Hospitals, insurers should end hide-and-seek with prices

June 14, 2013
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What will it take the stop the maddening situation with health care prices?

A massive change in attitude, policy and even laws across all state governments and all players in the health care system.

That’s the prescription given by well-known health reform advocates Dr. Bob Kocher and Dr. Ezekiel Emanuel published an interesting opinion piece last month in the Annals of Internal Medicine titled “The Transparency Imperative.” The imperative is a call for the disclosure of all data on price, usage and quality of health care—unless there is a reason in some circumstances not to do so.

This is a controversial idea, because health care providers fear that the public does not understand how health care prices are determined. Few people on the planet do, actually.

That’s because hospitals, doctors and health insurers have been playing a game of hide-and-seek with the public on health care prices--and they've been doing it for at least 30 years.

For decades, hospitals, doctors, health insurers and government programs such as Medicare have spit venom at each other rhetorically, winked at each other in their contract negotiations, and then passed on a bill to the general public that kept rising nearly every year at twice the rate of inflation.

“There is no method to this madness. As we went through the years, we had these cockamamie formulas,” William McGowan, then-chief financial officer of the University of California, Davis, Health System, told the Wall Street Journal in 2004. “We multiplied our costs to set our charges.”

Princeton University health economist Uwe Reinhardt cited McGowan’s comment in a 2006 journal article titled, “The Pricing of U.S. Hospital Services: Chaos Behind a Veil of Secrecy.”

The games hosptials and doctors play with Medicare are fairly straightforward. The federal agency that runs the health plan for seniors publishes fee schedules for the various parts of Medicare.

These fee schedules are indecipherable to a lay person, including myself. But hospitals and doctors employ an army of financial experts and consultants, who comb through the schedules, identify which areas are ripe for profitable services, and then counsel the health care providers to expand in those areas.

For most of the 1990s and 2000s, Medicare paid well for about four main things: heart surgery, neurosurgery, cancer care and orthopedics. The list matches up pretty well with all the health care advertising you see, and the various specialty hospitals that were built around Indianapolis—and the nation—in the past 15 years.

With private insurers and employers, the games are even more elaborate. Employers and their employees have almost always preferred the broadest network of providers and the deepest discounts. And health insurers, especially WellPoint Inc. and its Anthem subsidiaries, have delivered just what their customers asked for.

But there have been two problems. First, employers’ demand for broad networks takes away insurer’s strongest bargaining chip—excluding a health care provider from its network. And few employers ever seemed to ask, Discount off of what?

The discounts were for many years calculated off of a hospital’s chargemaster. So hospitals simply hiked the prices on the chargemaster every year before sitting down at the negotiating table. If they hiked prices by 10 percent and then gave a 5 percent larger discount to an insurer, the hospital still came out ahead.

Insurers got wise to this charade and began inserting in their contracts limits on how much hospitals could hike their chargemaster each year. But hospitals got around those limits. They would hold flat or even cut the prices of services that they rarely performed—while aggressively raising the price on services they performed a lot.

Because the chargemaster was not weighted based on the volume of each kind of procedure, this maneuver kept prices lower on paper, but in actual fact, raised them for the services hospitals were actually doing.

So larger and more sophisticated insurers moved to negotiate contracts based on diagnosis-related groups, or DRGs—a classification system for hospital procedures based on the severity of each patient's symptoms. Each DRG is assigned a dfifferent price.

But there are hundreds of DRGs. Insurers would focus on a few that were costing them a lot of money at a particular hospital—say, heart surgeries at a hospital that performed a lot of them. So the hospital might moderate its price increases on heart surgeries for that one insurer, but the hospital would then raise prices on other procedures that were not in the insurer’s crosshairs.

As hospital systems merged, they could often gain an advantage on pricing. Health insurers negotiate contracts with each individual hospital facility, even when they are all owned by the same entity.

Health insurers often were less aggressive when negotiating with smaller hospitals, so when a larger hospital acquired that small hospital, it would benefit from its higher prices for a few years.

Or if an acquired hospital had a worse contract, the acquiring hospital could bring the acquired hospital under the contracts it had with its other hospitals, thereby gaining an advantage from higher prices.

If you've ever wondered why prices can vary so dramatically from hospital to another, even in the same neighborhood, these are the reasons why.

“There was all kinds of gaming,” said one local health care executive. “It’s all negotiating power positioning, how much negotiating leverage you have.”

