Will pricing transparency reduce the cost of care?

Many people inside and outside the industry are grappling with this question. A recent Harvard study reports that pricing transparency does not lower cost and they are not sure why.

Having access to prices is important to patients required to shoulder more of the financial burden for their care. For the most part, patients were already able to get the cost or at least a reasonable estimate in advance of their services from outpatient providers. However, comparable information is generally not available to patients when medical services are more complex and unplanned. Those complex and unplanned services are the real cost drivers of healthcare.

However, there is more to pricing transparency than most realize. Let me shed some light on it for you.

Charges vs. Contracted Rates

There have been a lot of stories in the news sounding alarms about the high cost of care.  However, the stories are often comparing charges from one provider to the next or comparing charges to Medicare reimbursement.  There is some validity to making those comparisons but in reality neither comparison has much to do with cost to the consumer.

Medicare requires providers to set a uniform charge. There are so many billing codes that many large provider organizations, including hospitals and medical groups, set charges as a multiple of Medicare reimbursement rates. For many organizations, Medicare reimbursement reflects a payment floor, not their break-even point.  Adding a multiple to those rates allows the provider to comply with the Medicare requirement of a uniform charge and set a charge sufficiently high to allow for full reimbursement from all payers. The contracted rate is the cost consumers pay for the service and for most providers, it is a fraction of their charge.

Contracted Rates

Contracts with commercial insurers such as Blues, Aetna, Cigna, United etc. are given volume discounts by large providers. Physicians by in large have to accept the commercial rates to participate in the plan unless they are exceptional. The contracted rates from one insurer to the next vary because the rates reflect the market power of the insurer.  The market power of the provider is built into all the commercial rates and therefore, has little to do with the variability experienced by consumers.

For the most part, the contracted rates in existence limit the reimbursement to providers [in other words, limit what consumers pay] because they are paid a group rate for the billing code(s).  Each of the commercial payers use different reimbursement methodologies for complex services and items routinely passed through such as high cost implants and supplies.  The variation in terms muddy the waters and make the payment for those services hard for even professionals to compare without repricing technology.

Out-of-Network Providers

Out-of-network providers added to the variability in charges and in most cases, their charges became the high cost outliers.  The reimbursement rate to non-contracted providers is lower than that to contracted providers. Consequently, the non-contracted providers raised their charges billed to insurers to make up for the total reimbursed amount but at the same time, discounted the amount billed to patients.  Patients choosing a high cost, out-of-network provider were largely unaffected but insurers or employers of self-funded plans in the end paid a hefty price.

As payers limited out-of-network benefits, the out-of-network providers kept increasing their charges which is why few employers now offer plans with out-of-network benefits and why the outlier charges should soon disappear if they haven’t already. Access to out-of-network providers is limited under most plans and most patients will pay more now if they choose to continue using them.

Closed Networks

We’re entering another period of closed networks designed at least in theory to better manage the health and healthcare of patients by coordinating care and increasing compliance with behaviors that lead to healthy living.  However, these networks will also help reduce cost by using primary care physicians to channel patients to a fewer number of providers in exchange for bigger discounts. The downside is that patients often give up choice and control which scares some people.

Higher Discounts

Employer groups and others are reporting savings from using reference pricing and package pricing, also referred to as a bundled payment, which yield bigger discounts from providers on high volume services. Bundled payments make it easier for healthcare consumers to understand the cost of complex services and reference pricing makes it easier for them to choose a low cost provider.

However like most large businesses, healthcare providers including hospitals thinks about cost and profitability at a much higher level than a specific service or the patient.  Large providers can change their allocation methodologies to discount certain services as long as they can make it somewhere else.

Deeper cost cutting for all services will take some time.  What many outside the industry do not fully appreciate are all the constraints on the main cost drivers for delivering healthcare.  For instance, labor is the most significant cost driver for provider organizations and it is constrained by regulatory guidelines, unions, geographical location and staffing shortages.

So in the short run, the cost of some services may decrease and others may increase as a result of pricing transparency. The impact on the total cost of care will depend largely on what happens with demand and other initiatives to align the interests of the healthcare delivery supply chain.

With that said, pricing transparency is a good thing for everyone including healthcare providers. It is much easier to collect money for services rendered when people understand what they owe and know that they will receive good care in return.

Before a diamond shows its brilliancy and prismatic colors it has to stand a good deal of cutting and smoothing.

– Unknown Author