Cutting Costs Through Healthcare Price Transparency: Close but No Cigar
By Scott Leggett
Earlier this week, the Trump administration made a dramatic move to improve healthcare price transparency. President Trump signed an executive order directing agencies to draw up rules requiring insurers and hospitals to make public the negotiated prices agreed upon in contract negotiations. Their goal: Give healthcare consumers the kind of pre-purchase pricing information common to most other marketplace transactions.
Among those backing the administration’s efforts were almost 4,000 physicians who independently signed a letter collectively supporting the executive order to compel price disclosure in healthcare.
As reported by the Wall Street Journal, the physicians noted in their letter that they make “caring for patients [their] professional priority.”
In addition to this most recent and most controversial executive action by the administration, Congress has taken up the cause of price transparency with proposed legislation supported by America’s Health Insurance Plans (AHIP) and the ERISA Industry Committee, representing large employers. Opposing are hospitals.
Ironically, in spite of good intentions and great effort, no one — not the hospitals, Congress or the Trump administration — gets the proverbial cigar. All parties have largely overlooked an immediately available, proven approach to provide price transparency to patients prior to receiving treatment.
Driving this quest by the administration and Congress to harness market forces to drive down healthcare costs is a simple reality: At a total annual cost of more than $3.5 trillion — the equivalent of spending more than $10,000 for every person in the country — healthcare in the U.S. is too expensive.
Consider the experience of private employers, the largest sponsors of healthcare in America, who collectively spend more than $1.2 trillion annually providing healthcare coverage for almost half the U.S. population. For these employers, healthcare costs have increased by 50% in the past decade, a decade encompassing a great recession and historically low rates of inflation. Other estimates show the cost of hospital services have increased by 250% in the 20-year period from 1997-2017. This is against an overall U.S. inflation rate of 55.6% during the same period.
Looking at healthcare costs in another way, Secretary of Health and Human Services (HHS) Alex M. Azar II, in a March 2018 speech, noted: “Federal spending on our major healthcare programs is projected to rise from 5.5% of our economy in 2016 to 8.9% of our entire economy 30 years from now. By themselves, these programs will consume almost all of the income taxes collected by the federal government.”
By any measure, current trends in healthcare costs are unsustainable.
Drawing the Red Line
It was in the same March 2018 speech that Secretary Azar drew a red line around price transparency stating unequivocally, “I believe you ought to have the right to know what a healthcare service will cost — and what it will really cost — before you get that service.”
Azar’s speech followed years of political posturing, hand-wringing, finaling, promising — and even legislating — changes to healthcare. All this activity was largely for naught as the overall cost of healthcare in the U.S. continued its inexorable rise.
As the New York Times reported in March of this year: “Price transparency has been a hallmark of health policy under Mr. Trump. In a country that spends more than $3.5 trillion a year on health care, administration officials say, it is absurd that consumers cannot shop for medical goods and services as they shop for airline tickets and electronic gear.”
As a step toward transparency, via a regulatory decree, beginning in January 2019, the Trump administration, through the Centers for Medicare and Medicaid Services (CMS), required hospitals to post their chargemaster price list on their website. For those not familiar with chargemaster, it is a listing of hospital retail prices by diagnostic related group, or DRG. Each DRG is given a code number theoretically allowing patients who know their DRG to compare prices among hospitals.
In practical terms, where a given diagnosis may comprise multiple hospital, doctor, lab and post-op charges, the chargemaster prices list is virtually useless for patients in calculating the total cost of treatment. Further, hospitals significantly discount off their chargemaster pricing when negotiating contracts with insurance providers or with customers paying cash for healthcare services.
In March of this year, foreshadowing the president’s executive order, HHS signaled that it may require hospitals and insurance companies to disclose to the public their negotiated prices. As reported by National Public Radio, “HHS is arguing that the healthcare system, the hospital pricing system, is way too complex and opaque. Consumers don’t know what they’re buying and what they’re paying for it.”
The price transparency push received additional coverage last month when the Wall Street Journal ran a story headlined, “White House Wants Patients to Know Health-Care Prices Up Front.” The story went on to report: “The administration is strongly interested in forcing insurers to publicize the negotiated rates they pay for services, the people said. The requirement could affect insurers providing coverage in the private-employer market, where about 158 million people get their health insurance.”
Reflecting the widespread interest in healthcare cost containment, Senators Lamar Alexander, R-Tenn., and Patty Murry, D-Wash., chair and ranking member respectively of the Committee on Health, Education, Labor and Pensions, recently proposed the Lower Health Care Costs Act of 2019. The proposed bipartisan legislation includes language addressing prescription drugs, surprise hospital bills, vaccines, interoperability and price transparency. Regarding price transparency, the legislation requires hospitals and insurers to provide to patients cost estimates for upcoming treatments within 48 hours of a request.
As reported in Modern Healthcare, ERISA’s James Gelfand noted regarding the pending pricing estimates that “indeed, access to this information should help patients to better navigate the healthcare system.”
Forcing the opening of the healthcare pricing kimono and requiring that negotiated rates between hospitals and insurance companies be made public has major implications for the industry as a whole. Armed with competitive pricing information, hospitals and insurers alike would be positioned to demand consideration equal to or better extended to their competitors.
Further, truly transparent pricing would encourage self-insured employers to shop around for the best prices on high-volume healthcare procedures common to their employee population. At present, that kind of competitive information is blocked from disclosure via contractual agreements between the contracting parties.
In the face of the wave of activity around price transparency, the defenders of the status quo offered many reasons for opaque healthcare pricing. Hospitals argue that the reason healthcare pricing is not more transparent has to do mostly with the fact that healthcare is paid, in large part, through insurance with insurance companies negotiating discounted rates with hospitals based on their volume purchase of services. These discounted rates are closely held by hospitals and insurance companies alike.