Contracts between hospitals and health insurers are in flux right now, with Medicare and private insurers trying to pay hospitals based on patient health outcomes, not merely based on volume of procedures. Also, employers, individuals and insurers are hinting that they are willing to exclude health care providers from their networks.

But Kocher and Emanuel don’t think those changes will be enough. They want three key things to happen to bring the health care games to an end:

1. Require all payers—that’s private health insurers such as WellPoint and government programs such as Medicare—to make their medical claims data publicly available, although stripped of patient-identifying information.

2. Encourage all health care providers—hospitals, doctors and nurses—to use these payer data to give every patient personalized pricing information before he or she receives care.

3. Make total price information available to health care providers who are working in contracts that reward them for reducing health care spending.

They also think health insurers and employers should make use of services like Castlight Health, which I wrote about in January. Kocher is on the board of Castlight.

What do you think about these proposals? Are they feasible? Will they have any real effect on the rapid growth of health care prices?

  • Pricing games
    Just recently had blood work done a lab. Lab charge was $449.00; insurance negotiated price was $48.00. 'Writeoff' amount was $401.00--not complaining about this but just an example of the pricing games being played. Either the lab is losing a horrendous amount of money or (more likely) have bogus 'list' prices for procedures. Wonder who pays the $449.00?
  • "Don't Get a Physical"
    Recently went in for a physical -- totally covered by insurance. However, my doc asked if a prior issue was still affecting me, so I mentioned a refill on my script (I could have called it in and had the script filled). As a result of this component of my physical, the charge to me went from $0 to $75! I can't afford any more "free" physicals...Thank you St. Vincent
  • Any wonder?
    Is it any wonder that these games are played? ObamaCare and social medical programs want to reduce costs by limiting reimbursements to doctors and hospitals. Soon, health care facilities and providers will only offer care to those with private insurance or cash (some already do). If you think health care is free, think again. It's expensive and with all the social freebies provided by yours truly and other hard working taxpayers, those who can foot the bill will be expected to. When Medicare and Medicaid patients pay less than cost, someone has to make up the difference. It's simple math. This is socialism, thanks to the President too many voted for (twice). If doctors and hospitals can't make a reasonable profit, they will cease to exist. Perhaps that is next. Take care of yourself -- we're not far away from becoming Canada!
    • Thanks for the comments
      Thanks for your comments, Elaine. I always appreciate it when Seinfeld characters drop in to The Dose. Now if I could just get Kramer to read and contribute, that would really be something. You make a good point about hospitals' need to cost shift, due to low and lowering payments from Medicaid and Medicare. Are you saying that cost-shifting means that hospitals cannot be transparent about their prices to privately insured customers?
    • Cost shifting
      These games have been played for years. It's been the folks that have insurance covering the hospital's losses from those without insurance. Time to make everyone accountable.
      • Medicare vs. Obamacare
        Certainly, the current President is attempting to expand the government program...but Medicare has been around since the 1960's, LBJ signed it into law...not a single President nor Congress, regardless of party affiliation, has made much of an attempt to reform it or replace it in the interim...if you want to blame Obama for expanding it, that's fine Elaine, but for you to suggest that the reason health care and the cost of it is in crisis mode is because the people elected Obama twice is ludicrous...this article is about how the private providers, Medicare, and the hospitals have been gaming the system for 30 years...if the program is socialism, then it has always been socialism...That means that Nixon, Ford, Reagan, and both Bushes, as well as the Democratic elects, have had their shot at calling it what it is, and advocating for change, or a different system. If you want to take a shot at the current President for his expansion of a program that likley will make accesssing health care much more cumbersome and worse for all citizens (except the 1%) in its attempt to give everyone access, then that is completely fair...have at it. But to suggest that Obama is somehow more culpable than his predecessors, or the do nothing Congress, is simply silly, and completely ignores history.
        • nnnnnNEWMAN!
          Newman, I'm not sure Seinfeld would appreciate your dropping by, but I appreciate your comments. Jim, thanks for that perspective on the long-running and bipartisan support for Medicare.
        • I just want a ballpark price
          For years I have put up with going to doctors and getting blank looks when they recommend a treatment and I ask "How much is that going to cost?" They can't answer me. The real answer is that doctors truly don't know, even the ones that aren't associated with major hospital practice groups like IU Health. They don't know what they themselves charge, because they need to quiz me on my insurance first (and the doctors refer me to their billing office anyway) and often submit to the insurance company to get an "estimate" in order to determine what they will charge. On the other hand, my dentist has a set price list and he can tell me exactly what they charge for a particular service or procedure. If a person doesn't have dental insurance, they get a 10% discount and a reasonable payment plan. I was curious and asked as to whether the dentist has high default rates on his straightforward and generous terms, and he said "hardly any." Why can't doctors be more like dentists?
