Some hospitals and health systems are starting to review and revise their prices to make themselves more attractive to individual consumers who increasingly experience sticker shock when they pay for services out of pocket under high-deductible health plans.
Part of that effort involves analyzing how much those services actually cost to deliver, something providers have rarely done before.
Some hospital leaders say they are scrutinizing chargemasters—the master price list that often serves as the basis for rate negotiations with insurers—to see how prices compare against the actual cost of delivering services and how they compare with other providers in the market. Others, such as Memorial Hermann Healthcare System in Houston and the University of Utah Health Care in Salt Lake City, say price revisions are planned, but first they need to get a better handle on actual costs.
These efforts are at least partly driven by the growing prevalence of high-deductible plans, which prod consumers to shop around for the best price. Prices for office visits, diagnostic imaging, obstetric ultrasounds, colonoscopies and physical therapy—services that consumers increasingly must pay for themselves—especially are coming under the microscope.
“As more consumers have to pay more things out of pocket, it rises in importance of things that health systems are looking at,” said Dana Gilbert, formerly the chief operating officer at Advocate Physician Partners and now chief of population health for Chicago-based Presence Health.
Systems also are comparing prices across their own hospitals for differences that can’t be explained by underlying differences in cost. “If you’re a patient at Advocate and you go to three different hospitals and you get the same service and the bill is different, you begin to wonder why,” Gilbert said.
Out-of-pocket prices for the same service can vary sharply between hospitals. For example, a patient’s out-of-pocket price for the same MRI test with the same CPT code can vary from $64 to $476, depending on the state, according to the Health Care Cost Institute.
Hospital chargemasters have been widely criticized for irrational pricing. Yet hospitals and insurance companies continue to use those master price lists in some negotiations. Among health systems with credit ratings from Moody’s Investors Service, the median share of revenue in 2014 from contracts based on chargemaster prices was nearly one-fifth.
Efforts to track and manage costs have accelerated under the Affordable Care Act. Some systems use performance improvement methodologies such as Lean and Six Sigma to streamline their clinical and business processes. Under the ACA, the CMS has expanded the use of new financial incentives for hospitals to control costs, and private insurers have followed. That trend has overlapped with growth of high deductibles and heightened the pressure for hospitals to more carefully manage costs.
And hospitals are feeling pressure as state policymakers, insurers and a growing number of price-transparency companies such as Castlight Health have established databases and mechanisms that make it easier for employers and consumers to shop and compare prices.
Florida Republican Gov. Rick Scott, a former hospital system CEO, recently proposed a state all-payer claims database to enable comparisons of hospital expenses and costs. Facilities whose price for a service exceeded the average would face penalties. A dozen other states have established all-payer claims databases, and five more states have databases in development.
Intermountain Healthcare, the Salt Lake City-based system with 22 hospitals, has analyzed prices and costs for some services to identify areas where prices may be too high. “The push has been for more transparency,” said Todd Craghead, vice president of revenue cycle for the system.
MH Takeaways Some health systems are tryingto understand why costs and prices differ across their own hospitals, and seek to identify inefficiencies that could be eliminated.
Intermountain started this work as employers increasingly shifted their workers to high-deductible health plans, he said. Another factor driving the cost and price analysis was the rise of insurance contracts that place the system at financial risk for high spending. Those contracts set a global budget for healthcare costs for an enrolled group of members, and Intermountain can keep some or all of the savings below that budgeted total. The contracts create a powerful financial incentive to eliminate wasteful spending. More accurate data on costs and prices are needed to more effectively plan hospitals’ operating budget and strategic investments, Craghead said.
The first targets were the most commonly used services. Intermountain analyzed variation in prices and costs across its hospitals that could not be explained by differences in local labor markets, the types of hospital services offered or the acuity of patients. This allowed the system’s leaders to identify potential inefficiencies and waste, Craghead said.
As a result, Intermountain reduced some of its chargemaster prices, though Craghead declined to provide examples. “In many cases we may give up some dollars by adjusting those rates down to be more aligned with the cost structure,” he said.
Understanding the actual cost of delivering care is essential to managing expenses and setting prices, said Robert Kaplan, a Harvard Business School researcher who works with Harvard colleague Michael Porter in consulting for health systems on cost management. But unlike companies in other industries that know exactly what it costs to produce goods and services, hospitals often rely on estimated expenses from imprecise accounting or else they work backward from prices. “Healthcare is really strange,” Kaplan said.
Not surprisingly, some insurers welcome providers’ growing efforts to analyze their cost structures and potentially reduce prices. They say such initiatives grow out of increasing pressure from institutional and individual purchasers seeking better value.
“We’re seeing some reduction and restructuring in chargemaster rates and trends, especially in commodity services most visible to customers,” said Tom Garvey, Cigna Corp.’s total health and network vice president. Examples, he said, include routine labs, low- and high-tech imaging, treatment for sprains and simple fractures, and durable medical equipment.
But other insurers say their negotiations with hospitals are not based on chargemaster prices, so moves to revise those prices won’t affect those rate discussions. Dr. Don Liss, senior medical director for Philadelphia-based Independence Blue Cross, said his plan negotiates with Medicare rates as the starting point. Other plans negotiate global rates under alternative payment models.
Aetna said it has seen no change in prices. “We track the charges and we see no statistically significant movement upward or downward in charges,” said Aetna spokeswoman Sherry Sanderford. Less than 10% of Aetna’s contracted hospital business is variable, meaning an increase in a hospital’s chargemaster will increase the amount owed by members who have not met their deductible, she said.
University of Utah Health Care has launched a multiyear effort to itemize operating costs down to the minute. That work so far has included joint replacements, labor and delivery services, laboratory orders and transplants. The university is using a software program that helps calculate costs and now draws on more than three years of data that includes 30,000 hospital admissions and more than 1 million outpatient visits.
The work contributed to an average 0.5% per year decline in the cost per patient between 2007 and 2013, a system spokeswoman said. “We have bent the cost curve,” University of Utah Health Care CEO Dr. Vivian Lee told the New York Times.
But that effort has not yet extended to revising the system’s chargemaster price list, though that is the goal, Lee said in an interview with Modern Healthcare. First, the system must do more to understand its costs, she said. Changes to the chargemaster price list will come “down the line,” she added.
Her system’s efforts so far have targeted specific procedures or related groups of services for cost analysis and performance improvement.
To broaden the cost-analysis work beyond the current 20 clinical areas where the University of Utah is looking at costs and trying to improve efficiency, the system soon will make cost-analysis tools more widely available to physicians, she said. The system will learn more about its costs as more clinicians have access to those tools. That, she said, will lead to more savings that can be shared with healthcare purchasers. “I am very interested in getting those costs down,” Lee said.
Managing hospital costs requires closer examination of expenses to pinpoint variation that cannot be explained by sicker patients or other underlying costs, Harvard’s Kaplan said.
“Variation is opportunity,” he said.