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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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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.

Wellness Programs – New Study Confirms Cautioned Approach

During the past seven years, I have written a fair number of posts regarding wellness programs offered by employers. The core message of all blogs suggests that employers must have realistic expectations about what wellness initiatives will or will not do within the workplace.

A recent randomized clinical study published in JAMA is yet another reminder for employers to have tepid expectations when trying to keep their employees happy, healthy and less likely to incur more health costs. The study found that workplace wellness programs do not cut healthcare costs for employers, reduce absenteeism or improve the health of employees.

From the University of Chicago and Harvard, researchers used a large-scale approach that was peer-reviewed and included a more sophisticated design when analyzing BJ’s Wholesale Clubs. BJ’s has about 33,000 employees across 160 clubs. This analysis compared 20 randomly-assigned clubs that offered wellness programs with 140 BJ’s clubs that did not.

After 18 months of timeline analysis, this study revealed that wellness programs did not result in health measure differences, such as: improved blood sugar or glucose levels, reduced healthcare costs or absenteeism, or impacted job performance in a positive manner. In other words, employees with a wellness program did not experience reduced healthcare costs and other desired affects. I suppose one could argue that a year and one half was not enough comparison time to develop these conclusions.

One of the authors of this study, Katherine Baicker, dean of the Harris School of Public Policy at the University of Chicago, put it quite succinctly in a Kaiser Health News article: “[But] if employers are offering these programs in hopes that health spending and absenteeism will go down, this study should give them pause.”

What are your expectations about workplace wellness? Do you believe such programs, when appropriately and thoughtfully implemented, will greatly mitigate your healthcare costs, improve workforce productivity and reduce absenteeism? Maybe you feel these programs are a waste. From our 2012 Iowa Employer Benefits Study, employers shared their perceived ‘return on investment’ on the programs they currently had in place.

According to a 2013 “Workplace Wellness Programs Study” by researchers at the RAND Corporation, these programs only have a modest effect. This runs contrary to claims made by wellness firms that sell workplace wellness programs to employers. The report found that people who participate in wellness initiatives lose an average of only one pound a year for three years. Another finding is that employee participation in such plans “was not associated with significant reductions in total cholesterol level.” Smoking-cessation programs show some potential, but only “in the short term.”

Most likely, both skeptics and supporters of wellness initiatives will find ammunition to support their cause. Workplace wellness programs have grown to an $8 billion industry in the U.S., primarily as a direct result of rising employer health insurance costs.

This latest report may help stabilize any pre-conceived lofty expectations each of us may have about the benefits of workplace wellness programs. However, it must be noted that some employers have found value in these programs.

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