Hospital pricing: A conversation starter for brokers

If there’s one thing Americans can agree on, it’s that U.S. health care costs are clearly out of control. Between 1996 and 2013, health care spending increased nearly $1 trillion to a total $2.1 trillion. A short five years later, in 2018, Americans spent $3.65 trillion on health care, a total larger than the GDPs of the United Kingdom, Spain, and Canada combined, landing the U.S. with the highest health spending in the world.

While both the U.S. population and health care utilization are increasing, more than 50 percent of the growth in spending can be attributed to increases in service prices. The cost of patient care nearly doubled from 1996 to 2013, with hospital care being a major contributor to that increase.

One problem is that patients and the employers who provide coverage to the vast majority of insured individuals have little insight into hospital costs until after care has been received. Not at the time of care, and certainly not when selecting a provider or site of care.

Hospital charges are difficult to determine, are often greatly inflated, and vary from one hospital to the next. An independent report by the RAND Corporation sheds light on the issue.

Here are the findings brokers need to know to better serve your clients’ health care needs.

Health care costs vary by state and plan 

The RAND Corporation looked at data from 1,598 hospitals in 25 states and discovered that, on average, prices paid to hospitals for privately insured patients were 241 percent of what Medicare would have paid for the same procedure. For outpatient care, the private prices were almost triple what Medicare would have paid.

In addition, the report revealed an enormous and inexplicable disparity among hospital prices across the country. Depending on the state, costs range from 150 percent to 300 percet of what Medicare pays for the same procedure. For instance, the average price of a knee replacement can vary by over $35,000 among hospitals. The report showed no systematic pattern hinting at which facilities come with the higher price tag and no correlation between higher costs and higher quality of care.

The RAND report is the first time pricing information for a large group of individual hospitals has been made public, and it’s giving both brokers and employers data and information that can serve as a springboard for change.

When the report came out, some employers discovered they were paying eight times more than the federal government pays for certain outpatient services, such as x-rays, emergency room visits, and regular checkups. With new insight into the actual cost of care, employers may be more receptive and ready to consider alternative health plan options to lower health care costs for their employees and their organizations.

Intelligence to drive adoption of cost-saving opportunities 

Tucked into the Rand report is a sentence that will undoubtedly pique interest: “The wide variation in hospital prices represents an important opportunity for employers to save money.”

Here are three ways to use the RAND report to help clients lower costs and improve care for heir employees:

1. Drive patients to the right care. The RAND report qualifies hospitals in terms of higher-, medium- and lower-price structures, and notes that higher-priced hospitals do not always mean high-quality care. Building benefits programs that steer patients away from these higher-priced, lower-quality hospitals (and toward lower-priced, higher-quality hospitals) will help self-insured employers avoid high costs.
2. Eliminate your PPO. A health care solution that includes 98 percent of providers and hospitals in-network while offering no transparency into cost or quality just isn’t effective. Self-insured employers need to look for opportunities to lock in reasonable and predictable pricing with local, high-quality providers. Many local hospital systems are willing to engage with employers and establish contracts to differentiate themselves in a crowded marketplace. In particular, the RAND report recommends focusing on pricing and contracting for hospital outpatient services, an area that is relatively high to Medicare and highly variable.
3. Implement cost management strategies like reference-based pricing (RBP). Self-insured employers can counter expensive out-of-network arrangements with a “bottom up” approach to health care. For instance, RBP takes a reference point (typically the actual cost of care or Medicare reimbursement rate) as a benchmark for reimbursement and builds in a fair margin to come up with an agreed-upon rate that works for employers and health systems alike. RBP provides full transparency into costs and can yield significant savings. In fact, the RAND report suggests using Medicare as a reference point.

Time to start a conversation 

The RAND report is a credible and independent source of data that creates a strong case for clients to rethink their health care plan. It exposes the inflation and variation of health care costs across the country and provides a new opportunity to help your self-insured clients understand the importance of reviewing health plan design and options each year.

Health care costs will continue to be a significant expense for employers, but proven approaches such as direct contracting and RBP can help them curb costs, grow their businesses, and improve their quality of health care.

Chris Cigarran is the CEO of Imagine Health (www.imaginehealth.com), a company that offers self-funded employers an alternative to traditional healthcare plans.