        • Seriously???
          Elaine Benes - what bubble are you living in? You sound like an angry nurse that has absolutely no idea of how much your employer is truly profiting! Providers court Medicare because they make a tremendous amount of profit from services provided to those patients. I'll concede on the Medicaid issue, but Indiana recently agreed to increase those amounts so that may be a non-issue in the future. Do you honestly believe that all of the hospital construction going on, in Indiana alone, is taking place due to financial losses? NO! The non-profit organizations actually have higher profits than the for-profit organizations. Wake up and inform yourself!!
          • Now, now
            Make the costs transparent. Let consumers shop for the best deal. I think Elaine's point isn't that Obama created this environment. It is that he sold the working class out to the 'give-me-more' voting block. One class is shrinking, and with more presidents like this one, the other will grow. Unhealthy ne'er-do-wells are timeless, and there will always be someone appealing to them with more chicken's in yet more pots. That go back far enough for you Jimbo? Feel justified in your vote for our current Executive? It is my hope that whatever service you might provide is someday made free to anyone who might want it. That you are compelled to give it. And if you don't do it flawlessly, you can be sued for millions. Primum non nocere
          • Spoken like...
            an Obama socialist. That's just what they want you to think (say). When did "profit" become a dirty word? I am not in the health care field but I do have a doctorate degree. Certainly, I know enough to see that if physicians and hospitals cease to earn a respectable profit (GASP!), they will cease to exist. One way U.S. citizens could lower health care costs is by eating right, exercising, ceasing smoking and otherwise taking care of themselves. Instead, increasing numbers eat, drink and smoke themselves into an early grave and demand the best health care -- whether they can afford it or not. I know many people in the health care industry and the abuses by patients and the government are just as startling but rarely addressed. I'll tell you one thing: I wouldn't invest the time and money into medical school under the present system. Would you?
            • Transparency Elaine...
              President Obama might go down as the worst president since Warren G Harding, but he is only exploiting the voter and expanding the problem. Would you buy a house not knowing what it will cost on the day of signing? A cheeseburger? A car? Yoga togs from LuluLemon? Why can't consumers know what these profits buy? Look at the parking lot at the end of the day. It's all nurses, housestaff, and support staff. The bean-counters and admin staff are long gone. Hospital care is a shell-game and we aren't holding the shells. The wrong people are profiting and those doing the actual work (staff) and paying the bills (you) haven't the foggiest what a tylenol costs if a nurse hands it to you. Its expensive not because it requires a special license or talent. It's expensive because you are un-uniformed as to the cost. And yes, finally, if one is not paying for their personal healthcare, you won't ask why tylenol costs $20. No incentive. Does starbucks have a need-based coffee? My caffeine meter is low. Oh wait, here's a cost sheet. Dang. Better go to Hubbard and Cravens. Theirs is CHEAPER, and BETTER.
              • Preaching to the choir
                Galan, I agree with all of your comments. You're absolutely correct that Obama is giving the majority voter ("Give me more, give me more...") just what they want -- benefits at the expense of the idiot working man (and woman). Can you blame these voters for wanting all they can get for "free?" Those on the public dole shouldn't even be permitted to vote on how to spend other people's tax money -- but that is another topic for another day. What I am alluding to is where is the outrage over patients who go to the hospital for a scratch or headache (or because they need a narcotic fix)? Where is the outrage over expensive tests performed on illegal aliens who have no business being here in the first place? These all add to the price of health care, yet we smile and turn the other cheek. I think a menu of services with fixes prices is great, but what menu do you give the person who has "free" healthcare (likely in addition to social security disability and any other government program they can lie their way into)? And, I agree that H&C coffee beats Starbucks. In fact, I need one now.
              • smithinson
                i agree Obamacare is going to drive out all the doctors.Pretty soon we will not have enough doctors to care for everyone,like Canada. You have to go on a waiting list just to see a doctor or get a test. I just saw a program on PBS called Empowering Minds with Martin Sheen It talked about how we are not producing enough primary care doctors to keep up with population. This article touches on the cost. These doctors are losing money and spending more time hagling to get paid from medicare or insurance companies. They are getting out of the business. This shortage will be an epidemic in a few years.

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