KFF national average increase of 3.4 percent for single and 5 percent for family coverages. One explanation for this variance between surveys can be that KFF may have compared the actual premium change from 2018 to 2019 – AFTER plan design changes were made. Our survey, however, asked Iowa employers to share their rate adjustments (e.g. increase, decrease, no change) during the past year BEFORE plan design changes were made – subtle difference, but important.

The annual KFF single premium in 2019 is $7,188, which is merely $171 higher than the average Iowa single premium of $7,017. Statistically speaking, the single premiums are in a dead heat with each other. As for family premiums, the KFF premium is now at $20,576, which is $1,241 higher (or 6.4 percent) than Iowa’s $19,335. We often hear that Iowa’s medical costs are lower than the national averages, which is a true statement. However, it does appear with the latest data available, Iowa is inching closer to the national premium averages.

Since 1999, health premiums from both studies show very similar results when it comes to growth. Below is a graphic that superimposes the KFF premiums to the annual Iowa history of single and family premiums. The premium increases are staggering for both, but equally horrific is that the Iowa premiums (both single and family) have increased slightly higher compared to the national norms (denoted in green font).Employee Contribution as a Percentage of Premium

As the health premiums change each year, usually through increases, employers are forced to make decisions on how much to shift this increased cost to employees, most often through health plan design changes and having the employee assume more of the premium burden. One way to measure just how much the employer wishes the employee to assume is illustrated in the graphic below.

From this graphic, Iowa organizations and their national counterparts are nearly identical as to the percentage of the total premium that is assumed by employees for both single and family coverages. For single coverage, Iowa employees pay 19 percent of the total single premium, while employees elsewhere contribute 18 percent of the single cost. As for family coverage, employees in both Iowa and national organizations identically pay 30 percent of the total family cost.Single Health Deductibles

KFF’s report shows that, on a national basis, the average single deductible is $1,655, which is $537 lower than the Iowa average of $2,192. Part of this difference may be explained in the composition of small employers participating in each survey. As we know from previous results, smaller employers are less likely to control their health costs when compared to larger, more sophisticated employers – employers that have more tools at their disposal to keep their rates down (e.g. administration costs, self-insuring, etc).

Perhaps a larger mix of smaller employers in the Iowa study could very well influence the overall deductible averages being higher – however, this is pure speculation. NOTE: Family deductibles were excluded in this comparison due to insufficient historical data from KFF.

The following graphic displays how Iowa single deductibles compare to national norms.Conclusion

In past years, the KFF results most always demonstrated higher national health premiums compared to Iowa. However, despite higher premiums, employees in the U.S. paid, on average, a similar percentage for their health premiums than Iowans, except for family coverage, where they paid a lower percentage compared to Iowans. In 2019, however, Iowans have ‘regressed to the mean’ and now appear to be paying a similar percentage of the premium for both single and family coverages.

Despite having lower premiums, Iowa workers are asked to pay higher deductibles compared to their national counterparts, which makes paying for medical services a bit more challenging each year. Tracking these key components are vital to learning how Iowans fare with the rest of the country, and it appears that Iowa is becoming ‘more the norm’ in some of these components.

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