Will hospitals' higher facility fees survive health reform?

July 21, 2014
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When Anthem Blue Cross and Blue Shield put together its narrow network for Obamacare insurance policies, its price of admission was for hospitals to take a knife to their facility fees.

Why? Because in health care, that’s where the money is.

If you’ve never heard of a facility fee, you’re not alone.

But if you’ve ever had surgery, any kind of imaging scan or even just a blood test, then you’ve paid one. It’s the part of the bill that pays for the building where your procedure took place, as well as all the staff employed there. Physicians are typically paid separately for their work in treating or diagnosing you.

One of the open secrets in health care is that hospitals are paid facility fees that are quite a bit higher than independently owned (including physician-owned) health care facilities.

A recent study by the Massachusetts-based Workers Compensation Research Institute showed that hospital-owned outpatient facilities in Indiana were paid 5 percent to 20 percent higher, just for the use of the facility, for knee and shoulder arthroscopy procedures in 2011 than independent surgery centers received for the same procedures.

Those are much milder differences in price than was the case when I looked at the cost of blood tests a few weeks ago. But when we’re talking about expensive surgeries the differences in dollar amounts are much greater.

According to the WCRI study, private health insurers in Indiana in 2011 paid hospital-owned facilities 20 percent more on average for common knee arthroscopies than independently owned ambulatory surgery centers. That translated into $1,499 per patient.

For shoulder surgery to repair a rotator cuff, hospital-owned facilities were paid 13 percent more on average than independents—a difference of $1,729 per patient.

And for shoulder surgery to relieve inflamed muscles in the should blade—something called decompression of subacromial space—hospital-owned facilities were paid 5 percent more for use of their facility, a difference of $567 per patient.

When you see those differences, you can understand why Anthem asked (I’m told) for a 25-percent reduction to facility fees from the hospital systems that were included in its Obamacare network.

Hospitals' facility fees for outpatient procedures have also been targeted for reduction by the federal Medicare program. That's because, while inpatient facilities do face higher costs than outpatient facilities—namely, they have to make large buildings with lots of expensive equipment and expensive staff open to see patients 24-7—there appears to be little reason why an outpatient center that operates 9-5, Monday through Friday needs to receive higher payments than similar facilities that have non-hospital owners.

(Hospitals argue that they lose money on many inpatient procedures and, with fewer and fewer patients receiving care as inpatients, they need the higher payments for outpatient procedures to subsidize their inpatient costs.)

In the Indianapolis area, the hospital systems that joined Anthem's narrow network for the first year were Community Health Network, Eskenazi Health and the Suburban Health Organization hospitals.

I’m not sure what kind of price reduction they ultimately settled on. Overall, Anthem was seeking a 10-percent reduction in price to make its Obamacare exchange plans competitive enough on price to attract the high volume of patients it wanted—and which the providers in its network obviously want too.

The deal has worked out well for Anthem so far. It attracted about two-thirds of the more than 110,000 Hoosiers who signed up for Obamacare exchange plans this year.

And a decision by the Obama administration to automatically re-enroll those customers for 2015—unless they specifically opt out—should help Anthem keep up a solid market share going forward.

That will make it difficult for any other health insurer to negotiate lower rates from hospitals and doctors in the next few years—because it will be hard for them to gain enough members quickly to offer the providers enough business to make it worth the price cuts.

What providers may have to fear more is consumer knowledge of these facility fee differences. As I reported in my post on Friday, hospital executives see consumers—who are shouldering higher deductibles and have more access than ever to reliable price information—avoiding the hospital-owned facilities for blood tests, diagnostic tests and therapy—and are instead picking the lower-priced independent facilities.

Hospitals, which use the money the make from these higher facility fees to, in part, offset money they lose on other services (and also to fund executive pay,  physician pay and new facilities) may have to make the same choice they did when Anthem came calling: either cut their facility fees or watch patients go somewhere else.

  • Context Context...
    At first blush, one reads this story and says shame on the hospitals. But the story is more complicated. (1) Hospitals set prices to maximize revenues, thus relative prices in a hospital do not reflect relative costs across services (2) Higher prices on some services subsidize other services that generally lose money. (3) Hospitals maintain a wider array of services (including those that lose money) than do the ambulatory surgery centers, but if a patient gets in trouble at a center, the patient is rushed to a hospital for emergency or intensive care.(4) Surgery centers are designed to provide lucrative services where physicians receive a portion of the facility revenue. But these revenue streams used to fund money losing services in hospitals. (5) As a result of the building of many duplicated services (heart centers in hospitals and surgery centers) overall system costs in central Indiana are high relative to surrounding states. So I'd not just say shame on the hospitals, but shame on the whole system of facility providers.

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