Today’s Managing Health Care Costs Number is 336%
Provider price variation continues to drive a substantial amount of the high cost of American health care. Providers with the highest allowable prices often cost 30% more than providers with average allowable prices. But it’s not easy to figure this out - because the allowable price has little relationship with the price charged, otherwise known as the “chargemaster” price. Further, the discounts that one health plan achieves are different than what another health plan achieves. Medicaid gets the largest discounts of all, and Medicare prices are usually in between Medicaid and commercial health plan prices.
The Health Policy Commission in Massachusetts just released another report documenting that allowable charges for Massachusetts hospitals and physicians continue to show enormous variation. The most expensive hospitals were paid 336% of the allowable fees of the least expensive hospitals; the most expensive physician groups were paid 332% of the allowable fees of the least expensive physician groups.
There’s been a lot of publicity about the price differentials – but allowable price disparities are as large as they were five years ago when the Massachusetts Attorney General started reporting on the phenomenon. This research is possible because Massachusetts has an all-payer database for which all health insurers must provide data. The database isn’t really “all payer;” it does not include Medicare or Medicaid – which is good because these government programs set allowable prices – and so we wouldn’t expect any substantial differences among providers based on their market leverage. The database is also limited to fully insured commercial health products which are regulated by the state, so the majority of those with employer sponsored insurance are not included. Still, the all payer data base is a good start to understanding allowable charges in Massachusetts.
Looking at price disparities over years shows an especially troubling consequence. The hospitals which are allowed higher prices are able to better invest in their infrastructure and in hiring new staff – and so less care is delivered by lower priced providers in each successive year. (Chart at top of post)
The Health Policy Commission has four suggestions about how to counteract the high prices allowed for those health care delivery systems which have especially advantaged contracts.
1. Increase market transparency and encourage consumers to use high value providers.
Transparency alone has not moved much business to lower priced or higher value providers – but the HPC suggests moving toward reference pricing, where the consumer would pay the extra to go to a high priced hospital. Reference pricing works well for “shoppable” elective surgery – but it’s not clear that it can be operationalized over the broader portfolio of health care “consumed” by patients. It would be especially complicated for patients to understand widespread reference pricing – although the main impact might be to convince higher priced providers to cut their rates.
2. Limit provider charges for emergency out of network services
This would substantially lower provider clout in negotiations. Carriers would not have to pay “charges” if a provider dropped out –but instead would only have to pay whatever the price ceiling was. This would change dynamics, and could lower overall costs. This would make commercial plans similar to Medicare Advantage plans, where carriers are never liable to pay providers more than the Medicare fee schedule.
3. Don’t use historic prices as the basis for global budgets
High cost hospitals have become high cost over decades –and moving them to lower prices immediately would likely cause substantial market tumult, and substantial layoffs. But using historical prices as the baseline for global prices simply means that price disparities will never recede. The disparities might even get worse, as insurers give ‘inflation’ adjustments to the high cost facilities and have little left for raises for the lower cost facilities without exceeding their state-mandated rate caps.
4. Directly restrict price variation
The HPC reviews the Maryland experience of prohibiting price variation beyond specified limits – and shows that price variation for selected DRGs is much lower in Maryland than in Massachusetts. The HPC suggests that contractual demands for prices higher than the median require independent panel approval. The independent panel would be very busy, as a minimum of half of all providers would request rates at or above the median price!
Unit price of course is not the best metric of value. Providers who have higher allowable prices but who use other resources more sparingly (like imaging tests and specialist procedures) can have lower total medical expense – justifying their higher unit price. Policymakers should continue to press for data from all payer databases to compare provider value, and to calculate risk adjusted total medical expense.
