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Cost-Shifting of Hospital Prices to Private Payers

Many of us are lulled into the rhetoric coming from hospitals and health systems that they must increase their prices for private payers because of inadequate reimbursements from public payers, such as Medicaid and Medicare. To some degree, this may well be the case. After all, hospitals and health systems need to generate enough revenue to offset costs to keep their doors open.

But this argument may not be as iron-clad as we were led to believe. Case in point: A recent report by the RAND Corporation about hospital prices paid by private health plans and how they compare with Medicare payments.

Findings of RAND Corp. Study

This is the third consecutive year that RAND Corp. has analyzed medical claims to determine how much private insurers pay for inpatient and outpatient hospital services. The most recent year of claims data analyzed was from 2018, which is about a two-year data lag.

Due to lack of medical price transparency, the sad commentary is that for private hospital prices to be discovered, hospital claims must be thoroughly analyzed to determine the ‘game of horseshoes’ on the prices being charged and paid by private health insurers and large self-funded employers who voluntarily share their claims data with RAND. In return, RAND then compares these prices to similar medical procedures that are paid to the same health providers by Medicare. With this information, private payers can attempt to negotiate better deals with the provider community.

This most recent report concluded that private insurers paid hospitals on average 247 percent of what Medicare would have paid for the same service in 2018. This gap is up from 230 percent in 2017 and 224 percent in 2016. To put this another way, if private payers from this study had paid hospitals at Medicare rates, they would have paid $19.7 billion less between 2016 to 2018 – a potential savings of 58 percent.

Here’s the Kicker

The RAND study’s lead author, Christopher Whaley, indicated that if hospitals are truly up-charging based on being shorted by Medicare and Medicaid, he would have expected to see hospitals with more Medicare/Medicaid patients charging private payers more, and those with fewer public patients charging less. But he found no correlation. His assessment is that “…sometimes hospitals charge high prices because they have the reputation or the quality or the market dominance to charge high prices…”.

All good reasons on why hospitals desire to keep prices opaque from private payers.

In addition to prices, the RAND Corp. also determined whether higher prices correlated with higher CMS star ratings and better safety scores from The Leapfrog Group. The findings show that high-quality hospitals with low and medium prices do exist, and it’s up to employers to implement tactics like narrow networks or reference pricing to steer employees to these high-value facilities.

Criticism by the American Hospital Association (AHA)

The AHA issued a Fact Sheet in January 2020, indicating that in 2018, Medicare paid hospitals 87 for every dollar that hospitals spent treating Medicare patients. For Medicaid patients, the AHA said that hospitals received 89 cents.

As frequently as the RAND Corp. releases studies on private hospital prices, the AHA equally releases statements refuting these findings.  AHA Executive Vice President Tom Nickels recently stated that the RAND report “again perpetuates erroneous suggestions that Medicare payments should be used as a benchmark for private insurers…”. Nickels also suggests that the claims analyzed represents a “handpicked sample of employers and insurers” that are minuscule compared to the entire hospital claims in the U.S.

Nickels does have a point, yet the AHA does little to nothing to equip private payers with information needed to determine whether or not the money being paid to hospitals are reasonable and demonstrate high value. But why would they? The AHA represents hospitals, desiring to perpetuate their members’ best interest at the expense of private payers who cover nearly 150 million Americans enrolled in employer plans or through individual market insurance.

Quite frankly, insurers are not immune from this problem either. They can avoid gag clauses that require secret prices and arrangements with hospitals and health systems. Employers, at a bare minimum, expect transparent behavior from their insurers and must insist that insurers eliminate backroom ‘deals’ with health providers.

The opaque pricing methods we have historically allowed must be relegated to the past. It’s time to open the doors and turn on the lights to expose the truth. Past pricing practices, convenient for some but detrimental for most, must be replaced with honorable and sensible pricing practices.

This is my take on the latest RAND report.

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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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Presidential Candidates: Take the Pledge to Serve ‘We the People’

This Op-Ed was published by the Des Moines Register on August 21.

I write this not as a Republican, nor as a Democrat – I’m politically agnostic. When it comes to addressing healthcare, a critical election issue, Iowa voters have the first crack at drilling down and asking presidential candidates for details on how costs will be meaningfully lowered, who will be covered, what will be covered, how it will be paid, and how higher-quality care will be delivered consistently to all populations.

The candidates we eventually elect must thoroughly analyze the details of their plans, including the possibility of unintended consequences that will invariably result. Acknowledging the pros and cons of the plan they support is both honest and crucial.

For presidential candidates to successfully make it out of Iowa and live to compete in future primaries and caucuses, Iowans must require each to articulate the specifics of their plan. Generic responses of supporting “Medicare for All” or “Single-Payer” does little to inform voters, other than allow candidates to merely checkoff one of many issues they support. In healthcare, the devil is definitely in the details.

During the Democratic debates this summer, many candidates singled out insurance and pharmaceutical companies as being responsible for the cost predicament we have across the nation. In fact, Sen. Bernie Sanders, (I-Vt), pledged to reject any donations over $200 from political action committees, lobbyists and executives of insurance and drug companies. Sen. Sanders called on other Democratic candidates to do the same.

Per Sanders’ pledge, “Candidates who are not willing to take that pledge should explain to the American people why those corporate interests and their donations are a good investment for the healthcare industry.”

This pledge, although well-intentioned, does not go far enough. The narrative that insurance companies and pharmaceutical manufacturers are the lone villains is grossly naïve because it excludes other major contributors to the cost problem – hospitals and physicians.

Healthcare prices in the U.S. are considerably higher when compared to other industrialized countries, and a large part of this comes from those providing this care. In fact, providers do not want their negotiated fees with private payers to be transparent, largely under the guise that once prices are publicly known, costs would go even higher because lower-paid providers may want better deals through higher prices. This is merely a convenient approach to keep prices opaque and largely unknown. This status quo only benefits the intended stakeholders, not most Americans.

According to MapLight, a nonpartisan research organization, the American Medical Association and the American Hospital Association are the fifth and sixth largest lobbying spenders over the past decade. In the first half of 2019, the AMA has spent $11.5 million on lobbying while the AHA has spent $10.2 million. The AHA amount is equal to the combined lobbying contributions of three large insurance organizations: America’s Health Insurance Plans, Blue Cross and Blue Shield Association and UnitedHealth Group. Since 2008, the AMA has spent almost $228 million in lobbying, while the AHA spent over $205 million.

Sen. Sanders and all candidates (congressional included) should pledge to avoid donations and other influential contributions from all key healthcare stakeholders, including the AMA and AHA. Candidates must distance themselves from external influences that undermine a system that needs to be designed for the people, not by special interests.

These three foundational healthcare cornerstones – cost, coverage and quality – are the overriding factors that should determine whether our reformed healthcare system is run solely by the government, as some “Medicare for All” proposals tout, or through public-private reforms that improve or replace the existing Affordable Care Act (ACA).

Candidates of all parties – do the right thing – rid yourselves of conflicts of interest and represent all Iowans and Americans.

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