The American Hospital Association (AHA) has been notably active in pushing back against healthcare price transparency. As one AHA executive noted in a story reported by National Public Radio, “This isn’t really what consumers need or want,” said [Tom Nickels], the AHA’s executive vice president for government affairs. “What consumers need and want is what are their out-of-pocket costs.”
Speaking on behalf of investor-owned hospitals, Chip Kahn, CEO for the Federation of American Hospitals, made it clear he does not want the hospitals he represents to be responsible for cost estimates.
“Placing the onus on hospitals to provide cost estimates for any service reasonably expected to be provided in conjunction with the specified service is inappropriate as the hospital cannot accurately know exactly what services would be provided in all instances,” Kahn noted as reported by Modern Healthcare.
Still other news stories on the battle over price transparency report that patients alone do not make the selection of their inpatient healthcare provider. Physicians play an important role in selection. In addition, in emergencies, patients often seek out the nearest available care without considering price. Also, patients have been slow to make use of tools facilitating comparison of healthcare pricing.
And so, the argument goes on with almost everyone seemingly ignoring or overlooking an obvious solution.
The Key to Healthcare Price Transparency
Ironically, the current ongoing battle for healthcare price transparency overlooks a well-established tool that guarantees price transparency while substantially reducing healthcare costs for patient and payer alike — meeting or perhaps exceeding all the stated goals of the Trump administration. Widespread implementation of this tool would also meet or exceed the stated objectives of pending Senate legislation.
The tool: healthcare bundled payments.
Bundling all services for a single episode of care — from pre-op to post-operative care, for example — into a single coordinated package of services priced with a single price point is comprehensive, transparent and value-based. For surgical procedures, combining bundled payments with outpatient surgery in an ambulatory surgery center (ASC) can reduce costs even further as services are provided with measurable outcomes equal to or better than inpatient surgical procedures.
Chargemaster vs. Bundles; an Exercise in Comparison
A simple exercise illustrates where we are today with healthcare price transparency.
Making an online visit to the Monterey Peninsula Surgery Center (MPSC) website quickly reveals that for more than 75 surgical procedures, MPSC posts the total cost of the procedure — a single episode of care — on its website.
For example, a total knee replacement (total knee arthroplasty) is priced at $24,569.
By contrast, it is impossible to determine the total cost of a knee replacement by visiting any of the hospital websites in the greater Monterey Bay Area in Central California, or virtually any other hospital website, for that matter. According to healthline.com, the average cost for a total knee replacement in the U.S. is $49,500.
If the objective of price transparency is to give patients advanced information on costs while driving down the overall cost of healthcare, there must be some large-scale example of the benefits of bundled payments in reducing costs.
Earlier this year, Municipalities Colleges Schools Insurance Group (MCSIG) announced that it generated over $7 million in savings through a bundled payment network for surgical procedures. MCSIG provides a variety of healthcare plans to over 70 school systems and municipalities in California.
According to MCSIG, from January 2015 through December 2018, 485 surgeries were performed on MCSIG members who reside on California’s Central Coast through the Global 1 ASC bundled payment network. Global 1 (G1) is a licensed third-party administrator headquartered in Carlsbad, California.
The total savings to MCSIG during this four-year period was $7,121,250. The all-inclusive bundled payment includes the physicians and facility fees for the episode of care.
The cases were performed in five ASCs by over 70 surgeons, involving a wide variety of surgeries including total joint replacement, spine surgery, complex joint repair, hysterectomy, gallbladder removal, tonsillectomy, thyroidectomy, hernia repair, mastectomy and breast reconstruction. The average savings per case was $14,683.
The ASCs, surgeons and G1 were at risk for the cost of complications related to the surgery during the episode of care. The complication rate, including infections and readmissions, was extremely low, at less than 1%.
MCSIG’s innovative health plan emphasizes wellness and rewards its members (patients) for selecting centers of excellence, including the G1 provider network, through waiving the member’s out-of-pocket expenses, thus extending savings from the payer to the patient through benefit design and price transparency.
Michael Larsen, executive director of MCSIG, commented: “While the cost savings have been tremendous, the consistently amazing outcomes our members have received over the last four years working with G1 are even better. The quality is exceptional, and pricing is near miraculous from what others are charging along the Central Coast.”
Tom Wilson, co-founder of G1, stated, “G1 is uniquely able to leverage the great value ASCs provide to payers and patients through surgical bundled payments.”
The Bundle’s the Thing
While laudable, the efforts by the administration and Congress to drive healthcare price transparency and reduce overall healthcare spending in the U.S. widely miss the mark. While transparency by itself is a good start, it is impossible for consumers to determine healthcare costs based on transparency alone. Truly transparent pricing will arrive when healthcare services are bundled, giving patients a single price point for a single episode of care.
With over 135 surgery centers and 830 surgeons in the statewide network, the Blue Shield California (BSC)-G1 bundle payment program is going strong with many plans to expand.
Scott Leggett is co-principal, Global 1 and managing director, Convergent SameDay Orthopedic Strategies. With more than two decades working in orthopedics, Leggett’s experience includes founding a network of independent, physician-owned outpatient surgery centers. In addition, he served as the president and board member of the California Ambulatory Surgery Association (CASA).
Global 1, a licensed third-party administrator (TPA), is the largest commercially insured bundled payments manager in California and amongst the largest in the nation. G1’s innovative bundled payment structure is designed to deliver cost-effective surgical services that result in increased transparency, lowered costs and improved medical outcomes in an outpatient setting.