Reference-based pricing, uneven hospital pricing and the battle against inflation

 Across the United states, where a patient lives can be a key factor in the cost of hospital care.

“Some hospitals are receiving 200% of Medicare as their reimbursement level, and some are at about 350% of Medicare,” said Peter Hayes, president and CEO of the Healthcare Purchaser Alliance of Maine. “What that means in the real world is that if it costs a hospital $10,000 to deliver a medical procedure, one hospital is charging $20,000 but others are charging $35,000. Their costs are relatively the same, but their prices are significantly different. Employers are starting to ask, `Why should consumers who have high deductibles pay such wildly different prices for health care based on geography?’”

Hayes and a group of other panelists addressed that question in a June 9 webinar, “A Fresh Look at Reference-Based Pricing to Drive Affordability,” sponsored by the National Alliance of Healthcare Purchaser Coalitions. The issue of hospital pricing has become even more pertinent during the current time of soaring inflation. Although the price of gasoline dominates the headlines, the cost of health care is eroding the earning power of U.S. workers.

“If you look at overall inflation over the past decade, worker earnings are a little north of that, but not by much,” Hayes said. “But whatever they are gaining in wages is being more than consumed by the medical side of the equation. As more and more of our household budgets go to health care, it really is crowding out some of the other spends, such as food, housing, transportation and clothing.”

Related: Reference-based pricing: 4 factors to consider

Increasing health care costs are also reducing investments in social determinants of health, such as public health, mental health, infrastructure and education. But contrary to opinion, increased health care use is not the main problem.

“It really isn’t utilization that is driving our total spend,” Hayes said. “Hospital pricing is driving a lot of the trends we are seeing; prices often are unchecked and unconnected to underlying economic factors.”

Mike Thompson, president and CEO of the National Alliance, pointed to an April report from the National Academy for State Health Policy that showed hospitals’ break-even point as a percentage of Medicare.

“The bottom line is that it’s what they need to survive based on their current cost structure,” he said. “Shockingly, those prices are much lower than what their prices are to the commercial sector. State prices on average are twice what is required to break even. There also is a lot of variation within states.

“The question is, how do we as plan fiduciaries act responsibly in managing costs when these levels of price variation and price margins are commonplace in the market?” Reference-based pricing shows promise for being part of the solution as a model that pays claims based on an established benchmark rather than a carrier-determined fee.

“Current payment models are not transparent,” said Larry Thompson, chief strategy officer and revenue officer for Advanced Medical Pricing Solutions. “There is unwarranted price variation, and it poses significant fiduciary risk. Reference-based pricing is being used across the United States to set reasonable benchmarks There are already reference-based vendors in the marketplace that consistently are paying between 100% and 200% of Medicare.

“It is being used by about 4% to 5% of all claims in the country and is expected to be used for about 15% to 20% of all claims in the next 24 months.

Over time, it has proved to be the best cost-containment tool there is.”

This model offers several benefits, according to Hayes:

• Reference-based pricing helps purchasers meet their fiduciary responsibility to pay only reasonable plan expenses by rationalizing payments to hospitals using Medicare reimbursement as a benchmark.
• Transitioning from a discount-off-charges mentality to a system that reimburses hospitals based on a reasonable percent of Medicare can remove unwarranted price variation and lower costs for employees.
• When reference-based pricing reduces employer health costs, they often use those savings to lower employee premiums and cost-sharing, or to increase wages or add other benefits.
• When plans move to more rational payment models and more reasonable prices, they lower costs. Vendor-based reference-based pricing programs typically reduce employers’ overall medical spend by 20% to 30%.

Reference-based pricing also debunks several widely held assumptions about the cost of care.

“A lot of times, you hear that higher-cost hospitals are related to quality,” Hayes said. “But there is very little relationship between the costs that hospitals are charging and the quality that is being delivered. There is also absolutely no relationship between what hospitals are charging and the payer mix, such as having more Medicare and Medicaid patients.”

He referenced potential savings for members of his organization during a representative period.

“For our book of business in Maine, the total spend was $259 million,” Hayes said. “If we were to move to 200% of Medicare, the savings would be $98 million, which is almost 40% of spend. A lot of courts are starting to say that anything north of 200% of Medicare is no longer fair and reasonable.”

He believes reference-based pricing deserves a close look by all stakeholders.

“It creates much more predictable prices across your marketplace,” Hayes said. “A conservative estimate is a 20% to 30% reduction in spend. It makes health care more affordable for employees, and it creates a level playing field for providers. Employers also find if they free up some of their health care dollars, they can add them back into other benefit streams for employees.

“Reference-based pricing checks all of the boxes.”