Health Care Price Transparency Revisited

Over the Memorial Holiday weekend, I was invited to a swim party for my grand kids and 100 or so of their “closest” friends, held at the FGCU pool. (What a wonderful facility!) Shortly after I arrived I became engaged in a conversation with a local school teacher, who had recently been discharged from the hospital due to an emergency appendectomy.  What she related reminded me of an article I had previously written in 2007 on Price Transparency and Consumerism. She was admitted through the hospital emergency room and diagnosed that she had to have an immediate appendectomy. A few weeks after very successful surgery she received a hospital bill and was “appalled” at the almost $30,000 in charges she had been billed for only two days in the hospital, plus thousands more in expected physicians expenses. I asked her whether any of the providers had discussed costs before her treatment and they had not. However, as she pointed out, she was in pain and really did not care what it cost, and that is part of the dilemma. When we are sick, we don’t really care what it costs, but since more than 75% of hospital admissions and surgical procedures are elective, (could be planned or scheduled in advance) we should care about cost and quality, if we only asked and were provided with the information.

With the rapid increase in the number of high deductible tax advantaged health HSA plans which are being sold today, it’s often your money that would be saved. So why are we afraid to ask the provider “why and how much” and moreover, why are most providers unwilling to voluntarily post price and quality information so we can purchase healthcare services as informed consumers? Because price is a secret, and in most instances there is not one price for every consumer. Hospitals have one price for Medicare and Medicaid and perhaps, many dozens of different prices for other payors based upon whether you have insurance and that carrier’s/administrators’ ability to steer patients to a provider through their PPO networks. Yet there is only one cost for each procedure and service. Therein is the conundrum; multiple prices and a single cost, none of which is routinely published.

The healthcare marketplace in the United States operates differently than almost any other consumable product. Virtually every product sold publishes cost and quality statistics, metrics through which they seek to differentiate themselves from their peers. However, in healthcare, the marketplace is anything but transparent. In most cases, patients do not know what a service or procedure will cost until after the service or procedure is performed, and then it’s too late. Could you imagine shopping at Wal-Mart with nothing priced, and not knowing what you spent until you received the credit card bill at home? Of course not! So why do we allow it to happen in healthcare? It’s the same question I asked back in 2007, and it’s the same question I pose once again? Because price is a secret and carriers/administrators prevent willing providers from publishing price because it would violate their PPO agreement with the carrier/administrator. But the real reason is that carriers and administrators seek to differentiate themselves against their competitors through what I refer to as the “mine is bigger than yours” argument. Company “A” advertises that you should insure with them because they have larger discounts than Company “B”, and they may. But which of these two examples represents a lower price? A 30% discount from a hospital that charges an average of $8,000 per day or a 50% discount at a hospital that charges $15,000 per day? Clearly 50% is better than 30%, but which will cost the patient less.  Company “A”, with the 30% discount will cost $5600 per day whereas Company “B”, with the 50% discount will actually cost $7500 per day. It’s all “funny money” and unnecessarily complicated because there are too many different prices for the same service, and virtually no transparency in pricing. In addition, the administrative cost to administer the myriad of “funny money” pricing is substantial.

According to a recent Kaiser Study, the total cost of healthcare expenses in the US exceeded $2.6 Trillion in 2010. Almost 7% of that amount was attributed to administrative expenses, much of which was associated with the provider’s maintenance of the myriad of “funny money” pricing schedules associated with PPO’s. According to a recent Congressional Budget Office study, Medicare’s administrative expense load is only 2%, whereas, a typical insurer’s average administrative expense load is 12% of written premium. It’s hard to imagine that any governmental entity would be lower administratively than the private sector, but could it be partially attributable to a much more limited number of price schedules. Consider how many hundreds of billions of dollars could be saved each year if we could only simplify provider pricing?

Please do not confuse my basic premise. I am not advocating that every provider’s price would be exactly the same for every procedure. That would violate several Federal and State laws regarding restraint of trade and monopolies. However, what I am proposing is that all providers would be required to have only one price for each procedure and that they would be free to charge whatever they wanted for any specific procedure. Therefore, we would continue to have a free and open market where providers would be free to value their services independently and price accordingly. However, they would be required to publish their price and to publish available quality data. Consumers of healthcare service would be able to then compare price and quality measures and deal with the provider that had the most compelling combination of both.

Does my premise sound far-fetched and do you think I am dreaming? Perhaps, but in the State of Texas the legislature is considering HB 2340, which will probably fail this year, but next year looks promising. HB 2430 allows a provider to have only one price for each service and or product that it provides and expressly disallows discounting. There is a hardship provision that allows a provider to discount any amounts that they may be owed by a patient, if they determine that the patient is unable to pay. However, that is the only exception allowed for discounting. Additionally, the proposed legislation requires total price transparency. All providers must publish their prices for all of their procedures and would be required to convey that price to any patient prior to any elective procedure, presumably through some vehicle like the internet. This approach eliminates the necessity of PPO networks and virtually eliminates the administrative burden and expense for payors and providers associated with the maintenance of multiple PPO contracts and prices. It also eliminates the “mine is bigger than yours” advantage described above and levels the playing field amongst payors, leading to transparency and far less administrative cost. In later articles I will keep you informed regarding the progress of the Texas Bill. In the meantime, if you are interested in total price transparency, you may find the following web site of some interest.

Transparency issues impact many other healthcare sectors other than provider pricing. For example, in most states, including Florida, employers with fewer than 100 employee lives, are unable to obtain competitive group insurance rates because their carrier refuses to release claims experience.

Small group claims experience, while somewhat less credible from an actuarial perspective than large group claims experience, is still valuable when searching for lower rates. Groups with more favorable experience would become attractive to a new carrier who would often offer lower rates. Moreover, with claims experience, small groups would have an added incentive to promote wellness since they would improve their claims experience and would be able to obtain lower insurance rates in the free market.

Why would carriers resist providing claims experience to employers? They are afraid of adverse selection, where they would lose employers with good claims experience to other carriers and would be “stuck” with employers with bad claims experience. While it’s a valid fear, in a free and openly transparent market, everyone would benefit. Carriers would be incented to offer competitive rates to acquire healthy business and would be incented to promote real wellness programs to help reduce costs associated with unhealthy employers. Furthermore, I anticipate that in the free market, carriers would offset the adverse selection by acquiring their fair share of new and healthy employers. Moreover, in the State of Florida, it’s the law. Yes, in Florida, we have a Statute on the books that requires carriers to provide a minimum of paid claims, paid premium information, number insured and dependent status, within three weeks of receiving a written request from an employer.

Florida Statute 627.6647 has been on the books for years and almost every carrier routinely ignores it because it is not enforced by the Department of Insurance and there is no penalty for failure to comply. Texas had a similar statute with similar results until they amended the statute to include a $20,000 per occurrence penalty for any carrier that did not provide requested claims information as a normal part of the renewal process. Naturally, all carriers now comply, and Texas has become a true free market and openly transparent state. Texas small employers can easily shop carriers and determine whether insurance or another funding mechanism is more appropriate. Not surprisingly, the sky did not fall for Texas insurers, who have remained profitable in a transparent marketplace.

By the time this article is published, the Supreme Court will have rendered their decision as to the constitutionality of the Affordable Care Act. Irrespective of their decision, the current healthcare system needs to be simplified and made to be far more transparent. We need to find a way to reduce the cost of healthcare today by reducing unnecessary administrative cost and empowering consumers by creating a totally transparent process so that they know the price and quality metrics before they have the service.  What is happening in Texas can be duplicated in Florida and other states!  Dream with me!

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