Many economists and pundits who believe in market-driven healthcare have recommended increased pricing transparency as a component of healthcare reform. They tend to say that the rather baroque pricing structure of U.S. healthcare—in which the hospital charges one price, the insurance company or Medicare negotiates another, and then consumers pay yet another depending on the richness of their insurance plans—undermines the effectiveness of the free market in communicating information to consumers. Clearly, the directors of The Surgery Center of Oklahoma feel the same, as they have posted prices for their services directly on their website.
Will transparent pricing ever become a trend in healthcare, or is it simply too complex a field for menus to make sense? Milliman consultant Will Fox recently wrote about an intriguing innovation in this area—the Transparent Cost Network:
In no other area of our economy do consumers receive services where they do not know the cost in advance and are not able to make comparisons to alternative suppliers. As a result, healthcare provider costs have remained immune from the economic forces that could control them. This immunity has contributed to greatly increasing provider costs, a major component in today’s rising healthcare costs.
The lack of price information stems from the confidential nature of negotiations between providers and payors. Providers compete with each other trying to get the highest payment from payors, and payors compete with each other trying to set the lowest payments to providers. In hopes of getting the best deal, both providers and payors want their negotiated rates to be kept confidential. Information is kept from the consumer that is necessary to make the best choices and drive an improved market.
A transparent cost network is designed to break down this limitation, giving consumers the price information they need to make informed decisions. Payors that can deliver this valuable product offering to consumers will likely gain market share for this lower-cost product.
This trend appears to have significant support, at least in the group health insurance market. In Milliman’s 2010 Group Health Insurance Survey, 68% of insurers surveyed said they planned to provide more price transparency for members.
Milliman’s 2010 Group Health Insurance Survey, finalized in October, notes some of the steps that U.S. insurers are taking in response to healthcare reform legislation, and provides premium, trend, and other key metrics that can be used to benchmark healthcare expenses. Read more here.
We’ve commented before about the evolving research around cost shifting. The CT Mirror picks up on this discussion with a look at Connecticut hospitals and the pressures created by disparate commercial vs. Medicare/Medicaid payment rates. Here’s an excerpt:
Not everyone agrees that the higher costs commercial insurers pay to hospitals can be blamed on government underpayment. The Medicare Payment Advisory Commission, or MedPAC, which advises Congress on Medicare issues, has argued that Medicare payments are adequate for relatively efficient hospitals, and that raising Medicare rates would not necessarily lead to lower commercial charges. Hospitals that make high margins from commercial payers have less pressure to rein in costs, the group has argued, leading to expenses beyond what Medicare pays.
The actuarial firm Milliman concluded that a cost shift did exist in a 2008 analysis prepared for insurers and hospitals. The firm estimated the cost shift nationwide at $88.8 billion per year, or about 15 percent of what commercial insurers spend on hospital and physician services. The report defined cost shift as the difference between actual payments and payment amounts that would produce equal margins for each payer.
But more recent Milliman research has suggested that cost shifting is not the only option for hospitals, and that they might have little choice in the future but to become more efficient. The firm identified cities that have “high-value” hospital care, with low per capita inpatient costs for both Medicare and commercial insurance, and positive hospital margins.
“Considering cost shifting to be inevitable ignores both the potential for cost management within hospitals and hospitals’ flexibility to set commercial prices,” one report said. “The data demonstrates that hospitals can prosper in some low-Medicare cost regions without cost shifting to commercial payers for their inpatient services.”
Milliman released preliminary results for its 2010-2011 Group Health Insurance Survey today. Here is an excerpt from the press release:
Preliminary results from Milliman’s 2010 Group Health Insurance Survey indicate premium rate increases continue to exceed the government’s official rate of inflation and are higher than premium increases in recent years. The estimated January 2011 renewal increases are about 9.0% for health maintenance organizations (HMOs) and 11.0% for preferred provider organizations (PPOs). This marks the seventeenth time that Milliman has conducted the survey, the complete version of which will be available in late October.
The Milliman survey is unique in that it asks HMOs and PPOs to respond regarding a given set of group health benefits and demographics. The survey removes three important factors that can skew the results of other health cost surveys: changes in plan design, shifts in premium sharing between employer and employee, and member demographics.
We have blogged before about how the status quo approach of shifting hospital costs from patients covered by Medicare and Medicaid to commercial payors simply can’t last, a view explained in a recent reform briefing paper. That dynamic deserves a closer look:
We can model entire systems, fully adjust for reform initiatives, anticipate provider fee movement for commercial business, etc., based on our healthcare reform modeling capabilities, but in order to calculate the status quo we have only modeled the demographic changes expected in the population as the Boomers enter Medicare and as Medicaid expands. We have not figured in differences by region, type of service provider, or other sources of variation, nor have we tried to anticipate changes to the status quo and how those changes would be reflected in various cost relativities. By their very nature, those changes are dynamic and highly variable, and will depend on a number of factors, including the eventual success of provider efforts to pursue efficiency instead of cost shifting…
If action is not taken to minimize status quo cost drivers, the yield on current equivalent billed charges is projected to fall by 2020 in our most likely scenario. Specific localized areas could see a shift significantly more detrimental based on current payor mix, an aging population, and/or a heavy percent of low-income newly Medicaid eligible members. Our projection in Figure 2 shows a 12% decrease in average yield over the next 10 years before the influence of trend by payer. With governments limiting increases and little or no room left for cost shifting, this mix issue will go straight to providers bottom lines over time.
The full paper is available here.
The Talking Transition blog looks at a recent healthcare reform briefing paper on hospital cost shifting. Here is an excerpt:
Milliman concludes that providers will have no choice but to become more efficient. (Of course, many may elect to refuse government plans, consolidate or exit the business.)
It recommends various strategies, including:
- making facilities management more efficient as demand for beds exceeds capacity
- understanding the demographic mix in their particular area
- investing in service sectors that afford consistent margins in the long term
- rethinking cost structures and potential lowering expectations for future income
Just as demand for health care services crosses an inflection point, supply is likely to contract.